On 18 July 2012, the Petroleum Industry Bill 2012 (PIB or 'the Bill') was forwarded to the National Assembly for consideration and passage into law. The Bill "provides a legal, fiscal and regulatory framework for the Nigerian petroleum industry". The PIB will, upon enactment, repeal the Petroleum Act, Petroleum Profits Tax (PPT) Act, Deep Offshore and Inland Basin Production Sharing Contracts Act, as well as a number of other laws which currently govern the Nigerian oil and gas industry.

We have highlighted below key fiscal provisions of the Bill and their implications:

1.1 Imposition of Nigerian Hydrocarbon Tax (Sections 299 – 352)

The PIB proposes the replacement of the current Petroleum Profits Tax (PPT) with the Nigerian Hydrocarbon Tax (NHT). Section 313 of the Bill provides that NHT will be computed on the chargeable profits for the relevant accounting period at 50% for onshore and shallow water areas, and 25% for bitumen, frontier acreages and deep water areas.

The NHT provisions are similar to those of the PPT, but with some modifications. These modifications and their implications are discussed below:

(a) Allowable Deductions: The allowable deductions specified under section 305 of the PIB are similar to those listed in section 10 of the PPT Act1, but with the following modifications:

(i) The term 'reasonably' has been included in the PIB as one of the criteria for deductibility of expenses for NHT purpose2. The Bill does not specify a 'reasonability test', thus leaving it to subjective interpretation by the Federal Inland Revenue Service (FIRS).

(ii) Interest incurred on capital employed for upstream petroleum operations is taxdeductible, except where the interest relates to operations under a Production Sharing Contract (PSC). It is unclear why PSC operations have been singled out for such punitive treatment, especially given the large capital outlay required for deep offshore operations, all of which are currently under PSC arrangements.

(iii) Sums 'set aside in a fund' as decommissioning and abandonment expenditure have now been explicitly specified as tax-deductible. This implies that only funded provisions would be allowable.

(iv) Contributions to the Petroleum Host Communities Fund are allowable (please refer to 1.7 below for additional comments).

(v) Contributions to pension and other similar schemes/funds are taxdeductible. The need to obtain approval for these contributions has been removed, as long as the scheme/fund is in line with the Pension Reform Act.

(b) Deductions not Allowed: In addition to the items specified in section 13 of the PPT Act, the following expenses will not be deductible for NHT purpose:

(i) All pre-incorporation costs.

(ii) Signature bonus, production bonus or any bonus on a lease or renewal of a lease.

(iii) All general and administrative expenses incurred outside Nigeria in excess of 1% of the total annual capital expenditure.

(iv) 20% of offshore expenses (other than those in (iii) above) incurred by a company, except the goods/services purchased are not available in-country. The approval of the Nigerian Content Development and Monitoring Board (NCDMB) will also need to be obtained for the expense to be allowed. This provision is presumably intended to boost Nigerian Content. However, whether the approval of the NCDMB will not become another layer of bureaucracy in the procurement process of companies remains to be seen.

(v) Legal and arbitration costs relating to cases against the FIRS or the Government, unless specifically awarded to the company during the legal or arbitration process.

(vi) Any cost arising from fraud, wilful misconduct or negligence on the part of the company.

(vii) Any cost incurred in obtaining and maintenance of a performance bond under a PSC.

(c) Capital and Production Allowances: Under the PPT Act, the total capital allowance (CA) that a company can claim in an accounting period is restricted to 85% of its assessable profits less 170% of its petroleum investment allowance (PIA)3. This restriction has been removed in the PIB. The removal of the restriction should encourage investment in the oil and gas sector and allow companies to recoup their capital investments within a shorter period of time.

In addition to the CA claimable by upstream petroleum producing companies, section 312 provides for the claim of Production Allowance (PA) to be computed as provided under the Fifth Schedule to the PIB. The Schedule specifies the PA applicable to crude oil, natural gas and condensate production. The PA is to be determined based on production volume, water depth and specified price thresholds.

The PA will replace the Investment Tax Credit (ITC) or Investment Tax allowance (ITA) as applicable, currently available to PSCs, as well as the PIA currently available to all other companies liable to PPT. Companies in Joint Venture (JV) arrangements with the NNPC (at the time the PIB comes into force) will however not benefit from the PA applicable to crude oil production.

Generally, in computing the PA claimable by a company, the aggregate production of all its Petroleum Mining Leases (PMLs) will be compared against the PA thresholds specified in the Fifth Schedule. However, the PA claimable by PSC companies (operating in deepwater areas) and companies supplying gas solely to the domestic market, will be ringfenced/ computed per PML. Where a shareholder holds at least 10% shares directly or indirectly in several companies, the companies will be treated as one company for the purpose of computing PA.

(d) General Production Allowance: The Fifth Schedule also specifies the General Production Allowance (GPA) to which qualifying companies will be entitled. Like the PA, the GPA will be computed based on production volume and specified price thresholds. Companies in JV arrangements with the NNPC (at the time the PIB comes into force) will only be entitled to the GPA applicable to natural gas production.

Companies in PSC arrangements will be entitled to the GPA applicable to crude oil, natural gas and condensate production.

1.2 Payment of Companies Income Tax (Section 353)

In addition to NHT, the PIB imposes Companies Income Tax (CIT) on companies engaged in upstream petroleum operations, as provided under the CIT Act4. Companies involved in both upstream and downstream petroleum operations will be required to compute CIT separately on the profits from both operations. The NHT will not be tax-deductible for CIT purpose. Furthermore, companies involved in upstream petroleum operations will be required to settle their CIT liability on actual year basis using a similar 'estimate' mechanism to that provided for NHT in the PIB.

To provide a legal basis for the above, section 353(4)-(13) of the PIB amends some of the provisions of the CIT Act. Some of the significant amendments are as follows:

(a) Inclusion of "any rents and royalties payable on Upstream Petroleum Operations" as part of deductions allowable for CIT purpose under section 24 of the CIT Act.

(b) Substitution of section 29(3) with a new subsection which should eliminate the double taxation of profit which currently occurs under the commencement rule due to overlap of basis periods.

(c) Based on the amendment of section 29(3) of the CIT Act, the right of election (which currently exists under the CIT Act) to be taxed on actual year basis for the second and third years of assessment will also no longer be applicable.

(d) Deletion of the current restriction on the ability of companies to carry forward losses beyond the fourth year of commencement of business under section 31(2)(a)(ii) of the CIT Act.

(e) Extension of the tax incentives under section 39 to companies engaged in export gas operations with respect to LNG, companies operating gas extraction facilities and companies operating downstream crude oil processing facilities. Companies engaged in upstream gas operations will be entitled to the three-year tax holiday incentive in the section, provided the gas is supplied solely to the domestic market.

(f) Definition of "Qualifying Upstream Petroleum Expenditure" under the Second Schedule of the CIT Act. The "Qualifying Upstream Petroleum Expenditure" will have 'Nil' initial allowance, an annual allowance of 20%, and retention of 1% in the last year until the asset is disposed.

The PIB does not amend/delete paragraph (h) of section 19(1) of the CIT Act, Cap 60, LFN, 1990, which exempts "the profits of any company engaged in petroleum operations" from CIT. It may be expedient for the Bill to specifically delete this paragraph to avoid potential controversy on the liability of profits derived from petroleum operations to CIT.

1.3 Payment of Royalties (Section 197)

The PIB does not specify the basis and percentage of royalties to be paid by companies engaged in petroleum operations. However, the Bill empowers the Minister for Petroleum Resources ('the Minister') to make regulations in this regard.

We understand that the new royalty regime that will apply under the PIB will be based on water depth, production volume, and value. Essentially, the new regime is designed to ensure that Government derives more revenue from royalties when commodity prices exceed the defined threshold. Thus, in addition to the royalty based on water depth and volume as currently applies, companies would be liable to additional royalty when crude oil, natural gas and condensate prices exceed specified benchmark prices.

1.4 Exemption of Dividends from further Tax (Section 350)

Based on section 60 of the PPT Act, any dividend paid out by a company from profits on which PPT has been paid, is exempted from further Nigerian tax. This provision is retained in section 350 of the PIB. Consequently, dividends paid out of profits that have been subjected to NHT will not be liable to withholding tax, personal income tax, CIT and other Nigerian taxes.

1.5 Penalty for Gas Flaring (Sections 275 – 283)

The PIB prohibits the flaring of natural gas after a 'flare-out date' to be specified by the Minister via regulations. It empowers the Minister to grant companies gas flaring permits after the 'flare-out date', only for a limited period of time "in cases of start-up operations, equipment failure, shut down, safety flaring or due to inability of gas customer to off-take gas" 5.

Where gas is flared without ministerial approval, the defaulting company will be liable to "a fine which shall not be less than the value of the gas flared". The Bill however, stops short of specifying the price to be adopted in determining the value of the gas flared.

Based on section 306(k) of the PIB, gas flaring penalty will not qualify as a taxdeductible expense, as is currently the case.

1.6 Payment of Renewal Bonus (Section 185)

Section 185(2) of the PIB specifically requires lessees under a PML arrangement to pay "a renewal bonus of an amount specified in the lease" at the time of renewing the PML. The inclusion of this provision appears to be a fallout of the current debate on the legality or otherwise of the payment of renewal bonuses in respect of Oil Mining Leases (OMLs).

The PIB also introduces a new condition for renewal of leases. The additional condition is to ensure that the amount to be paid to the Government during the renewal period (which could be as long as 10 years) will be based on re-negotiated lease terms that reflect current economic realities.

Based on section 306(l) of the PIB, renewal bonuses are specifically disallowed for NHT purposes. A pertinent question, therefore, is whether renewal bonus payments would qualify as capital expenditure in respect of which capital allowances can be claimed for tax purposes. The determination of this would depend on whether renewal bonus is covered by the PIB's definition of 'Qualifying Expenditure' as capital expenditure incurred in connection with "the acquisition of... rights in or over... petroleum deposits" or for "wining access" to such deposits, and if the renewal can be viewed as a 'new' "acquisition of... rights in or over... petroleum deposits".

1.7 Contributions to the Petroleum Host Communities Fund (Sections 116 – 118)

Section 116 of the PIB provides for the creation of a fund to be known as the Petroleum Host Communities Fund (PHCF or 'the Fund'). The Fund is to be "...utilised for the development of the economic and social infrastructure of communities within petroleum producing areas".

Companies engaged in upstream petroleum operations will be required to remit 10% of their estimated 'net profit' (as defined in the Bill6) to the Fund on a monthly basis. At the end of each fiscal year, companies are expected to reconcile their monthly remittances with the actual PHCF contributions payable based on the 'net profit' computed in their actual tax returns, and settle any underremittance to the Fund. The PIB is silent on the treatment of over-remittance to the Fund.

Contributions made by a company to the PHCF are to be set off against its 'total fiscal rent obligations'7 for the relevant accounting period. Hence, contributions to the Fund should not increase the financial burden on companies. Based on section 118(5), it also appears that overremittances to the Fund will be recoverable from the company's fiscal rent for the period.

It is pertinent to note that while the purpose of the Fund is to aid the development of the host communities, section 118(5) provides for the deduction of the cost of repairing petroleum facilities damaged by an act of vandalism, sabotage or other civil unrest, from the Fund, "unless it is confirmed that no member of the community was involved". This provision is expected to encourage host communities to protect petroleum facilities in their communities. It is unclear why the proviso on community involvement was inserted, as without it, communities would likely take more active steps in ensuring that facilities within their areas are not vandalised.

1.8 Assignments of Shares (Section 194)

Under existing regulations, a licensee, lessee or contractor is required to obtain consent of the Minister, before assigning its right or a part thereof to another party. Section 194(1) of the PIB has now extended the requirement to cover exchange of shares in a company holding a concession, and mergers and acquisitions where one of the parties involved holds a right to a concession.

This provision reinforces the recent ruling of the Federal High Court in the case between Moni Pulo Limited and Brass Exploration Unlimited and 7 other parties, which held that the Minister's approval is required before shares of the holder of an interest in a concession can be transferred.

It is uncertain whether the requirement for ministerial approval would also apply to publicly quoted companies, given that the ownership of such companies could change on a daily basis.

1.9 Introduction of Self-assessment (Sections 317 – 349)

Based on a strict interpretation of the PPT Act, companies engaged in petroleum operations are required to submit audited accounts and tax computations to the FIRS. The FIRS is required to review the returns and issue notices of assessment to the relevant companies. The companies are obligated to make payment within 21 days of receiving the assessment from the FIRS.

Section 327(1) of the PIB revises the above regime by requesting that companies self-assess for NHT and pay the tax due within 21 days of filing the assessment. This self-assessment regime is similar to that specified in the Tax Administration (Self Assessment) Regulations recently released by the FIRS, except that the latter requires companies to pay their selfassessed PPT at the time of filing the relevant returns8.

Other key modifications made by the PIB in respect of returns and assessments include:

(a) Requirement for parties in a PSC arrangement to file separate tax returns in respect of their respective interests in the relevant concession. This provision should address the challenge PSC contractors currently have with NNPC, on filing of joint tax returns for the contract areas.

(b) Requirement for companies yet to commence bulk sale or disposal of chargeable oil and gas to submit accounts and returns to the FIRS. Although not clearly specified in the PIB, it is expected that such returns would contain the schedule of expenditure incurred by the company, prior to the first accounting period.

(c) Issuance of Best of Judgement assessments (a.k.a. Administrative Assessments) by the FIRS for non-filing of estimated tax returns.

(d) Steep increase in the sanctions for noncompliance with the provisions on returns and assessments.

(e) Seeking of redress against assessments directly at the Federal High Court as opposed to the Tax Appeal Tribunal as provided under the FIRS (Establishment) Act, 2007 (FIRSEA). This seeming contradiction between the FIRSEA and the PIB may need to be straightened out by the National Assembly during its review of the Bill.

1.10 General Comments

One of the major objectives of the PIB is to establish a progressive fiscal framework that will encourage further investment in the petroleum industry while optimising revenues accruing to the Government. The Bill seeks to achieve the objective by revising the fiscal regime in the petroleum industry. However, it remains to be seen if the revised fiscal regime will encourage further investment in the industry.

Whilst the requirement to pay CIT (in addition to the NHT) is not new in the taxation of petroleum companies in other jurisdictions, the rates of the two tax types, together with other fiscal provisions of the PIB, will most likely result in an increase in the effective tax rate of many companies under the PIB regime.

For instance, PSC companies that currently pay PPT at a rate of 50% of chargeable profits, will be liable to NHT and CIT at a combined rate of about 55% (i.e., 30% CIT plus 25% NHT). This is aside from the fact that the companies will give up the relatively more favourable ITC/ITA that currently applies, for PA and GPA. Similarly, JV companies that are yet to fully amortise their capitalised pre-production expenses are currently liable to PPT at a reduced rate of 65.75%; whereas they will be liable to NHT and CIT at a total rate of about 80% under the new regime.

For JV companies that currently pay PPT at 85%, it would appear on the surface that they will pay lower corporate tax at a total rate of 80% under the PIB. However, considering that the companies will no longer enjoy PIA, will not be entitled to PAs and GPAs except for gas operations, and may have a significant proportion of their offshore expenses disallowed, the companies may well have a higher effective tax under the PIB.

Another objective of the PIB is to optimise domestic gas supplies. It is however unclear how the PIB, in its current form, will achieve this objective, especially considering that the fiscal incentives for upstream gas development/utilisation under the PIB are less attractive than what currently obtains under the PPT regime.


It is conceded that the version of the PIB that will be eventually passed into law may be different from the current version submitted to the National Assembly. Still, companies engaged in upstream petroleum operations and other stakeholders in the Nigerian oil and gas industry, will be well-advised to critically review (and simulate) the impact the PIB will have on their operations if enacted in its current form. This is necessary to ensure that crucial issues are raised and addressed before the Bill is passed by the National Assembly and signed into law by the President.


1 PPT Act, Cap P13, Laws of the Federation of Nigeria (LFN), 2004.

2 Section 305(1) provides that allowable expenses are those that are "wholly, exclusively, necessarily and reasonably incurred..."

3 Although this is the provision of the PPT Act, in practice, the CA claimed by companies is typically restricted to 85% of assessable profits (without considering 170% of PIA).

4 CIT Act, Cap C21, LFN, 2004 (as amended by the CIT (Amendment) Act, 2007)

5 Section 277(2) of the PIB.

6 Section118(2) defines Net Profit as" adjusted profit less royalty, allowable deductions and allowances, less Nigerian Hydrocarbon Tax, less Companies Income Tax.

7 Fiscal rent is the aggregate of royalty, Nigerian Hydrocarbon Tax and Companies Income Tax obligations arising from upstream petroleum operations.

8 For additional comments on this, please refer to KPMG's newsletter on Changes to the Self-Assessment Regime on

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.