NCDMB AND THE IMPLEMENTATION OF THE NCDF 1% TAX

NCDMB AND THE IMPLEMENTATION OF THE NCDF 1% TAX

The enactment of the Nigerian Oil and Gas Industry Development Act in April, 2010 was greeted with much fanfare within the circles of Nigerian Businesses and Professionals plying their trade in the Nigerian Oil and Gas Industry. Many Nigerians directly or indirectly linked with the oil industry all let of a sigh of relief as the new law was widely expected to create more opportunities for Nigerian professionals and businesses in an industry currently dominated by expatriates and foreign multinational firms.

However, for Nigerian companies to compete they had to drastically close the gargantuan gaps between themselves and foreign players. This gaps was glaring across board i.e. in terms of skills, equipment, technical capacity, major assets, investments in new technology, and Research & Development initiatives etc.

Closing these gaps required enormous financial investments and robust funding mechanisms. Sourcing for funding from Nigerian commercial banks was never going to be an attractive nor viable option because of the unfavorable and non-competitive lending rates. Luckily for Nigerian players, the folks who drafted the NOGICD Act had thought about the problem and ingeniously conceived the Nigerian Content Development and Monitoring Fund (NCDF).

Section of 104 of the NOGICD Act, 2010 reads as follows:

104(1) A Fund to be known as the Nigerian Content Development Fund (the Fund) is established for purposes of funding the implementation of Nigerian content development in the Nigerian Oil & Gas Industry.

104(2) The sum of one per cent of every contact 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 shall be deducted at source and paid into the Fund.

104(3) The Fund shall be managed by the Nigerian Content Development Board and employed for projects, programmes, and activities directed at increasing Nigerian content in the oil and gas industry.

Since its establishment, NCDMB has utilized the Fund to guarantee and secure low interest loans for companies seeking to build lasting capacity in the industry, though there have been some complaints that all the hurdles companies have to go through to access the fund is similar and little different from that required while sourcing for loans from commercial banks (that is a topic for another day).

A lingering complaint across key industry stakeholders has to do with the manner of which NCDMB goes about deducting the one percent sum based on its interpretation of the enabling provisions stated above. The Board has been accused of “multi-tiered” deductions on some contracts which end up exceeding the one percent required by law. The challenge is often encountered on Major Projects which often have multi-layered contracting phases, where you have numerous sub-contracts under the main contract. While some stakeholders believe that the moment the statutory one percent has been deducted at source for the main contract by the awarding entity then the other sub-contractors under the same main contract need not deduct and remit the one percent for sub-contracts they award under the (main) contract. Unfortunately, NCDMB the regulator disagrees with this position, as it appears the agency has taken a literal interpretation of the word “every” in Section 104(2) of the Act (see below). To support its position, the regulator released to the industry in 2011, a clarification document called the “NCDF Questions and Answers” containing 21 questions and answers regarding the implementation of the Fund.

"The sum of one percent of every contract awarded by an operator, contractor, subcontractor, alliance partner, or any other entity involved in any project, operation, activity or transaction in the upstream sector".

Examining the case of the disgruntled players in the industry who do not agree with the regulator’s stance on the matter, one cannot help but see the merits of their case.

Consider the example outlined in the table below:

There are two different Projects all worth the same value i.e ($10 million). In Project A, the one percent is deducted for only the main contract (Contract 1), it is not deducted for the 1^st level sub-contracts (Contract 1.2 & 1.3), nor is it deducted for the 2^nd level sub-contracts (contracts 1.2.1 & 1.3.1). This is the manner of deduction that some industry stakeholders expect NCDMB to implement.

Project B on the other hand, shows the current manner NCDMB administers the implementation of deductions. The main contract, level 1 sub-contracts, and level 2 sub-contracts have one percent deducted at source. As shown in the table, we end up with a deducted percentage of 1.58% relative to the main contract value instead of the 1% as obtained in Project A.

Sample Project A & B showing NCDF Analysis.

To date the critics of the regulator continue to grumble in hushed tones and suffer in silence instead of taking the initiative and approaching respected judicial channels like the Office of the Attorney General of the Federation (AGF) to seek proper legal interpretation once and for all.

This is the only practicable and recommended way forward as NCDMB has shown in the past that it is an agency that respects the rule of law as long as such rulings are discharged from appropriate judicial quarters. Therefore, the industry as an organized entity should have nothing to fear if it eventually decides to take NCDMB up on this interesting matter and hopefully secure victory over the regulator.

Article Analysis and Research, Developed by:
Local Content Consultant,

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