Under the Nigerian constitution, petroleum is considered a national asset and the ownership is vested in the Federal Government to manage for the entire country. Petroleum is the mainstay of the Nigerian economy and as such, the upstream oil and gas taxation in Nigeria is different from other forms of taxation in Nigeria.
Legal Framework for Oil & Gas Taxation in Nigeria
In Nigeria, taxation of oil & gas is regulated by four principal legislations depending on the nature and scope of the companies. These are namely:
- Petroleum Profit Tax Act (PPTA) LFN 2004
Section 8 of this Act levies upon the profits of each accounting period of any company engaged in petroleum operations during that period, a tax to be charged at the prescribed rate. It is important to note that not all petroleum operation is taxed under this PPTA
- Company Income Tax Act (CITA) LFN 2004
Oil and gas companies involved in downstream operations are to be taxed under CITA and not PPTA. The tax rate is 30% of the chargeable profit.
- Education Tax Act LFN 2004
This tax is imposed on the assessable profit of all companies at a flat rate of two percent 2%. It applies only to companies and it is paid alongside company income tax.
- Value Added Tax (VAT) LFN 2004
This is a tax on the consumption of goods and services. It can be regarded as tax charged on value-added during the production of goods and services. VAT is imposed at a flat of 7.5% on vatable goods and services.
ADMINISTRATION OF THE OIL & GAS TAXATION
The administration of the principal legislation regulating oil and gas taxation in Nigeria is under the charge and management of the Federal Inland Revenue Service. The Revenue Service may do all acts as may be deemed necessary and expedient for the assessment and collection of the tax and shall account for all amounts so collected.
TAXATION OF PETROLEUM OPERATION
For tax, Petroleum operations are divided into two viz:
(1) Upstream Activities: These involve all activities carried out in the exploration, development and production of crude oil from its natural state. Companies in this category are referred to as Exploration and Production (E&P) companies. Upstream activities are taxed under the Petroleum Profits Tax Act (PPTA).
(2) Downstream Activities: These activities involve the conversion of crude oil produced into useable forms at the refineries such as Petroleum Methylated Spirit (PMS) Fuel, kerosene, diesel and the transportation of such refined products to the final user or secondary industries. Examples include transporting, refining, liquefaction of natural gas, distributing and marketing of refined petroleum products, gas and derivatives. Downstream operations are subject to tax under the Companies Income Tax Act (CITA) LFN 2004.
BASIS OF ASSESSMENT
Incomes from petroleum operations are assessed on an actual year basis (AYB).
The adjusted profit of an accounting period shall be the profits of that period after the deductions of all allowable expenses
ALLOWABLE EXPENSES (SECTION 10 PPTA)
These are all out-going expenses wholly, exclusively, and necessarily incurred, whether within or outside Nigeria, during that period by such company for the sole purpose of petroleum operations and which are deductible while computing the adjusted profit of any company for any accounting period.
NON-ALLOWABLE EXPENSES (SECTION 13 PPTA)
These are expenses not wholly, exclusively and necessarily incurred, whether within or outside Nigeria, during that period by the company for the sole purpose of petroleum operation and which are not deductible while computing the adjusted profit of any company for any accounting period. These expenses are to be added back to get the adjusted profit for the relevant period of assessment.
The following incomes are non-taxable income under the PPTA:
a) Any profit on the disposal of a fixed asset.
b) Any reversal into the income of a previously disallowed expense
c) Income from the transportation of oil by ocean-going oil tankers
d) Income from refinery operations.
Where a company engaged in petroleum operations is engaged in the transportation of chargeable oil by ocean-going oil-tankers or carries refinery operations, such income derived should be taxed under CITA, these is because these operations are down-stream operation and consequently, the income is not chargeable to tax under PPTA. Besides any expenses incurred to earn the income shall be treated as a non-allowable expense under the PPTA and allowable under the CITA to reduce the income before being subjected to tax.
ASSESSABLE PROFIT (SECTION 16 PPTA)
The assessable profits of the company for any accounting period shall be the amount of the adjusted profit of that period after the deduction of the amount of any loss incurred by that company during any previous accounting period or for a new company, the amount of any loss incurred during its first accounting period in its business. Also, losses that cannot be fully deducted in any one period can be carried forward to the next succeeding accounting periods until fully relieved. Furthermore, the company has the right to defer the utilization of any loss relief available to it. This is possible where within five months after the end of the accounting period, the company elects in writing not to deduct the amount of the loss or part thereof from the profits of the accounting period under consideration. The amount so deferred will be deducted from the following year's accounting profits unless the company makes a similar election in that following year.
CHARGEABLE PROFIT (SECTION 20 PPTA)
The chargeable profits shall be the assessable profits, less capital allowances. The capital allowance includes unrelieved Capital allowance (capital allowance b/f), annual allowance for the year, petroleum investment allowance, and any applicable investment tax credit. However, there are some restrictions on the amount of capital allowance to be claimed in any one accounting period. This restriction is to ensure that the tax chargeable on the company is not less than fifteen percent 15% of the tax that would have been chargeable had no deduction been made for capital allowances.
ASSESABLE TAX AND CHARGEABLE TAX (SECTION 21 PPTA)
The assessable tax for any accounting period of an oil company shall be an amount equal to eighty-five percent- 85% of its chargeable profits of that period provided the company is operating Joint Venture Contract (JVC) with NNPC and the company has spent over five (5) years in oil production. Where an oil company has operated Joint Venture Contract with NNPC but for a period below five (5) years, the assessable tax for any accounting period of such company, shall be an amount equal to 65.75% of the chargeable profit of that period.
The assessable tax of an oil company operating a Production Sharing Contract with NNPC for any accounting period shall be an amount equal to fifty percent- 50% of its chargeable profits of that period irrespective of the number of years of operation.
In closing, the oil and gas industry is known for its high cost of investment and high-risk levels in the exploration of oil, and as such one must align the financial goal with efficient tax planning and management to reduce the tax liability. Tax planning is the exercise undertaken to minimize tax liability through the best use of all available allowances, deductions, exclusion, exemption, etc. to reduce income while tax management deals with the filling of various tax returns on time, compliance with the appropriate provisions of the law and making timely payment on taxes to avoid payment of penalties and interest.
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.