The Tax and Fiscal Regime under the Petroleum Industry Act 2021

In our third series examining the main provisions of the newly enacted Petroleum Industry Act (PIA), we consider some of the tax and fiscal provisions under the Act.

Goldsmiths Solicitors PIA Series III

Introduction

The PIA altered the administration of taxes and the payment of fees and levies in the Nigerian Petroleum Industry and makes changes aimed at encouraging investment in the Industry. The Act also sets out the agencies now in charge of the administration and collection of taxes and levies, and makes alterations on the rates, allowable and non-allowable deductions, etc. to be made in respect of taxes.

Responsible Agencies

The Agencies responsible for the administration and collection of taxes and other levies under the PIA are:

1. The Federal Inland Revenue Service (FIRS) – responsible for assessing and collecting Hydrocarbon Tax, Tertiary Education Tax and Companies Income Tax.^[1]
2. The Nigerian Upstream Petroleum Regulatory Commission (the Commission) – responsible for determining and collecting royalties, signature bonuses, rents, production shares profit sharing or risk service provisions and other related payments;[2] and
3. The Nigerian Midstream and Downstream Regulatory Authority (the Authority) – responsible for the determination and collection of penalties on gas flaring arising from midstream operations.[3]

Applicable Taxes

The PIA has made some changes with respect to some aspects of taxes payable by operators. The Petroleum Profit Tax (PPT) will now be replaced with Hydrocarbon Tax (HT) and Companies Income Tax (CIT).

The Hydrocarbon Tax

Hydrocarbon Tax (HT) are assessable taxes, chargeable on profits of Companies engaged in upstream petroleum operations in the onshore, shallow water and deep waters and it applies to crude oil, field condensates and natural gas liquids derived from associated gas and produced in the field upstream of the measurement points.[4] The following are not subject to Hydrocarbon Tax (HT):

1. Associated gas produced which is not upstream of the measurement point[5];
2. Any frontier acreage until it is reclassified to a general onshore[6].

The crude oil taxable under the HT is the value of chargeable oil adjusted to measurement point.[7] To determine Hydrocarbon Tax (HT), the adjusted measurement point, allowable deductions[8] adjusted profit and non-allowable deductions[9] are to be considered. In ascertaining the adjusted profit, penalties, litigation and arbitration costs, bad debts, financial/bank charges, etc. are not deductible.^[10]

In determining the HT, the sum eligible for deduction in an accounting period is subject to the cost ratio limit of 65% of the gross revenue determined at measurement point.[11] Where deductions required to be made are not made in an accounting year, such deductions may be brought to FIRS’ notice within 5 months after the end of an accounting year or as extended by the FIRS[12] and may be deducted in the subsequent accounting year.[13] HT is payable in installments.[14] and its assessment, computation and payment is to be made in USD.^[15]

The Act categorizes chargeable tax with respect to HT into two (2), namely:

1. Profit on crude oil for Petroleum Mining Leases (PML) with respect to onshore and shallow water areas, which is 30% of the lessee’s profit; and
2. Profit on crude oil for Petroleum Prospecting Licence (PPL) with respect to onshore and shallow water areas, which is 15% of the licensee’s profit.

Chargeable Persons under Hydrocarbon Tax

Generally, Companies engaged in Upstream petroleum operations are liable to be charged and to pay Hydrocarbon Tax. The following persons/companies are also subject to hydrocarbon tax:

1. Any person or persons or partnership except companies and/or partnership between companies that engages and makes profit from upstream petroleum operations is liable to pay taxes in addition to provided penalties.[16]
2. Companies engaged in upstream petroleum operations either as a Partnership, Joint Ventures or any other arrangement. These companies will be charged in proportion to the equity interest held respectively by them.[17]

Accounts/Returns to be Kept

The FIRS oversees the administration, assessment and collection of Hydrocarbon Tax. Companies assessable to Hydrocarbon Tax are required to keep and submit accounts to the FIRS

Accounts of Profit and Loss

Companies engaged in Upstream Petroleum Operations relating to crude oil are required to make accounts of profits and loss within an accounting period and they are required to submit a copy of the accounts to the FIRS within 5 months of the accounting period or within 5 months from the effective date of the PIA.[18]

Returns of Profit and Loss

Companies engaged in upstream petroleum operations related to crude oil are also required to submit an estimated return of profits and loss not later than 2 months after the commencement of each accounting period. Where there is a change in price, cost or volume after filing of returns, the company will be required to submit further returns reflecting the change.[19]

Accounts or Returns on Bulk Sale or Disposal of Chargeable Oil

Every company yet to commence bulk sale or disposal of chargeable oil are to file its audited accounts or returns to the FIRS within 5 months after the 31^st of December of each year for already existing Companies and 18 months for newly incorporated companies.[20]

Dispute on Hydrocarbon Tax

A company liable to pay Hydrocarbon Tax may deliver a self-assessment for any accounting period. The FIRS on the other hand may accept or refuse the assessment. Where the FIRS refuse the self-assessment or where such company fails to deliver a self-assessment, the FIRS may estimate an amount of tax to be paid. A dispute may arise from the estimate projected by the FIRS and the PIA provides for the channels to resolve such dispute as follows:

Pre-payment Dispute: Where before the payment of the HCT, a person in whose name an assessment was made disputes the assessment, such person may apply in writing to the Service for revision by way of a Notice of Objection within 30 days of service of assessment.[21] The time frame for service of Notice of Objection may be extended by the FIRS. Where the assessment/estimated tax is not amended, the person may apply to the Tax Appeal Tribunal.[22]

Post-payment Dispute: any person who claims that there is an excessive or erroneous assessment in respect of a paid HT is to apply to the FIRS within 6 years from that accounting period in which the payment was made.[23]

Companies Income Tax under the Petroleum Industry Act

Companies in the upstream, midstream and downstream petroleum sector are liable to pay Companies Income Tax (CIT) and are subject to the provisions of the Companies Income Tax Act. In determining CIT, Hydrocarbon Tax is not deductible.^[24] Production bonuses and signature bonuses paid for the acquisition of rights in or over petroleum deposits, signature bonuses or fees paid for renewing Petroleum Mining Lease or Petroleum Prospecting License, etc. are also not deductible for Companies Income Taxation.[25]

In addition to deductions generally applicable to companies for the purpose of CIT, royalties, rents, payments made by a holder of a Petroleum Mining Lease to the Federation Account relating to production sharing, profit sharing, etc. are deductible for the purpose of calculating CIT.

The Funds of the Host Communities Development Trust^[26] as well as the 3% annual contribution of the Settlor(s) are to be deducted for the purpose of both hydrocarbon Tax and Companies Income Tax.^[27]

A person who intends to carry on the business of more than one stream is to incorporate different companies for each stream and the companies when incorporated shall each be liable to pay CIT. However, companies with a Petroleum Mining License will not be charged any stamp duties or capital gains tax with regards to the segregation.[28]

Furthermore, withholding tax on dividends at 10% and Tertiary Education Tax (TET) of 2% of assessable profits will still be applicable however unlike under the PPTA, TET will not be tax deductible. Bank charges have also now been included as expenses which are not tax deductible.

The PIA also replaces the Investment Tax Allowance (ITA) and Investment Tax Credit (ITC) with a Production allowance per crude oil production

Payment of Rent and Royalties

Holders of Petroleum Prospecting License and Petroleum Mining Lease are required to pay rent and royalties on a yearly basis and per hectare. The payment of such rent and royalties are to be paid into the Federation Account and verified by the Commission. Royalties may be paid in cash or in kind.

Where any of this remains unpaid to the Government for a period of 30 days, it is regarded as a debt with interest accruing. These payments cannot be waived or discounted.

Conclusion

The PIA introduced several changes to the fiscal and tax regimes in the Nigerian Petroleum Industry. These changes are aimed at making Nigeria attractive for Petroleum operations. The Act has also introduced several changes in the rate of taxation and levies in the industry, applicable taxes, the agencies responsible for the collection of revenue, allowable and non-allowable deductions, etc. It is however important to state that this new tax regime is only applicable to holders of the new licenses under the Act and persons operating under the Oil Prospecting License and the Oil Mining lease interested in benefitting from the new tax rates, will be required to convert to the new licenses applicable under the Act.

Generally, the fiscal and tax regimes in the PIA apply to various operators in the Petroleum Industry and thus, are not exhaustive. Operators in the sector are advised to seek further advise on areas peculiar to them.

Watch out for the concluding part of our PIA series which is to be published next week. This shall deal with the establishment of the Host Communities Fund introduced by the PIA.

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