Nigeria: new fiscal regime on oil and gas proposedFebruary 22, 2013
The regulatory and fiscal regime governing the operations and taxation of the oil and gas sector is to be replaced with a new regime set out in the Petroleum Industry Bill of 2012 (PIB).
The bill was presented to the Legislative Assembly on July 2012 and is still being debated.
Apart from a number of saving provisions contained in the PIB that are designed to provide for a smooth transition to the new regime, several existing laws governing various aspects of the industry will be repealed when the bill is enacted into law.
These include the Associated Gas Reinjection Act, the Deep Offshore and Inland Basin Production Sharing Contracts Act, the Hydrocarbon Oil Refineries Act, the Nigerian National Petroleum Corporation Act, the Nigerian National Petroleum Corporation (Projects) Act, the Oil Pipelines Act, the Petroleum Act, the Petroleum Products Pricing Regulatory Agency (Establishment) Act, the Petroleum Equalization Fund (Management Board etc.) Act, the Petroleum Profits Tax Act, the Petroleum (Special) Trust Fund Act and the Petroleum Technology Development Fund Act.
The main details of the tax provisions in the PIB, in particular the changes made to the existing regime, are summarized below.
Imposition of hydrocarbon tax
All companies engaged in upstream petroleum operations are liable to pay a hydrocarbon tax on their profits.
The tax is in addition to the normal corporate income tax payable by companies under the Companies Income Tax Act. The hydrocarbon tax replaces the existing petroleum profits tax (PPT) and will be determined in accordance with the following rules.
Scope of profits
Profits are generally deemed to include the proceeds from the sale of all taxable oil, gas, condensate or bitumen sold by the company, as well as the value of all taxable oil, gas, condensate or bitumen disposed of by the company.
Profits also include all income derived by a company, which is incidental to and arises from its upstream petroleum operations.
The deductions permitted in calculating taxable profits are broadly similar to those recognized for purposes of the PPT, except that specific provision is made for the following additional deductions:
- Contributions to a pension, provident or other society scheme or fund in accordance with the provisions of the Pensions Reform Act, without the necessity for prior approval.
- Contributions to the Petroleum Host Communities Fund (i.e., a fund set up under the PIB for use in the development of the economic and social infrastructure of communities located in petroleum producing areas). Petroleum companies are required to contribute 10% of their estimated net profit to the fund. Net profit for this purpose consists of the adjusted profits minus royalty, allowable deductions and allowances, the hydrocarbon tax and the companies income tax.
- Sums set aside in a fund as decommissioning and abandonment expenditure, under conditions determined by the Upstream Petroleum Inspectorate established under the PIB.
A number of expenses are specifically designated as being non-deductible, including:
- Any bonuses payable on the signature, production or otherwise of a lease or renewal of a lease
- All general and administrative expenses incurred outside Nigeria that exceed 1% of the company’s total annual capital expenditure
- Twenty percent of offshore expenses (other than general and administrative expenses) incurred by a company, except where such expenditure relates to the procurement of goods or services that are not available within Nigeria in the required quality and quantity, and in respect of which the prior approval of the Nigerian Content Development and Monitoring Board has been obtained
- Any legal or arbitration costs relating to cases against the Federal Inland Revenue Service (FIRS) or the Nigerian Government, unless such costs were specifically awarded to the company during the legal or arbitration process
- Costs arising as a result of fraud, wilful misconduct or negligence on the part of the company
- Any costs or fees incurred in obtaining and maintaining a performance bond under a Production Sharing Contract
- Pre-incorporation costs
The existing investment allowances are replaced with production allowances at prescribed percentages based on volume produced, the depth of the water and the sale price.
The hydrocarbon tax will be levied at the rate of 50% for onshore and shallow water areas, and 25% for bitumen, frontier acreages and deep water areas.
The tax payable is determined, by way of self-assessment, and is payable within 21 days of the submission of the assessment.
Additional administrative provisions govern:
- The supply of information by taxpayers to the authorities
- Penalties for transactions or arrangements designed to avoid tax
- Penalties for the breach of other provisions of the PIB
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