Taxation Of Upstream Petroleum Operations Under The Petroleum Industry Act: An Overview.

 By Abdulrahman Yusuf Muhammad

On the 16^th of August 2021, President Muhammadu Buhari granted assent to the petroleum Industry Act (PIA). Prior to this, the Act has had a chequered journey on the drawing board having been in the legislative process since the administration of late president Umaru Musa Yar’adua.

The Act provides legal, governance, administrative, regulatory and fiscal framework for the petroleum industry in Nigeria. It introduces an array of changes and innovation to the industry amongst which are; the creation of new regulatory agencies for the petroleum industry, viz; the Nigeria Upstream Petroleum Regulatory Commission[i] and the Nigerian Midstream and Downstream Petroleum Authority,[ii] the establishment and incorporation of an oil company to be known as the Nigerian National Petroleum Company Limited to replace the current Nigerian National Petroleum Corporation (NNPC)[iii] with ownership vested in the Federal Government, introduction of Petroleum Host Communities Development and Host Communities Development Trust to foster sustainable prosperity, social and economic benefits for host communities from petroleum operations and also the introduction of a Petroleum Industry Fiscal Framework.

The provisions of the PIA relating to taxation are encapsulated under the fiscal framework of the Act which seeks to promote investment in the Nigerian petroleum industry, enhance the revenue of the federal government while ensuring fair returns for investors, simplify the administration of petroleum tax and promote equity and transparency in the petroleum industry fiscal regime.[iv]  This write up attempts an overview of the provisions of the PIA that relates to the taxation of companies involved in upstream petroleum operations under the PIA.

1. TAX ADMINISTRATION UNDER THE PIA:

Administration of tax under the PIA is vested on the Federal Inland Revenue Service (FIRS)[v] the Act saddles FIRS with the responsibility of carrying out the assessment and collection of hydrocarbon tax, companies’ income tax and tertiary education tax in accordance with the act as it relates to taxable petroleum operations under the act.

2. HYDROCARBON TAX (HT):

This is a new tax introduced under the Act. It is levied on the profits of companies operating in the upstream petroleum sector.[vi] This is a shift from the old regime where companies operating in the upstream petroleum operations pay petroleum profit tax. Some salient points relating to HT are considered below;

1. Applicability: Hydrocarbon tax applies to crude oil as well as field condensates and liquid natural gas liquids derived from associated gas and produced in the field upstream of the measurement points. The tax also applies to individuals who engaged in and profited from upstream petroleum operations[vii]
2. Rate: It is charged at the rate of 30% for any accounting period of a company from profits made on crude oil for petroleum mining licenses with respect to onshore and shallow water areas and 15% for onshore and shallow water for petroleum prospecting license.[viii] For companies engaged in upstream petroleum operations either by way of partnership, joint venture agreement or under any kind of scheme or arrangement HT shall be paid in line with the proportion of their equity interest in a jointly executed agreement forming the basis of their relationship for the purpose of upstream petroleum operations which shall be made available to FIRS. Where there is no agreement between such companies, the Nigerian Upstream Petroleum Regulatory commission shall advise FIRS on the approved equity interest of the parties which shall be binding on the parties. The Act also empowers FIRS to make regulations for the purpose of ascertaining the tax to be assessed or charged in a situation such as this.[ix]
3. Self-assessment and filing of returns: for the purpose of determining hydrocarbon tax, companies engaged in upstream petroleum operations shall for each accounting period of the company make up accounts of its profits or losses and which shall include;
4. A statement of account of its profit or losses.
5. Computations of its actual adjusted profit or loss and actual assessable profit of that period.[x]

The account so made up for any accounting period of the company shall be delivered to FIRS within five months after the expiration of that period or within five months after the coming into effect of the Act whichever is later.

A company that is unable to deliver to FIRS its account made up in line with the Act may be granted an extension of time for it to deliver its accounts of profit where the company shows to the satisfaction of FIRS good reason for its inability to deliver its accounts within time.

In addition to the above, companies are required to submit to the service an estimated return of their profit or losses for each accounting period not later than two months after the commencement of the accounting period and such return shall include;

1. Computation of its estimated adjusted[xi] profit or loss and of its estimated assessable profits of that period;
2. For the purpose of ascertaining the assessable profit for the purpose of hydrocarbon tax, the Act has made changes on deductible and non-deductible items and the minimum tax provision.[xii]

Upon the expiration of the time for the delivery of self-assessment the FIRS may proceed immediately to assess a company with hydrocarbon tax for any accounting period.[xiii]

Where a company defaults to carry out the above actions within the time stipulated The Act provides for penalty in the sum of N10,000,000 on the first day of default and N2,000,000 for each and every subsequent day in which the failure continues, or other sum as may be prescribed by the Minister of Finance by an order published in the Federal Government Gazette.[xiv]

1. Payment: The payment of hydrocarbon tax for any accounting period shall be made in equal monthly installments. The payment of the first monthly installment shall be an amount that is equal to one twelfth of the assessed tax and should be paid not later than the third month of the accounting period. Where the accounting period is less than a year, in an amount equal to equal to monthly proportion of the amount of tax estimated to be chargeable for the accounting period. The payment for each of the remainder to be made subsequently shall be due and payable not later than the last day of the month in issue. The final installment shall be due and payable on or before the date of filing of self-assessment of tax for such accounting period and shall be the amount of tax assessed for that accounting period less so much as has already been paid.[xv]

Where there is any default in payment by a company within the prescribed time, a sum equal to 10% of the amount of tax assessed and charged shall be added to the tax so assessed for the defaulting company. Also, the tax due shall incur interest at the prevailing LIBOR (London Inter-Bank Offered Rate) or any successor rate, 10% from when the tax becomes payable until it is paid.[xvi] In addition to this penalty the Act makes it is an offence for a company to refuse to pay hydrocarbon tax without lawful justification or excuse within a period of one month prescribed under section 292 (1) of the Act.

3. Companies Income Tax (CIT):

The widening of the scope of the liability to pay companies income tax under the Companies Income Tax Act by companies in the petroleum industry forms part of the major changes introduced by PIA. Prior to the PIA companies operating in upstream petroleum operations are not liable to CIT, the only tax liability such companies are liable to is petroleum profit tax under the Petroleum Profit Tax Act[xvii]. Thus, companies operating in the upstream sector are no longer exempted from paying companies income tax and shall now be liable to pay companies income tax at the rate of 30%.[xviii]

4. Consolidation of costs and taxes:

For the purpose of companies income tax, companies operating in the upstream sector across the different terrains[xix] are granted leeway to consolidate costs. For the purpose of HT however, a company is only allowed to consolidate costs and taxes across its assets relating to its petroleum mining lease and petroleum prospecting license in accordance with the tax chargeable for the license and lease.[xx]

5. Computation of HT to be in dollars:

Under the Act, computation and assessment of HT shall be made in dollars[xxi].

6. Application of the HT and CIT to companies engaged in upstream operations:

Although the PIA has been passed and assented to and in fact some of its provisions are being implemented, the Act will only apply to companies upon conversion or renewal of existing oil mining leases (OMLs) to petroleum mining lease and oil prospecting license (OPLs) or execution of new ones, after the commencement of the Act. That is, the Petroleum Profits Tax (PPT) Act will continue to apply to OMLs or OPLs obtained prior to the coming into effect of this Act, until such OMLs or OPLs are converted or renewed.[xxii]

Conclusion

The PIA has been adjudged by many as a game changer for the Nigerian petroleum industry. The Act retains certain principles that were applicable to the industry hitherto to its coming into force and it also repeals key legislations applicable to the industry. The above represents an overview of the key tax related provisions of the Act applicable to companies operating in the upstream sector. It is imperative that companies acquaint themselves with the provisions of the Act that affects them, particularly the tax aspects to enable them take maximum advantage of the benefits of the act and to also mitigate the risk associated with suffering liabilities for any default under the Act.

Abdulrahman Yusuf Muhammad is a counsel at the Kano office of Dikko and Mahmoud Solicitors and Advocates and can be reached via [email protected]

[i] Establish under section 4 of the Act to regulate technical and commercial petroleum operations in the upstream sector.

[ii] Established under section 29 of the Act to regulate technical and commercial petroleum operations in the midstream and downstream sector.

[iii] Under section 53 a limited company to be registered under the Companies and Allied Matters Act

[iv] Section 258 of the Act.

[v] Section 259 (a)(i)(ii)

[vi] the under sections 260 and 261 to be paid by companies

[vii] Section 273 (1) and (2)

[viii] Section 267 (a) and (b)

[ix] Section 273 (5)

[x] Section 277 (1)

[xi] Adjusted profit is defined as the profits of a company less the deductions allowed under section 263 of the Act

[xii] Section 280.

[xiii] Section 282 (1)

[xiv] Section 277 (6) and 280 (6)

[xv] Section 291 (1), (2), (3) and (4)

[xvi] Section 292 (1) (a) (b) and (c)

[xvii] Section 8 of the Petroleum Profit Tax Act.

[xviii] Section 302 (1)

[xix] This means the area of any prospecting exploration license, petroleum prospecting license and petroleum prospecting lease. See section 318 of the Act.

[xx] Section 272 (1) and (2)

[xxi] Section 287

[xxii] Section 92 of the Act