The Tax Appeal Tribunal (TAT) has ruled that the payment made by an oil producing company to flare gas in the course of crude oil production is not a fine to be disallowed for tax purposes but a necessary business expense that is fully tax deductible. This is regardless of whether a written permit was obtained from the government to flare gas.
Gas flaring is the burning of natural gas accompanying crude oil that is being pumped from the ground. To reduce pollution, government seeks to encourage using the gas for other purposes or returning it to the ground rather than flaring it. However, there are instances where it may not be practicable or commercial to do otherwise hence the leeway for the continued flaring of gas.
The principle established by the TAT in this appeal is very important as businesses should not be denied tax deduction for undesirable expenses which they have to incur for reasons beyond their control such as demurrage.
Read a copy of the judgment for more on this decision.
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