The coordinating Minister of the Economy Dr Okonjo Iweala last weekend revealed waivers and tax breaks may have caused Nigeria a whopping $20billion in tax breaks. She chided the Nigerian Investment Promotion Council (NIPC) of dishing our tax holidays to companies in a frivolous and often irresponsible way, breaking the law in some cases. The example that upset her the most are companies operating in the upstream sector that were granted pioneer status from acquiring assets that previously paid tax. One of such company that has fallen under the purview of many investors is Seplat.
Seplat obtained a 5 year pioneer status in 2013 which is expected to expire in 2018. However, with the Government now sensing a loophole, there is every likelihood that they will come after Seplat. But if they did what could Seplat stand to lose and indeed shareholders? Here is our list;
1. Back taxes – Seplat reported that it did not pay tax in 2013 and 2014 due to the Pioneer status that it obtained. If the incoming government finds legal grounds to revoke Seplat’s pioneer status, then back taxes could crystallise. The FIRS could achieve this by deciding to launch a back duty investigation on Seplat. The impact of this could be detrimental to shareholder value should it occur.
2. Deferred Tax Liability – Seplat in 2014 reported that it had crystallised a Deferred Tax liability of about N14billion in 2014 which it included in its profit after tax. If the FIRS finds parts of this tax credit as illegal it could request that Seplat refund the cash which will greatly impact on its operations and liquidity status.
3. Threat to projected tax savings – Seplat had in its 2013 IPO document projected that the Pioneer Status obtained could results in a whopping US$2.3bn tax savings estimated over period 2014 – 20172. The company also explained the projection is assumed on the basis of an increase in anticipated production levels which it frankly hasn’t achieved. However, its IPO valuation was mostly hinged on the tax savings and as such any reversal whatsoever will negatively impact on investor sentiments and the ability of the company to make future projections especially on tax and fiscal issues.
It is important to note though that Seplat has acknowledged some of this threats. In its 2014 annual report the company revealed as follows;
The Group continued to benefit from pioneer tax status in 2014 which resulted in the effective tax rate remaining consistent with 2013 (2014 and 2013: nil%). There was a tax credit in the prior year relating to the reversal of the deferred tax balance as a result of being granted pioneer tax status. Post period end the Nigeria Investment Promotion Council (NIPC) notified oil and gas companies that are in receipt of the pioneer tax incentive of its intention to test compliance with the conditions under which the pioneer tax status was awarded to all companies, including Seplat, in order that the final two out of five years of the incentive be received. The Group is currently in its third year of the scheme and considers that it has met or exceeded these requirements, as evidenced by the investments it has made to develop its blocks and in particular accelerate the expansion of its gas business to supply the domestic market.
Nevertheless, shareholders and potential investors should track the actions of this incoming government regarding this issue.