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Introduction
Nigeria's upstream sector remains the undisputed engine of its national economy, significantly and consistently contributing to Gross Domestic Product (GDP), foreign exchange earnings and Government revenue. The sector contributed approximately 4.60% to the real GDP in Q4 20241 and accounted for an impressive 88.26% of Nigeria's total export value, despite fluctuations in crude production numbers and global crude prices. Crude oil alone generated over ₦55 trillion (US$36 billion) in export revenue2, emphasizing its immense importance to the nation's foreign exchange earnings. The sector remains crucial for energy security and employment, even with global push from fossil fuel to clean energy and domestic challenges such as pipeline vandalism and crude oil theft.
On 26 June, 2025, Nigeria embarked on one of its most ambitious fiscal overhauls in decades with the Presidential assent of the Nigeria Tax Reform Bills, now Acts3. These sweeping reforms aim to modernize the country's tax architecture, enhance revenue generation and foster a more equitable and investment-friendly economic environment. These reforms introduce critical amendments to the current tax legislation, including a Minimum Effective Tax Rate (ETR) of 15% for large corporations and multinationals and becomes effective on 1 January 2026. It also aligns Nigeria with global tax standards, especially the Organisation for Economic Co-operation and Development (OECD)'s Pillar Two framework, which seeks to curb aggressive tax planning and profit shifting.
The tax reforms arrive at a critical juncture for Nigeria's upstream sector; a sector actively competing for global investments. The Government has simultaneously intensified efforts to attract investments through a range of upstream sector specific incentives.
This article explores the future of tax compliance in Nigeria's upstream sector, particularly navigating the ETR.
Understanding ETR under the Nigeria Tax Act (NTA)
The ETR aims to improve Government revenue, ensure large corporations pay their fair share of taxes and prevent profit shifting, thereby aligning Nigeria with the OECD's Pillar Two (Pillar Two) framework.
Under the Pillar Two framework, a top-up tax applies to a multinational enterprise's operation in any jurisdiction where its ETR falls below the minimum 15%. The framework calculates the combined ETR for all constituent entities located in a specific jurisdiction and applies a top-up tax to bring the rate up to the 15% minimum, if it had not already been met.
The ETR is calculated by dividing the aggregate adjusted covered taxes (which include both current and deferred tax with other adjustments) by the Global Anti-Base Erosion (GloBE) income of all constituent entities in a jurisdiction. GloBE income is based on the financial accounting net income or loss of a constituent entity and is adjusted for specific items, such as revaluations, foreign exchange differences, tax credits, gains or losses from disposition of assets and liabilities, deferred taxes e.t.c.
The Pillar Two framework also includes a carve-out for the portion of profits directly related to tangible assets and payroll costs of constituent entities in a jurisdiction. This carve-out initially excludes 10% of eligible payroll costs and 8% of the carrying value of tangible assets, thereafter, both metrics reduce to 5% over a ten-year period. This ensures that profits from genuine, substantive economic activities are not subjected to the top-up tax.
Nigeria, as a member of the OECD/G20 Inclusive Framework has now incorporated the Pillar Two rules into its local legislation with the introduction of the ETR. These rules include;
- Qualified Domestic Minimum Top-up Tax (QDMTT) – This allows Nigeria to collect ETR domestically (Section 57 of the NTA); and
- Income Inclusion Rule (IIR) – Nigerian resident parent company of a multinational group pays top-up tax on income from its low-taxed non-resident subsidiaries (Section 6(3) of the NTA)
However, Nigeria's domesticated version of these rules presents some slight differences. The scope is broader, applying not only to constituent entities of multinational groups with an aggregate group turnover of at least €750 million, but also to domestic companies with an aggregate turnover of ₦50 billion or more in a financial year. Companies that meet any of these conditions are now required to pay an additional tax where their ETR falls below 15%. The NTA defines ETR to mean: "the rate produced by dividing the aggregate covered tax paid by a company for a year of assessment by the profits of the company". While profits are defined as: "the net profits before tax as reported in the audited financial statement less 5% of depreciation and personnel cost for the year". A separate provision defines "net income" similar to "profits" but with additional exclusion for franked investment income and unrealized gains or losses from profit before tax.
Unlike the Pillar Two framework which provides for a number of adjustments to GloBE income and adjusted covered taxes, Nigeria's definition of profits/net income and covered taxes is less complex. Profits/net income exclude franked investment income and unrealized gains or losses and permits a carve-out of 5% for depreciation and personnel costs. Covered taxes include income tax, petroleum profit tax (PPT), hydrocarbon tax paid or payable, development levy and priority sector tax credit. This simplifies the Nigerian ETR calculation while still protecting a portion of profits attributable to substantive economic activities from being subjected to the top-up tax.
The Future of Income Tax Compliance For Upstream Companies
To ensure the government earns minimum revenue from upstream entities, the NTA retains the minimum tax rules from both the PPT Act and Petroleum Industry Act (PIA). The PPT Act minimum tax rules caps the capital allowance that upstream companies can claim annually, guaranteeing chargeable profits for taxation. Similarly, the PIA minimum tax rules limit tax deductible costs to 65% of gross revenues, subject to certain cost exemptions.
Upstream companies earn revenue principally in US dollars. Consequently, the ₦50 billion (circa USD$33 million) aggregate turnover threshold, should capture a majority of indigenous upstream entities. In addition, local subsidiaries, associated companies or permanent establishments of multinational groups in Nigeria may fall under the scope of constituent entities, making them liable to pay a top-up tax where their ETR falls below 15%.
The introduction of the ETR adds a new layer of complexity to the planning, tax reporting and budgeting processes of entities in a highly capital-intensive upstream industry. Contrary to the Pillar Two framework which assesses ETR at a jurisdictional level, Nigeria's domestic ETR rules seem to apply on an entity-by-entity basis. This means that upstream entities, specifically those governed by the PIA fiscal regime and engaged in petroleum operations across multiple streams, may have to consider the ETR impact on each entity. Also, for budget and portfolio optimization, these upstream companies often float other local related entities to handle non-core upstream activities or on some occasions to manage divested oil or gas assets from other upstream entities. These entities may be subject to the ETR and so it is important that a proper evaluation is carried out to determine their fit.
Assessing the Relationship between ETR and Upstream Sector Specific Incentives
At initial glance, there appears to be a conflict between the ETR designed to protect Government revenue within its borders and upstream sector specific incentives meant to reduce the tax burden of upstream entities and attract investments.
It is no news that the upstream sector has been provided with an array of fiscal incentives of late. Notably, the Non-Associated Gas (NAG) Greenfield Development Incentives, Gas Utilisation Investment Allowance, Deep Offshore Oil and Gas Production Incentives and Cost Efficiency Incentives. These incentives offer both sector and terrain specific tax allowances and credits tied to capital investments, production cost reductions and increased crude oil and gas production. Hence, a 15% ETR may potentially claw back some of the intended benefits of these tax incentives. This is even more so for local entities who are not part of a multinational group and unlikely to shift profits. This raises a vital question; Are upstream companies able to fully leverage the available incentives under this new tax framework?
The Pillar Two framework makes use of a deferred tax accounting approach when considering the allowable adjustments for tax incentives. The impact of tax allowances, which create a temporary difference, are spread out over the period of the tax benefit, keeping the ETR largely consistent. Conversely, tax credits that do not qualify as Qualified Refundable Tax Credits (QRTCs) have a downward effect on the ETR, creating a top-up tax. In Nigeria, the available upstream tax credits may not meet the criteria to be considered QRTCs. This is because Pillar Two requires tax credits to be refunded, where credit exceeds tax liability, in cash or cash equivalent within four years from the date the company becomes eligible for that credit to qualify as QRTCs.
The Pillar Two framework challenges traditional tax incentives (such as tax credits, exemptions, holidays or deductions), as it, on most occasions, triggers a top-up tax that negates the intended benefits of these incentives. Governments, around the world, are thus rethinking and redesigning available tax incentives to retain their attractiveness for investment while complying with the Pillar Two framework. The jury is out on how the Nigerian Government intends to redesign the available upstream sector specific tax incentives and explore incentives that may keep, as well as attract more investments into its oil and gas sector.
Notwithstanding, upstream entities that meet the conditions for payment of the ETR are to draw up a comprehensive long term operational plan of both their global and local operations, as the case maybe, to determine the potential tax impact over a period of years. Also, this analysis may be helpful to determine how these entities appropriately allocate free cash flow in meeting revenue, additional investment and tax compliance targets.
Conclusion
The NTA, particularly with the introduction of the ETR, represents a defining moment in Nigeria's fiscal journey. Notably, the Government's intention to close potential tax revenue leakages which could arise under the OECD's IIR and Undertaxed Profits Rule (UTPR) in a global environment increasingly embracing Pillar Two. By also ensuring large corporations and multinational groups remit a domestic minimum tax, the Government safeguards its tax base, preventing other jurisdictions from claiming top-up taxes on profits generated from Nigeria.
Like Nigeria, many countries have embraced the Pillar Two rules and have commenced incorporating them into their respective local legislation.
However, the success of this ambitious fiscal overhaul is dependent on achieving a delicate balance in delivering increased government revenue and driving investment in the upstream sector. A robust stakeholder engagement process is, therefore, essential prior to the issuance of detailed guidance by the Nigeria Revenue Service (NRS) on the provisions of the NTA.
Corporations and Investors, both local and international, thrive on certainty. It is thus without a doubt that clarity, predictability, and consistency in fiscal policy implementation are essential and cannot be overemphasized.
Footnote
1. Nigeria Bureau of Statistics Gross Domestic Product Report Q4 2024
2. Nigeria crude oil export value and revenue - 2024
3. President signs into law the four (4) Tax Reform Bills
The opinion expressed in this article is solely personal and does not represent the views of any organization or association to which the authors belong.
