Nigeria: Deletion Of "Non-Oil Exports" From Zero Rated Goods Under The Nigerian Value Added Tax Act  – A Disincentive To The Solid Mineral Sector

Introduction

Mining business is capital intensive, the critical reason why governments across the world continue to seek ways to incentivise investors in this industry. Nigeria is no different.  There are indeed a handful of incentives available to operators in the Nigerian Mining Sector ("the Sector").  However, stakeholders in the Sector have continued to clamour for more incentives.

Nigeria is endowed with vast reserves of solid minerals, including, but not limited to, precious minerals, base minerals, industrial minerals, energy minerals and metals. Successive governments at the Federal level have demonstrated commitment to revamp the Sector, following avowed promises to diversify the economy from its over dependence on "liquid" minerals (crude oil) as a major source of revenue and foreign exchange for the country, to the mining sector.

In Nigeria, mining business is largely export-oriented. Local demand is low but the returns from exports are indeed rewarding.  According to the Nigerian National Bureau of Statistics (NBS) in its report titled "Foreign Trade in Goods Statistics for Q3 2023¹), the value of total export stood at ₦5.9trillion in Q3 2022, which accounted for 51.2 per cent of total trade for the quarter.  Interestingly, the figure showed a decline by 19.89% when compared to the Q2 2022 level of ₦7.4trillion.  The value of total trade in solid minerals goods in Q3, 2022 stood at ₦60.03billion representing 0.52% of total trade in that quarter, of which solid minerals exports stood at ₦22.5billion, showing an increase of 7.07% and 22.69% when compared to the value recorded in Q2, 2022 (₦20.99 billion) and the corresponding quarter of 2021 (₦18.31 billion).  While the optics seem to look good for the Sector, it is evident that export of solid minerals at 37.5% of total trade in solid mineral and 0.52% of total export, is not reflective of the Sector's full potential.

The government signed the Nigeria's Mineral Value Chain Regulations, 2021 ("the Regulation") in July 2021². The Regulation is primarily aimed at boosting the country's revenue through the local development (processing and refining) of raw materials into refined products before export. This is to encourage value addition and to demand better pricing of the output by foreign off-takers.  In essence, mineral resources in raw form should be refined or beneficiated locally before export, to avoid exporting low-value raw materials and importing the corresponding refined outputs at a higher value after value-addition offshore. Consequently, mining companies are expected to procure inputs such as reagents, chemicals, gas, etc., required for basic processing, refining and / or purifying mineral ore, in preparation for export.

Basic Beneficiation Process

Most minerals are often found as compounds in rocks, bound to other elements and /or waste rocks. Only a few minerals are rarely found in their pure form e.g., diamonds.  Hence, before minerals become useful, they need to be separated from the waste rock. A number of different separation techniques are used, which mostly require the use of chemical reactions, additives, and / or reagents.  For example, to effectively mine gold from the field, explosives are needed to first breakdown the ore (rock which contains gold) and waste (rock which does not contain economic quantities of gold) into transportable sizes.  The blasting process also applies to majority of other solid minerals, depending on the hardness of the mineral or the host rock. The broken-down chunks of gold bearing ore then passes through a three-stage processing cycle to ensure maximum recovery of the gold from the ore. The stages are: crushing and grinding; floatation and oxidation and finally, leaching and adsorption. Certain inputs are required during the different stages, including but not limited to SIBX (Sodium Isobutyl Xanthate) - to cause the gold particles in the blended slurry to bond with the sulphur inside the rock; Sodium Cyanide – to leach the gold from the rocks turning it into a liquid; activated carbon (coconut husks) – to adsorb the gold particles, and finally Cathodes wrapped in steel wool – for electroplating the gold. It is important to note that the end product from the above process is gold dorés which will still require further refining to achieve maximum purity.

Another example is Tin. Tin is extracted by roasting the mineral cassiterite with carbon in a furnace. Thereafter, the roasted ores undergo leaching with acid or water solutions to remove impurities. Electrostatic or magnetic separation is then employed to remove any heavy metal impurities.  Zinc ore when mined, is roasted to a relatively high temperature (about 950 degrees Celsius) causing zinc, sulphur and iron oxidization. After the Zinc and iron oxides are reduced to powder form and leached with diluted sulfuric acid, the solution is neutralized and contaminants are removed via filtration.  

It is therefore manifest that certain key inputs are required for basic processing, extracting and beneficiation of ore minerals.  Other key mining inputs required for processing solid minerals include but not limited to Flocculants, Coagulants, Collectors, Dewatering Aids, Dispersants, Dust Control Suppressants and Frothers e.g., Dithiophosphate, Ferrous Sulphate and Hydroxamic Acid amongst others. These reagents are typically expensive, not reusable and are often required in large quantiles.  Apart from chemicals and all the scientific elements, other inputs such as coal is required to roast ores (as illustrated above); gas is used up in powering the heaters / furnaces; and explosives are used in breaking the ore bearing rocks into moveable chunks and processable sizes etc. All these inputs are liable to Value Added Tax (VAT), based on the extant provisions of the VAT Act (VATA) – whether imported or sourced locally.

The Value Added Tax Issue

Section 17 (1) of the VATA, provides, amongst others, that:

"... the input tax to be allowed as a deduction from output tax shall be limited to the tax on goods purchased or imported directly for resale and goods which form the stock-in-trade used for the direct production of any new product on which the output tax is charged".

The above section of the law suggests that for input VAT to be recoverable, there must be a corresponding output VAT charged. Consequently, under the Nigerian VATA, only two forms of input VAT are allowed for recovery against the output VAT of the taxpayer:

• VAT incurred on goods purchased (input VAT) for direct resale on which VAT is charged (output VAT) in a typical buying and selling arrangement; and / or

• VAT incurred on goods which serve as inputs or raw materials for the production of a VATable good.

Prior to 30 July 2021, Part 3 of the First Schedule to the VAT Act, 2007 ("the Schedule") categorized non-oil export as "zero-rated".  The implication of this classification was that all companies that engaged in non-oil exports could charge VAT on their sales, albeit at zero percent; and they were able to claim a refund of all valid input VAT incurred in the processing and / or production of their exported items.  As indicated in the preceding paragraphs, the process of purifying mineral ores or raw minerals qualifies as a "manufacturing" process as it results in the formation of a "new product". Hence, any VAT incurred on inputs employed in the refining or purification process should qualify as valid input VAT, for refund or recovery through the VAT input-output mechanism.

However, the Federal Ministry of Finance (MoF) on 30 July 2021, signed the VAT (Modification) Order, 2021 ("the Order"), which amended the First Schedule to the VAT Act by deleting "Non-oil Exports" from the list of "zero-rated" products (amongst other amendments), therefore making  all exports VAT-exempt.  The current "exempt" status for all exports, including non-oil exports, changes the VAT footprint - i.e., no output VAT will be charged on exported goods, and therefore, any input VAT incurred in the process of producing or processing the exported items would have to be expensed via the profit & loss (P/L) account. In essence, valid input VAT attributable to exported solid minerals can no longer be recovered or reclaimed against output VAT.    

Impact of the Amendment on the Nigerian Mining Sector

For a sector that is remarkably cost intensive, the recharacterization of "Non-Oil Exports" from "zero-rated" to "VAT-exempt" has effectively increased the cost of doing business for miners by not less than 7.5% (the VAT rate in Nigeria), in addition to other export-related costs such as insurance, freight, port charges, duties, etc.  This may potentially discourage exportation, in preference for domestic sale (for which miners could charge output VAT and recover their input VAT).  Domestic sale, although seemingly judicious in the circumstance, is obviously not as lucrative compared to exporting the refined minerals. Worst still, domestic demand is low given the current low level of industrialisation and refining capacity of the country. Targeting local market may also not align with the government's objectives in passing the Regulations and by extension, it may dampen the Sector's contribution to the nation's gross domestic product (GDP) and foreign exchange earnings.

The competitiveness of minerals' and precious metals' prices in the global market ensures that miners realize the benefits of beneficiation before export and whenever there are upticks in demand. A relatively expensive metal from the Nigerian market, occasioned by a high-cost structure not unrelated to over-taxed inputs, would put Nigerian miners at a comparative disadvantage in the global arena.  This is not desirable for a country that intends to diversify its economy on the back of resuscitation of the mining sector amongst other initiatives. Even within the local economy that is plagued by illegal mining activities, there is little incentive to motivate illegal and unregistered miners to formalise and conduct legal export, partly because there is no expectation of receiving any VAT refund from the government.

Finally, the impact of the amendment should also be viewed from the perspective of the thrust of the Nigerian Mining Sector Roadmap, 2016 (the Roadmap). One of the policy thrusts and strategic intent of the Roadmap is for the Ministry of Mines and Steel Development (MMSD) to work with other relevant government agencies to develop a robust fiscal framework that is aligned to the nature of the Sector and incentivize investment into it. It is difficult to reconcile how this isolated provision of the Order regarding making export of solid minerals (and other exports) VAT-exempt aligns with this policy thrust. At best, it would appear inconsistent, and should be revisited.

Practices in Other Jurisdictions

According to an Economist Intelligence Unit report issued in May 2022³, South Africa, Nigeria, Algeria, Angola and Libya produce more than two-thirds of Africa's mineral wealth. Other key contributors include Egypt, Ghana, Democratic Republic of Congo, Gabon and Zimbabwe.  A comparative analysis of the relevant fiscal provisions in these jurisdictions could be helpful in evaluating the competitiveness of the provisions of the Regulation on the VAT-exempt status of (solid mineral) export.

For example, in South Africa, exported goods continue to enjoy "zero" VAT rate, depending on whether it is a direct export or indirect export. A direct export is a classical export, where the supplier delivers goods to the purchaser in the destination country.  The applicable VAT rate is Zero percent.  However, for indirect exports (Ex Works), where the purchaser arranges for the collection of the goods in South Africa (i.e., deemed a local sale between the supplier and the purchaser), the applicable VAT rate is 15% (VAT rate in South Africa).  For indirect export, the Purchaser is still able to recover the input VAT at the time the goods eventually leave the country.  Ghana with a VAT rate of 12.5% also operates a similar VAT law with that of South Africa, where direct exports of all goods (including agricultural produce which otherwise would have been exempt) are zero-rated, with the exception of Cocoa beans which are specifically exempt from VAT.  Similarly, Algerian VAT Law allows for a Zero percent rate on exported goods and associated services.

Outside of Africa, China, which was recently declared to be the world's largest mining hub, both in exportation, importation and utilisation of solid minerals and fossil fuels, also operates a zero percent VAT rate for exported goods (although the refund rate applicable to the inputs used in the production of those goods may be less than the VAT incurred i.e., there is an embedded cost).  In Russia, exported goods and services also enjoy the zero percent rate. Saudi Arabia, a country touted to be the largest country in Arabian Peninsula, and another mining giant in the world, also operates a zero-rated VAT system for all exported goods (and services).  However, exported goods must be outside the Gulf Cooperation Council (GCC) region within 90 days after the supply has taken place, to qualify for the zero-rating. 

The above analysis of the fiscal comparison of VAT on exported goods across the select mining jurisdictions shows that Nigeria's decision to delete non-oil exports from zero-rated products appears ill-timed and not aligned to global best practices.  While the government's intent for the deletion remains unclear, Nigeria should be seen as a business-friendly nation that should further incentivize investment in the Sector and not vice-versa.

Conclusion

According to the latest World Bank annual ratings report issued in 2020, Nigeria is ranked 131 among 190 economies in the ease of doing business, up from 146 in the 2019 report.   With the current economic challenges ranging from rising inflation, currency depreciation, high interest rates, insecurity, decrepit (but improving) infrastructure amongst others, the rating could have potentially worsened in 2022, had the World Bank continued issuing the report annually for Nigeria⁴.

Despite the inherent security challenges, erratic power supply and multiplicity of taxes amongst others bedevilling the Sector, mining companies are touted to provide social amenities and employment opportunities to the immediate communities apart from contributing to the tax and royalty revenues of the federal government. Revisiting the VAT issue should be a quick win for the government, as it would be an insignia of its commitment to supporting the Sector and growing the economy through it. In doing this, the government may consider any of the following options: 

• Reclassify exported goods under the "zero-rated" category, in the Finance Act 2022 or any subsequent Modification Order issued by the Minister of Finance, Budget & National Planning. This option, apart from being easier to adopt, will be beneficial to not only operators in the mining sector, but all export-oriented businesses.

• As an alternative to option one above, the government may introduce a Sector-specific incentive to cover the identified gap. For example, similar to what is currently obtainable under Section 25(1)(a) of the Nigerian Mining and Minerals Act (NMMA), wherein operators are exempted from payment of customs and import duties in respect of plant, machinery, equipment and accessories imported specifically and exclusively for mining operations; the government can consider extending the Section (or introducing a new section all together either under the VATA or under the NMMA), to exempt valid inputs purchased specifically and exclusively for processing and refining of raw minerals in the mining sector, from customs and import duties and VAT. Under this scenario, there is neither any input VAT incurred on the inputs nor any output VAT (in case of export).

• The government may also consider a different sector-specific incentive, which delineates only "exported minerals that is mined and processed or refined in Nigeria as zero-rated". This option would not only give the miners the opportunity to recover their input VAT, but it would also create a sense of responsibility for the miners to ensure value addition to the raw minerals mined in the country, before exporting same, to qualify for the incentive. For transparency and to ensure that only qualified miners enjoy the incentive, the MMSD may set up a desk to inspect and certify the operations of miners for this purpose.

It is no gainsaying that incentivising the Sector may just be the best way to attract Foreign Direct Investment, whilst enabling the existing operators to shorten their investment pay-back period.  The government should seek more opportunities to demonstrate its support for the budding sector by being open to formulating industry specific incentives, interventions and favourable policies.  The author believes that a quick revision of the VATA to address this specific need of the mining sector and all exporters at large would create a beneficial downstream effect for the government and all sectorial stakeholders.