PETROLEUM PROFITS TAX - Ascension Consulting … of Petroleum Profits... · Agricola or crude oil...
Transcript of PETROLEUM PROFITS TAX - Ascension Consulting … of Petroleum Profits... · Agricola or crude oil...
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PETROLEUM PROFITS TAX
– Azeez ALATOYE
• HND, LLB, FCTI, FCA, ACIArb,
• Partner/ Chief Executive Officer
• Tax, Regulatory & People Services
• Ascension Consulting Services
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Introduction • It is my pleasure to be here this afternoon to
share my views with the respected officers of the Economic & Financial Crimes Commission who I understand are from Cadet offices of different educational background but who have chosen to dedicate to the upliftment of Nigeria by promoting voluntary compliance with the provisions of the law and eliminating corrupt practices that has been identified as one of the major retrogressing factors in the lives of the residents of Nigeria
• I understand that the Commission has signed an MOU with the Chartered Institute of Taxation of Nigeria in the promotion of understanding of the technicalities in taxation practice including the Petroleum Profits Tax. As a member of the Institute, I have therefore been directed to facilitate the PPT session.
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Introduction (contd.)
• PETROLEUM, according to Wikipedia, was coined from Greek word which literally means "ROCK OIL", first used in the treatise De Natura Fossilium published in 1546 by the German mineralogist Georg Bauer, known as Georgius Agricola or crude oil is a naturally occurring, flammable liquid found in rock formations in the Earth consisting of a complex mixture of hydrocarbons of various molecular weights, plus other organic compounds.
• The Petroleum Profits Tax Act Cap P13 LFN 2004 (S2) defined PETROLEUM as any mineral oil or relative hydro-carbon and natural gas existing in its natural condition in Nigeria but does not include liquefied natural gas, coal, bituminous share or other stratified deposits from which oil can be extracted by destructive distillation.
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Introduction
• PETROLEUM OPERATION means winning or obtaining and transportation of petroleum or 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 (oil process, Oil marketing companies and marketing of Liquidated Natural gas this company are assessed to tax under the companies income tax act 2004) in the course of 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.
• UPSTREAM covers the exploration, production and transport prior to refining.
• DOWNSTREAM means refining, marketing and distribution operations that occur after refining as opposed to Upstream.
• PETROL or gasoline or Premium Motor Spirit simply called PMS.
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Introduction (Contd.)
• NIGERIA joined in 1971. OPEC was formed in 1960 and currently has 12 members
• OPEC crude oil production is expected to average 29.4 million bbl/d, then rise to 30.1 million bbl/d in 2010
• Oil Industry is the backbone of the Nigerian economy, accounting for over 90% of total foreign exchange revenue.
• Estimates of the total crude oil reserves vary, but are generally accepted to be about 25 billion barrels in 2008. New offshore discoveries are likely to push this figure to about 40 billion barrels in 2010.
• Average daily production is 2mbpd as against the 2.5 mbpd OPEC quota. The Government expects this to be 4million bpd in 2010
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OPEC Petroleum Production
Million Barrels per Day
2006 2007 2008 2009 2010
Crude Oil
(Million barrels per day)
Algeria 1.37 1.37 1.42 - - - -
Angola 1.37 1.68 1.91 - - - -
Ecuador 0.54 0.51 0.5 - - - -
Iran 3.77 3.7 3.83 - - - -
Iraq 1.99 2.08 2.35 - - - -
Kuwait 2.54 2.46 2.57 - - - -
Libya 1.68 1.7 1.71 - - - -
Nigeria 2.22 2.12 1.94 - - - -
Qatar 0.82 0.81 0.85 - - - -
Saudi Arabia 9.15 8.72 9.26 - - - -
United Arab Emirates 2.53 2.49 2.57 - - - -
Venezuela 2.47 2.39 2.35 - - - -
OPEC Total 30.45 30.06 31.27 29.41 30.13
Other Liquids 4.3 4.33 4.48 5.14 6
Total OPEC Supply 34.74 34.39 35.75 34.54 36.14
Source: EIA
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Introduction (Contd.)
• All of the crude oil in Nigeria comes from numerous, small, producing fields, located in the swamps of the Niger Delta, and product is exported through 7 terminals
• There are about 606 fields, most with less than 100 million bbls of extractable reserves
• Current Government policy is to raise total reserves to 40 billion barrels by the year 2010, while daily production is targeted at 4 million barrels per day
• Africa’s proven gas reserves as at January 2007 was 500.7 trillion cubic feet. Nigeria was the leading country with proven gas reserves of about 183.9 trillion cubic feet with 86% in the Niger Delta Region and 14% Deep waters
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Introduction (Contd.)
African Proven Reserves (Tcf) as at Jan 2007
42.8
46.5
68.5
159
183.9
0 20 40 60 80 100 120 140 160 180 200
Other Africans
Libya
Egypt
Algeria
Nigeria
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Overview of stages of petroleum operations
• Oil Upstream Sector
• Gas Upstream Sector
Mineral Right Acquisition
Prospecting
Exploration
Appraisal
Development
Production
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Some recent allegations of Petroleum Profits Tax Evasion / Case study
• Case study 1 (Thisday News 21 May 2008)
– Yar‟Adua Orders Shell, ExxonMobil to Refund N236bn –
President Umaru Musa Yar‟Adua has ordered the Nigerian National Petroleum Corporation (NNPC) to immediately recover outstanding payments of $1.91 billion (N236 billion) due to the Federal Government from Shell and ExxonMobil on the Production Sharing Contracts (PSCs) for the Bonga and Erha oil fields. “President Yar‟Adua directed as follows: That the total sum of $1.496 billion accruable to NNPC based on the proper application of the PSC‟s capital allowance should be recovered. This sum is made up of $850 million from Bonga and $646.3 million from Erha; “That the sum of $414.6 million accruable to NNPC and to government from Bonga gas sales and as tax revenue from the gas sales should be recovered; and
“That all future government gas sales agreements should account for Natural Gas Liquids (NGLs) to ensure that government derives maximum economic benefits from them and that this position be adopted in the renegotiation of all existing PSC agreements which are due for renegotiation,” he said.
Question: Ambiguity leading to Tax Disagreement or outright case of Tax Evasion?
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Some recent allegations of Petroleum Profits Tax Evasion / Case study
• Case study 2 (Thisday News 15 November 2006)
– The $500 Billion Question:
Using the final tax returns submitted to the Federal Inland Revenue Service (FIRS) by Shell, Mobil, Chevron Nigeria, Nigeria Agip Oil Company (NAOC), Texaco and Elf, the Okogu-led unit started by conducting a study on the margin of profit allowed to oil companies under the Memorandum of Understanding (MoU) based on the existing fiscal regime, a study which revealed very clearly that Nigeria was being shortchanged by the oil majors. With the report, Okonjo-Iweala thought that on her own, working with FIRS, she could arm-twist the oil companies to pay back the $340 million shortfall by the calculations done. But the majors, given the operating MoU which they probably drafted, were well aware that the only person who could raise issues with them was the Petroleum Minister and since the president has refused to relinquish the portfolio, he was the only man they could deal with. Not Okonjo-Iweala whatever may be her designation. When the then Finance Minister eventually got the message, she met the President with a one-page executive summary from Okogu's report. The memo goes thus: "Part of the incentive package granted to oil companies under the Memorandum of Understanding (MOU) in the Joint Venture agreements was a guaranteed margin of at least $2.50 per barrel irrespective of the oil price. In addition, the companies are allowed an extra margin based on a formula that escalates the base margin when the price lies between $19 and $30 per barrel, which works out at $4.147 when the oil price reaches $30. If the price stays above this level for 45 consecutive days, the MOU states that the Oil Minister would advise the oil companies on any change in applicable margin. "At the time the MOU was designed (including the various amendments) it could hardly have been imagined that the oil price would rise to the levels seen in recent times. The condition for a new advisory to companies has been met three times since 2000 (September to November 2000); in 2003 (January to March); and throughout 2004. However, it does not appear that the basis for calculating the margin has been changed, as companies have continued to claim higher and higher margins (reaching a peak of $6.46 per barrel in October 2004), which have translated into lower Petroleum Profits Tax (PPT) payments to the treasury.
After reading this memo, the president was said to have exclaimed: "Are you sure of your facts?" Okonjo-Iweala answered in the affirmative. There and then, Obasanjo requested that a letter be drafted for him to the oil majors. The next day, he signed the letter as the de facto oil minister and within weeks, $340 million was returned to the Nigerian treasury by the oil companies. Just like that!
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Some recent allegations of Petroleum Profits Tax Evasion / Case
study
• Case study 3 (The Sun News Friday, May 9, 2008)
– Obasanjo‟s policies encouraged tax evasion –Yar‟Adua
Yar‟Adua who, was addressing the 10th Annual Tax Conference of the Chartered Institute of Taxation of Nigeria (CITN) in Abuja, insisted that tax holidays have been selectively granted in the past, which gave rise to discriminatory treatment of taxpayers and muted complaints. “You will, therefore, agree with me that persuading those not enjoying such waivers and concessions to voluntarily file returns and pay their taxes would be an uphill task.
• Case study 4 (Thisday Online 25 December 2006)
Tax Evasion: PENGASSAN Defends Mobil The association said “we pay about N2billion naira taxes to the Akwa Ibom State Government annually (and)
in addition, MPN as the principal source of the 13 percent derivation revenue is the live-wire of Akwa Ibom State with billion of naira accruing to the State Government monthly as derivation revenue.” The Association which sent copies of their resolution to the Minister of Petroleum (Presidency), Akwa Ibom State Government, Group Managing Director of NNPC and few others warned against further negative actions against MPN as regards the tax matter. Reacting to the tax issue, some prominent persons in the State have condemned such advice from the tax consultants saying “it was hasty considering the fact that both MPN and the State Government agents were discussion on the matter”. Moreover,it added that there is no record to show any tax evasion by MPN in the past and such ill advice was enough to incite the Akwa Ibom people against MPN and its workers in the wrong direction.
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Some recent allegations of Petroleum Profits Tax Evasion / Case study
• Case study 5 (Managing Consultant. For: ABZ INTEGRATED LTD)
– CHEVRON NIGERIA LTD has been indicted in an $18 billion tax fraud in Nigeria and the scandal is threatening to rock the boat of the whole multinational oil and gas companies in Nigeria. The letter published below was sent to NIGERIAN TIMES by the consultants investigating Chevron Nigeria Ltd. 9th July, 2005 The Executive Chairman Economic and Financial Crimes Commission (EFCC) Abuja. Dear Mr. Nuhu Ribadu, RE: $10.8 BILLION TAX EVASION, FRAUD AND CORRUPTION IN THE CHEVRON NIG LTD AND ITS ASSOCIATED COMPANIES. Please refer to your orchestrated appearance and representation on the Nigerian Television Authority (NTA) programme „POINT BLANK‟ as relayed on Thursday 28th July and Friday 29th July 2005.
– Based on the letter under reference: (i) how could you say that ABZ is not entitled to at least 10% of what is recovered from its effort. (ii) how can you portray us as „419ers‟ who have equally gone to FIRS, Nigeria Police, etc to extort money?
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Upstream Crude Oil Fiscal Regime
The Nigerian Oil Extraction activities keep on moving
from one arrangement to the other while the existing
arrangement continues as parallel running since
1958 to date. The current Position is as below.
Nigeria Oil
Fiscal Regime
Concessionary /
Licensing
Arrangement
Contractual
Arrangement
Joint Venture Sole Risk Operation Service
Contract
Production Sharing
Contract
Marginal fields Hybrid Condensate
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Upstream Crude Oil Fiscal Regime
• Oil Sector [ Upstream Regimes]
– Joint Venture
Cash-call challenges are moving the government
away from this arrangement
– Sole Risk Operations
Local content directives of 60%/40% [funding,
revenue & tax sharing issues]
– Risk Service Contract
No increase in the numbers of RSCs
– Production Sharing Contracts
The New order
– Marginal Field operations
– Hybrids
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PPTA PSC
(DOIB)
MOU CITA
JV 4 4
Sole Risk Operations/ 4
Marginal field
4
PSC 4 4
Risk Service Contract 4
Rates of Tax 65.75/85
%
50% 65 –
71%??
30%
Legal frameworks
Petroleum Profit Tax Act 1959, Cap 354 LFN 1990, Cap P13, LFN, 2004
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Policy, Laws and ADMINISTRATION OF PPT
• Policy – No Approved Policy Document
– Self Assessment
– Voluntary Compliance
– Transparent Payment in currency of transaction
• Law
– Petroleum Profit Tax Act 1959, Cap 354 LFN
1990, Cap P13, LFN, 2004
– Deep Offshore And Inland Basin Production
Sharing Contracts Act 1999
• Administration
– Federal Inland Revenue Services (NNPC ???)
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Key features of Petroleum Profits Taxation
Legislative Provisions - PPTA/DOIBPSC/MOU/CD/SL
•Administered by the FIRS
•Chargeable entities
•Chargeable income and imposition of tax
•Commencement rules
•Cessation
•Continuing businesses rules
•Change in accounting dates
•Merger & Acquisition
•Liquidation
• Tax Templates for review
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Petroleum Profit Taxation
Petroleum Profits Tax (PPT) is the taxation imposed on
the profits from the winning of petroleum in the course of
petroleum operations in an accounting period.
Petroleum operations as defined by the Act essentially
involves the exploration, development, production and
sale of crude oil.
The principal legislation guiding the computation of this
tax is the Petroleum Profits Tax Act 2004 (as amended) -
PPTA.
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Petroleum Profit Taxation, cont.
Under JV, there is Consolidation of Revenues and
Expenses in Nigerian petroleum profits taxation as
revenue aggregation and deductible expense rules are
set on a company basis and not at the level of wells,
fields, blocks etc. Thus, there is no Ring Fencing.
The Production Sharing Contract (PSC) arrangements
with NNPC appear to have introduced Ring Fencing to
the Contract Areas covered by the PSC.
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Basis of Petroleum Profit
Taxation
Petroleum profits tax is levied on the profits of the
accounting period.
Under PPT the revenue from the petroleum won and sold is
reduced by tax depreciation (capital allowances) and
genuine business expenses (allowable deductions) and the
resulting profit is taxed at the applicable PPT rate.
The companies involved in the marketing and sale of
petroleum products are not included in this definition - they
are taxed under the Companies Income Taxation Act (CITA)
of 2004.
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Petroleum Profit Tax Rate
The PPT rate is 65.75% for a company in its first five
accounting periods of production and sales. Thereafter,
the PPT rate is 85%. (PSC = 50%).
A Company that is not producing and selling petroleum
under a continuous programme of production and sales
is not liable to PPT. All the major producers under joint
ventures with the Government of Nigeria have signed a
Memorandum of Understanding (MOU) with the
government.
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Adjusted and Assessable Profit
Adjusted profit is the profit for the period after the
deductions of allowable expenditure and any
adjustments necessary to exclude the profit or loss
attributable to transportation operations which is
assessable under CITA.
Assessable profit is the adjusted profit for the period
after the loss relief available to the company has been
claimed
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Chargeable Profit
Chargeable profit is the assessable profit less capital
allowances. Capital allowances to be deducted are
restricted to the lower of:
• the amount computed or
• a sum equal to 85% of the assessable profit less 170%
of the total amount of the PIA (S.17 / S.20)
The restriction is to ensure that the tax chargeable on the
company is not less than 15% of the tax that would have
been chargeable had no deduction been made for capital
allowances.
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Adjusting the profits for tax -
Profit for the period
Add: Disallowed expenditure (S.11 items)
Adjusted profit
Less: Loss relief
Assessable profit
Less: Capital allowances
Taxable/Chargeable profit
Assessable tax @ 50% of Chargeable profit
Less: ITC (S.17/S. 20)
Chargeable tax
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Capital Allowances
Capital Allowances are granted on qualifying expenditure
(QE). QE is grouped into five categories with a 20% per
annum annual allowance rate and a 1% residual in the
fifth year. Detailed rules are provided for the
determination of QE and the treatment of asset
disposals.
In addition to capital allowances, Investment Allowances
are available for qualifying expenditure at rates ranging
from 5% on onshore operations to 20% for offshore
operations up to 200 metres depth for non-PSC’s and
50% for PSC’s.
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Balancing Allowance/Charge
Balancing charges and balancing allowances relates to
disposal of operating assets.
When fixed assets are disposed, profit or loss on
disposal may arise which is for accounting purposes.
For tax purposes a balancing allowance or charge is
computed. Usual rules under Companies Income Tax
apply.
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Royalties
In addition to PPT, upstream companies also pay
Royalties to the Federal Government of Nigeria.
The Royalty rates range from 20% (onshore) to 0%
(offshore) of the crude oil or gas revenues for onshore
activity to offshore activities.
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Royalty rates Areas of operation JV Companies&others
%
Deepwater PSC
%
Onshore 20 Inland 10
Offshore - up to
100m
18.5 Inland 10
- 101 –
200m
16.67 Inland 10
- 201 –
500m
N/A 12
-501 –
800m
N/A 8
-801–
1000m
N/A 4
>1000m N/A 0
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Dividend Payment
Dividends paid by petroleum producing companies to their
shareholders are free of withholding tax.
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Allowable Deductions – Section
10
Some of the allowable expenses for Petroleum Profit Tax
purposes are:
• Any interest on a loan obtained for the purpose of petroleum
operation except in the PSC arrangement (???).
• Doubtful debt of specific nature.
• Bad debt written off.
• Royalties incurred by the company in respect of crude oil
either exported or sold locally.
• Contribution to pension fund approved by the Joint Tax Board.
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Allowable Deductions, cont.
• Rent for land and building occupied under an oil prospecting
licence or an oil mining lease for disturbance of surface rights
or for any other like disturbance.
• All royalties, the liabilities for which was incurred by the
company during that period in respect of natural gas sold and
actually delivered to the Nigerian National Petroleum
Corporation, or sold to any other buyer or customer or
disposed of in any other commercial manner.
• All royalties, the liability for which was incurred by the
company during that period in respect of crude oil or of casing
head petroleum spirit won in Nigeria.
• Custom duties on essential and non - essential items.
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Allowable Deductions, cont.
• Rent of accommodations for members of staff. The amount to
be allowed is not more than their annual basic salaries.
• Any other expenditure, including intangible drilling costs
incurred in connection with drilling of an exploration or
development well, excluding qualifying expenditure.
• The cost of drilling the first two Appraisal wells.
• Legal expenses on general advisory services, renewal of
short - term lease and defence of the company and its
properties.
• Education tax.
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Allowable Deductions, cont.
• Compensation for damage to crops, houses and interference
with the right of way.
• All sums, the liability of which was incurred by the company
during that period to the Federal Government, or to any State
or Local Government Council in Nigeria by way of duty, stamp
duties, customs and exercise duties, any rate, fee and similar
charges and tax (other than tax imposed under PPTA).
• Expenses incurred on the repairs of the company’s assets for
the purpose of petroleum operations.
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Expenditure not wholly, exclusively and necessarily
incurred for petroleum operations (WEN)
Capital withdrawn or any sum employed or intended
to be employed as capital
Capital employed in improvements as distinct from
repairs
Sums recoverable under an insurance or contract of
indemnity
Rent or cost of repairs to any premises or part of
premises not incurred for the purpose of those
operations
Non Allowable Deduction – Section 11 PPTA
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Income tax, profits tax or similar tax charged in
Nigeria or elsewhere.
Depreciation/abandonment provision.
Payments to a pension, provident or other
society or fund not approved by the Joint Tax
Board (changes with the Pension Act 2004).
Expenditure for purchase of information relating
to the existence and extent of petroleum
deposits.
Interest on money borrowed from a related
company - parent or co subsidiary (prior to
1999).
Non Allowable Deduction – Section 11
PPTA
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Tax Offsets – Pre 1996 (Section
17)
Tax offsets are used to reduce the assessable tax in
order to arrive at the chargeable tax or tax payable.
The items are as follows:
(a) Non- productive or dead rents expenditure.
(b) Royalties of local sales i.e. chargeable oil won
and locally disposed.
(c) Custom or excise duties or other like charges on
essential items.
(d) Investment tax credit on qualifying expenditure.
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Tax Offsets – Post 1996
(Section 20)
Based on post 1996 amendment to PPT Act:
• items (a) – (c) have been classified as allowable
expenses under section 10 of the Act.
• investment tax credit applicable to PSC prior to July
1998 and Investment Tax Allowance applicable to PSC
post July 1998. The iinvestment allowance is to be
added to capital allowances.
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Capital Allowance Rates
All qualifying capital expenditure under Petroleum Profit
Tax has maximum tax life of five years. The rates are as
follows:
Year 1 20%
Year 2 20%
Year 3 20%
Year 4 20%
Year 5 19%
The remaining 1% can only be written off with the
approval of the Minister of Petroleum who will issue
certificate of disposal.
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Petroleum Investment Allowance/
Investment Tax Allowance Areas of
operation
JV
Companies&
others
% - PIA
Deepwater
PSC
% - ITA
Onshore 5
Offshore - up
to 100m
10
- 101 – 200m 15
> 200 20 50
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Tax Rates
Years PPTA PSC MOU
% % %
First 1 – 5
years +
Indigenous
Companies
65.75 50 No fixed rate
6 years and > 85 50 No fixed rate
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Computations presentations 1 - PPT format
US $'000
Sales: (Volume X Realisable Price Section 9) X
Add: Other Income X
Total Sales proceed X
Less expenses (Section 10 - Allowable Expenses) X
Adjusted Profit X
Less : Losses brought forward (Section 14) X
Assessable profit X
Less Capital Allowances (Section 18 and 2nd Schedule) X
Restricted to 85% of Ass Pro - 170% PIA
Chargeable Profits X
PPT Chargeable @ 85%/ 65.75% X
Less : PPT already paid X
PPT Balance payable X
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Computations presentations 2 - PSC format
US $'000
Sales: (Volume X Realisable Price Section 9) X
Add: Other Income X
Total Sales proceed X
Less expenses (Section 10 - Allowable Expenses) X
Adjusted/Assessable Profit X
Assessable profit X
Less Capital Allowances (Section 18 and 2nd Schedule) X
Restricted to 85% of Ass Pro - 170% PIA
Chargeable Profits X
PPT Chargeable @ 50% X
Less: ITC @ 50% of qualifying investments X
PPT Due X
Less : PPT already paid X
PPT Balance payable X
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Computations presentations 3 - MOU format
US $'000 US $'000
Sales: (Volume X Offset Price ) X
Add: Other Income X
Total Sales proceed XX
Less : Technical Cost
Less : (Section 10 of PPTA- Allowable Expenses) X
Less : (Section 14 of PPTA - losses) X
Less :Capital Allowances (Section 18 and 2nd Schedule) X
Total Technical Cost XX
85% Technical Cost (T2) X
Government Take X
Less: all royalty paid X
Revised Governement Takte (GRT) X
Less: Tax credit CIC (T1) X
PPT Payable X
Less : PPT already paid X
PPT Balance payable X
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Filing of Returns
Not later than two months after the commencement of
each accounting period of any company engaged in
petroleum operations, the company shall submit to the
Board a return, the form of which the Board may
prescribe, of its estimated tax for such accounting period.
Within five months after the company’s year - end, it
should file its audited accounts together with the tax
computations based thereon with the Revenue.
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Tax Payment
1. Tax is payable on equal monthly instalment based
on the estimated tax payable submitted to the
Revenue within two month at commencement of the
company’s accounting year.
2. The first instalment is payable not later than the third
month of the accounting period of that company i.e.
31 March. The instalment must be equal one-twelve
of the amount due for the year. If the accounting
period is less than 12 months, the number of the
instalments should be equal to the number of the
months for the period.
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Tax Payment, cont.
3. Each of the remaining monthly instalments should
be paid not later than the last day of the month of
instalment.
4. After the final instalment, the Revenue will assess
the actual tax due based on the audited accounts
and tax computations filed with the Revenue.
5. The assessment for the difference between the
estimated tax and tax based on the actual tax
returns filed will be raised and this has to be paid
within 21 days after the service of the notice of
assessment.
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Penalty for Late Filing & Late
Payment
If the tax return is not filed as and when due, the company
will be liable to pay N10,000 in the first instance, and N2,000
for everyday the failure to file continues.
A penalty of 5% of the amount of the instalment is payable, if
any instalment is not paid within the appropriate time limit i.e.
the last day of each month.
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Objections, Appeal, offences
and penalties
Objections to assessments
Appeal against notices of assessments
Offences
Penalties
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Tax Clearance Certificate / Clearance Letter
Filing of Tax returns
Payment of Taxes dues
Issuance of Tax Clearance Certificate within 2 weeks
Communicating reasons for denial (if any)
Conduct tax audit
Issue Clearance Letter.
Seek tax ruling
Obtain Ruling / Position Paper
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Production Sharing Contract
– The New Order
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DEEP OFFSHORE AND INLAND BASIN PRODUCTION SHARING
CONTRACTS ACT.
What is in there?
1. Production sharing contracts area.
2. Duration of oil prospecting licence.
3. Determination of Petroleum Profits Tax.
4. Determination of investment tax credit and investment tax allowance.
5. Royalty payable in respect of deep offshore production sharing contracts
6. Computation of petroleum profit tax.
7. Allocation of royalty oil.
8. Allocation of cost oil.
9. Allocation of tax oil.
10. Allocation of profit oil.
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DEEP OFFSHORE AND INLAND BASIN PRODUCTION SHARING
CONTRACTS ACT.
11. Payment of Royalty.
12. Chargeable tax on petroleum operations.
13. Use of realisable price in determining royalty and petroleum
profit tax in respect of crude oil, etc
14. Submission of receipts
15. Adaptation of laws.
16. Periodic review
17. Interpretation
18. Short title
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Production Sharing Contract
Oil sharing under a PSC
The Contractor v The Government
Royalty Oil
Generally about 0-12% of prodn
Tax Oil
Enough oil to cover the hypothetical tax liability of the producer
Cost Oil
The company is reimbursed for its production costs by receiving a share of the oil
Profit Oil
Any oil remaining after the Government has been paid its Royalty and Tax Oil and the Company has been reimbursed its production costs is deemed “profit oil”. This is “shared” between the
Government and the Company
Profit Oil Share Profit Oil Share
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Production Sharing Contract
$90
$40
$20
Contractor Government
Oil Production $100
Royalty 10%
Cost Recovery 50%
Tax Oil - 50%
Profit Oil (30/70%)
$10
$20
$14
$44
$50
$56
$6
Example: Typical value extraction in the PSC can be illustrated as follows:
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Proposed Amendments to the PPTA A Bill for an Act to amend the Petroleum Profits Tax Act
• Extends the categories of allowable deductions,
• Retains Ministers power to approve maximum spread of inter-company loan
• Provides the president with approval to make regulations
• The Bill extends the category of allowable deductions in respect of royalties on
natural gas, first four appraisal wells as well as provision for abandonment and
restoration as approved by the Ministers of Petroleum and that of Finance. It
however still retains for the Minister of Finance, the power to approve a maximum
spread on inter-company loans. The Bill also provides the President with the
approval of the Federal Executive Council to make regulation prescribing a regime of
tax– possibly to provide legal backing to the MOUs
• The Bill also provides a 50% tax rate for those carrying on petroleum operations by
production sharing contract or any similar arrangement in the deep offshore and in
land water basins
• Transfer of gas to gas utilisation project shall be at 0%. Where the coy transfers the
gas at a higher price, the profit shall be taxed at CITA rate.
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Proposed Amendments to the PPTA
• New rules now extend the amount of capital allowances claimable
• There is no longer the application of the limit of 85% of assessable profit less
170% of Petroleum investment allowance on how much of the Capital
allowances can be claimed
• Estimated tax now to attract interest at LIBOR rate
• Hitherto there was no interest payment on late payment of estimated tax
• The Bill also seeks to remove transportation cost by tankers as deductible
item
• We believe this is ostensibly to encourage the use of pipelines and railway for
transportation.
• Penalty for late payment of tax to be 10%
• This is currently 5%]
• Criminalisation of failure to deduct tax [Just as in CITA)
• All other provisions are in pari materia with CITA including the criminalization
of failure to deduct or remit tax.
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Proposed Petroleum Industry Bill, 2008
• Looked at by the Oil and Gas Sector Reform Implementation Committee (OGIC),
• Forwarded to the NASS
• The objectives of the fiscal regime to include “the creation of an economic climate that encourages stability, the
observance of the rule of law, and he elimination of corruption,” and “the gradual elimination of subsidies in all
areas of the petroleum industry.”
• Other objectives include:
• The establishment of a tax regime for taxation on petroleum products for the purpose of financing infrastructure in
and around the entire federation;
• The establishment of appropriate rules which shall discourage the consolidation of downstream projects with
upstream fiscal regimes;
• The development of a regime that allows the licensee, lessee or contractor to derive reasonable and proportional
profits, taking into account the economic and geological prospects and the duration of the licence, lease or contract;
• Ensuring that the licensee, lessee or contractor utilises cost effective measures in the course of petroleum
operations in order to ensure efficient cost savings and maximum economic benefits to the state.
• The fiscal regime, according to the 216-page draft bill seeks, among others, establish the Nigerian Petroleum
Directorate (NPD), which shall function in the main as the secretariat of the Ministry and shall take over any
functions, which were previously undertaken by the Ministry of Petroleum Resources.
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Local Content
• As defined by the 2003 Industry Local Content Committee,
• Local Content is the quantum of composite value added to, or created in, the
Nigerian economy through the deliberate utilisation of Nigerian human and material
resources and services in the exploration, development, exploitation, transportation
and sale of Nigerian crude oil and gas resources, so as to stipulate indigenous
companies, and encourage foreign investments and participation, without
compromising quality, health, safety and environment.
– LC directives was necessitated by activities of offshore companies earning income
from Nigeria and repatriating all – no job creation, wealth enhancement.
– Started in the O & G industry in 2001 and is now a national issue – House
Committee inaugurated in Mar 05
– The President‟s directives on LC is
• 45% by 2006 and 70% by 2010
– Nigerian Content (LC) bill still underway to becoming law.
– LC is compatible with S 54 of CAMA
– Cabotage Act is an example of LC implementation
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Joint Development Zone
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The Joint Development Zone
• The JDZ covers 35,400 km2 in the maritime boundaries
between Nigeria & Sao Tome & Principe in the deep
offshore Gulf of Guinea.
• The zone comprises of 9 blocks between Nigeria and
Sao Tome and Principe that are available for
investment opportunities
• The Joint Development Authority manages the Nigeria -
Sao Tome and Principe Joint Development Zone,
• A Treaty on the joint development of resources has
been signed and ratified by the two countries. The key
provisions of the JDZ treaty are:
1. Definition of the Joint Development Zone by co-
ordinates; 60% of resources to Nigeria, 40% to Sao
Tome and Principe;
2. Treaty to last for 45 years with review after 30
years.
3. No renunciation of claims to zone by both
countries. The Joint Development Authority reports to
a Joint Ministerial Council.
• Experts assume that the joint zone holds between 6
and 12 bn barrels of crude oil.
The licensing round opened April 22, 2003
Nigeria – Sao Tome Tax Regulation
Nigeria – Sao Tome Petroleum regulation
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Onne Oil & Gas Free Zone • The Onne/Ikpokiri Oil and Gas Free
Zone in Rivers State aims to provide for investors a platform to support the oil and gas Industry in Nigeria and is being managed by a private company referred to as the Technical Manager.
• The zone was established in 1996 by an Act and serves as a perfect location to use as a distribution center for goods and services in the Sub Sahara West African Region. It operates both as Free Port as well as a Free Zone. The incentives available include:
• Corporate tax exemption
• Import and Export duties exemption on goods imported or exported from the Free Zone
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Onne Oil & Gas Free Zone
• Possibility of building duty free stock of equipment, spare parts and merchandise with no time restriction
• Ability to manufacture, process, refine, mix or blend with other materials (domestic or foreign), sort, grade and distribute such material outside or inside the free zone
• Exemption from personal income tax
•
• 100% repatriation of capital and profits
• No foreign exchange regulation
• 100% foreign ownership of business is allowed
• No pre-shipment inspection for goods imported into the free zone
• The company is not required to obtain expatriate quotas
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Corporate Social Responsibilities &
Governance
• The Nigeria Extractive Industries Transparency Initiative (NEITI) (2004) Corporate Governance & Social Responsibilities
– Cost review focus
– Transfer pricing
– Thin Capitalization
• Value for money audit
• American FCPA/Nigeria ICPC
• SABOX
• The Role of EFCC in investigating tax evasion and enforcing collection
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Tax Controversies
66
• Potential Causes of Tax Controversies locally referred to as Tax Avoidance and Tax Evasion under PPT
– and
• Current issues in the Taxation of Oil & Gas Industry in Nigeria that could lead to future tax controversies
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Current Issues in the Taxation of
Oil & Gas Industry
1. Ambiguities and conflicts in the law – eg; taxes in S10/11
2. Gaps in the period of enactment – What should taxpayers do?
Eg PSC has expired after 15 years and there is no new laws
3. Lack of communication of incentives claimable at the expiration
of the existing incentive or change in matrix
4. Lack of clarity of uncertain Tax Issues such as
► Assets Ownership and Claim of Capital Allowance,
► Gas taxation under a PSC,
► Interest claim under PSC etc
5. The roles of NNPC on tax collection and evidencing
6. Is PSC a petroleum operations or a financing activity?
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Current Issues in the Taxation of
Oil & Gas Industry
7. Signature Bonus & Capital Allowances
8. Cost Recovery and Capital allowances
9. Investment Tax Credit / Investment Tax Allowance /
Petroleum Investment Allowance
10. Filing of tax returns (Contractor Vs NNPC)
11. Official Tax Receipts (FIRS or NNPC)
12. Tax Appeal Processes
13. Expatriate Cost Management (IAS)
14. Taxation of Non Resident Companies in Nigeria
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Case studies – issues identified • Case study 1 - Yar‟Adua Orders Shell, ExxonMobil to Refund N236bn – based on the proper
application of the PSC‟s capital allowance and the gas sales “That all future government gas sales
agreements should account for Natural Gas Liquids (NGLs)..”.
Questions – 1) Was it a tax evasion? Tax avoidance? Or Tax Uncertainty and Controversy?
2) Was there a clear understanding?
3) Was there a genuine efforts to seek clarifications by the NNPC & the
contractors
4) Who should be blamed for the gaps in the laws and its poor admin? Govt or Operators?
5) Should the only one issue identified be the one to address?
• Case study 2 - The $500 Billion Question - a study on the margin of profit under the
Memorandum of Understanding (MoU) based on the existing fiscal regime, a study which
revealed very clearly that Nigeria was being shortchanged by the oil majors. $340 million was
returned to the Nigerian treasury by the oil companies. Just like that!
Questions – 1) Was it a tax evasion? Tax avoidance? Or Tax Uncertainty and Controversy?
2) Was there a clear understanding?
3) Was there a genuine efforts to seek clarifications by the NNPC & the
contractors
4) Who should be blamed for the gaps in the laws and its poor admin? Govt or Operators?
5) Should the only one issue identified be the one to address?
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Case studies – issues identified
• Case study 3 - Obasanjo‟s policies encouraged tax evasion –Yar‟Adua –
policies that gave rise to discriminatory treatment of taxpayers and
muted complaints – 3 models?
Questions – 1) Should there be different models, different incentives etc?
• Case study 4 - Tax Evasion: PENGASSAN Defends Mobil
Questions – 1) Was it a tax evasion? Tax avoidance? Or Tax
Uncertainty and Controversy?
2) Was there a clear understanding?
3) Was the consultant not mischievous.
4) Should the government have sued for tax evasion?
5) Was the allegation necessary?
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Case studies – issues identified
• Case study 5 : CHEVRON NIGERIA LTD has been indicted in an $18 billion tax fraud - The Executive Chairman Economic and Financial Crimes Commission (EFCC) Abuja. Dear Mr. Nuhu Ribadu, RE: $10.8 BILLION TAX EVASION, FRAUD AND CORRUPTION IN THE CHEVRON NIG LTD AND ITS ASSOCIATED COMPANIES.
– Based on the letter under reference: (i) how could you say that ABZ is not entitled to at least 10% of what is recovered from its effort. (ii) how can you portray us as „419ers‟ who have equally gone to FIRS, Nigeria Police, etc to extort money?
Questions – 1) Was it a tax evasion? Tax avoidance? Or Tax Uncertainty and Controversy?
2) Was there a clear understanding?
3) Was the consultant not mischievous.
4) Should the government have sued for tax evasion?
5) Was the allegation necessary?
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Thank you.
Azeez Alatoye