AN APPRAISAL OF PETROLEUM PROFITS TAX (AMENDMENT) ACT, 2007
The Principal Act governing the taxation of profits from petroleum operations in Nigeria is the Petroleum Profits Tax Act 2007. The Petroleum Profits Tax Act, 2007 emerged after the amendments of the Petroleum Profits Tax Act, Cap.P13 LFN 2004 via the Petroleum Profits Tax (Amendment) Bill, 2005. The provisions of the PPTA, 2007 are discussed below.
Petroleum operations are divided into two:
1. Upstream Operations
2. Downstream Operations
Petroleum Operations (Upstream)
Section 2 of PPTA defines petroleum operations as the winning or obtaining and transportation of petroleum chargeable oil in Nigeria by or on behalf of a company for its own account by any drilling, mining, extracting or other like operations or process, not including refining at a refinery, in the course of a business carried on by the company engaged in such operations, and all operations incidental thereto and any sale of or any disposal of chargeable oil by or on behalf of the company. This is taxable under PPTA.
The main activities involved in petroleum operations
From the foregoing definition, these activities are:
e) Transportation by Pipelines
f) Sale of chargeable oil
g) All other operations incidental to any of the above
Another name for Petroleum Operations is Upstream Operations
Major companies in Petroleum Operations in Nigeria
i. Chevron Nigeria Limited
ii. Shall Petroleum Development Company Limited (SPDC)
iii. Shell Nigeria Exploration and Production Company Limited (SNEPCO)
iv. Nigeria Agip Oil Company (NAOC)
v. Elf Petroleum Nigeria Limited EPNL)
vi. Mobil Producing Nigeria Limited (MPN)
vii. Addax Petroleum Exploration Limited
viii. Consolidated Oil Nigeria Limited
ix. Moni-Pulo Limited
x. Famfa Oil Limited.
Petroleum Operations (Downstream)
These are operations which are not included in the upstream petroleum operations. It is noteworthy that downstream operations are not taxable under PPTA. They are taxable under CITA.
a) Petroleum Products Marketing
b) Crude oil refining
c) Gas refining and distribution
d) Crude oil transportation by ocean going vessels
Examples of companies in Downstream Operations
iii. Nigeria Liquefied Natural Gas Limited (NLNG)
iv. Nigeria Gas Company
v. Port Harcourt Refineries Company
Oil producing companies file 2 types of returns under PPTA in an accounting period; these are:
1. Estimated PPT returns; this must be filed not later than 28/29 February in an accounting year (Section 33)
2. Annual PPT returns; This must be filed not later than 31st May in the following accounting year (Section 30)
Section 2 defines an accounting period in the following terms
1. A normal accounting period runs from January - December
2. For a new company it is a period beginning from the day the company makes the first sale to 31 December of the year of commencement.
3. For a company which ceases business it is from 1st January to the day the company ceases business in the year of cessation.
When PPT is Payable
1. In respect of Estimated Returns PPT for any accounting period is payable in 12 equal instalments commencing from March of that accounting period and ending in February of the following accounting period.
2. For the annual returns, the PPT payable is the PPT computed less estimates already paid; this is called 13th or final instalment and is payable not later than July of the following accounting period.
The Penalty for late payment of PPT
Late payment of PPT attracts penalty of 5% payable with the PPT due not later than one month after the receipt of Demand Note.
Income chargeable under PPTA (Section 9)
a. Fiscal value of chargeable oil
b. All incidental income, except income from oil shipping activities, wet cargoes (section 12)
Note that natural gas is no longer taxable under PPTA since 1998, by the reason of the provisions of section 10A (2) of PPTA; natural gas is now taxable under CITA.
Examples of Incidental Income
1. Rental Income
2. Interest Income
PPT Computations under PPTA N“000 N“000
Chargeable Income (Sections 9 & 23) & other Incidental Income xxx
Deduct Section 10 Deductions& adjust for Transport (shipping):
Royalty on exported crude xxx
Admin & Prod Exp xxx
Intangible Drilling Exp xxx
Exploration Costs and Expenditure on first two appraisal wells xxx (xxx)
Adjusted Profits xxx
Losses recouped (relief)(Section 16) (xxx)
Assessable Profit xxx
Capital Allowances (Section 20) and PIA (xxx)
Chargeable Profits xxx
Assessable Tax (Chargeable Profit x Tax Rate[85%]) xx
Determination of the Fiscal Value of Chargeable oil
By the provisions of sections 9 and 23 of PPTA, the fiscal value of chargeable oil for the purpose of PPT computations is the higher of.
a. Volume of oil lifted multiplied by actual sales price and
b. Volume of oil lifted multiplied by posted price (realizable price)
Posted price and realizable price are derived official prices of chargeable oil. They help to prevent under-pricing of chargeable oil by oil companies.
What is Adjusted Profits under PPTA?
Adjusted Profits as defined in section 9 is the fiscal value of chargeable oil less deductions under section 10 and after adjustment under section 14.
Deductions under section 10 include:
a. Operating expenses such as royalty paid, admin & production expenses.
b. Some capital expenditure like intangible drilling expenses, exploration expenses and expenses for the appraisal of the first two wells.
From the above, we can see that some capital expenses are allowable under PPTA unlike in CITA. Adjustment under section14 is the exclusion of income from transportation of chargeable oil by ocean going oil tankers from taxable income under PPTA; such income is taxable under section 14 of CITA.
Deductions not allowed under PPTA
i. Expenses not being wholly, exclusively and necessarily expensed for the purpose of the operations;
ii. Any sum employed as capitals except as allowed under section10.
iii. Any amount employed as improvements as distinct from repairs;
iv. Sums recoverable under an insurance or contract of indemnity;
v. Rent of or cost of repairs to any premises not incurred for the purpose of the operations;
vi. Amounts incurred in respect of any income tax, profit tax or other similar tax within Nigeria or elsewhere;
vii. Depreciation of any premises, building, structures, works or a permanent nature, plant, machinery or fixtures;
viii. Payment to any provident, pension, saving, or other society scheme or funds not approved by the Joint Tax Board;
ix. Any expenditure for the purchase of information relating to the existence and extent of petroleum deposits;
x. Interest on borrowed money where such money was borrowed to a second company, if during that period;
- either company has an interest in the other company or
- both have interest in another company either directly or
- through other companies or
- both are subsidiaries of another company.
Assessable Profits is defined in section 9 (4) as adjusted profits less deductions allowed by section 16, which are losses brought forward (if any). Therefore, under PPTA losses are deducted in arriving at assessable profits unlike in CITA.
Chargeable Profits is defined in section 9 (5) as assessable profits less deductions allowed under section 20, which are annual allowances and petroleum investment allowances (PIA).
Capital Allowance Rates under PPTA
By the provisions of paragraph 5 and Table 1 of 2nd Schedule of PPTA Annual allowances are claimed on qualifying capital expenditure at the rate of 20% p.a for four years and 19% in the fifth year.
PIA rates under PPTA
By the provisions of paragraph 4 and Table II of 2nd Schedule of PPTA PIA rates applicable are:
a. Onshore Operations 5%
b. Operations in Territorial Waters and continental shelf
area up to and including 100m of water depth.. 10%
c. Operations in Territorial Waters and continental shelf are
between 100m and 200 m of water depth. 15%
d. Operations in Territorial waters and continental shelf area
beyond 200m of water depth. 20%
The tax rate is applied to the chargeable profits to get assessable tax. The rates specified in section 21 are.
i. For the first five accounting periods of a new company the rate is 65.75%.
ii. For other accounting periods the rate is 85%
Main business/fiscal arrangements available under the upstream operations
The three Main business and fiscal arrangements are:
1. Joint Venture Contracts (JVC)
2. Production Sharing Contracts
3. Sole risks (independent operators)
4. Farm-in and Farm-out
5. Alternative Funding.
Main features of Joint Venture Contracts
a. It is a contract between NNPC and one or more International oil companies.
b. The members are Joint concessionaires of the oil blocks
c. The contract is governed by a Joint Operating Agreement (JOA)
d. One international oil company is appointed the operator of the JVC Projects are funded through cash calls
e. Cash call are payable on the basis of equity participation.
f. Crude oil produced is also lifted by each partner on the basis of equity participation
g. JVC companies used to enjoy special tax incentives packaged under an agreement termed Memorandum of Understanding (MOU). MOU was suspended by FG in early 2008.
Features of Production sharing contracts
i. It is a contract between NNPC and one or more contractor
ii. NNPC is the sole license holder unlike under JVC.
iii. The contractor bears all the risks of operations.
iv. The application of PPTA is moderated by the provisions of the Deep Offshore and Inland Basin Act and PSC Agreements.
v. Areas of operation are deep offshore and inland basins.
vi. PPT rate is 50%
Features of PSC Continues
i. Contract areas in respect of contracts signed before 1999 are entitled to investment tax credit at 50% on investments made.
ii. But for contracts signed from 1999 what is applicable is petroleum investment allowance at 50%.
iii. Crude oil produced is allocated in this order.
• Royalty oil to NNPC
• Cost oil to contractor
• Tax oil to FIRS, Abuja
• Profit oil to NNPC and contractor
Features of Sole Risk (Independent Operators)
The license holder(s) also take all the risks.
NNPC has no stake except that of regulation and supervision.
They are all indigenous companies like Conoil, Moni-Pulo, Atlas etc
No special tax incentives outside PPTA.
Farm-in and Farm-out in Petroleum Operations
Farm-out is a situation where an oil block license owner releases part of his interest but retains the operatorship. The owner is termed Farmee while the new entrant is Farmor. Farm-in is an arrangement in which a new investor takes over part of the interest in an oil block; ownership still resides with license holder.
Alternative Funding Arrangement in Petroleum Operations.
This is an arrangement in which the international oil companies in JVC agrees to fund all the capital costs of a project; that is no cash call is made upon NNPC for its own equity participation. NNPC pays back its share of the capital costs through allocation of additional crude oil produced. NNPC in this arrangement is termed the carried partner while the IOC is called the carrying partner.
1. PETROLEUM PROFITS TAX (AMENDMENT) BILL 2005 BY THE CHARTERED INSTITUTE OF TAXATION OF NIGERIA
2. PETROLEUM PROFITS TAX ACT, 2007 AS AMENDED AND PASSED BY THE NATIONAL ASSEMBLY
ABOUT THE AUTHOR
OSOLAKE VICTOR OMOYELE is an indigene of Abeokuta. He attended All Saints Anglican Primary School, Itori in Ogun State where he had his primary education before proceeding to Saint Peter’s College, Abeokuta, Ogun State. He graduated from the school as the best graduating student.
He thereafter went to the Federal Polytechnic, Ilaro to study Accounting and he successfully completed the course and was subsequently awarded a National Diploma in Accountancy (Distinction). He proceeded further for his Higher National Diploma in Accountancy in the same institution. He graduated from the Institution with a Distinction grade.
Osolake has a banking working experience with Intercontinental Bank Plc, Guaranty Trust Bank Plc and First Bank of Nigeria Plc.