PETROLEUM PROFITS TAX - Ascension Consulting … of Petroleum Profits... · Agricola or crude oil is a naturally occurring, flammable liquid found in rock formations in the ... •

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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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• 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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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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• 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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• 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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• 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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• 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



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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



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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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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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$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.

57

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.

59

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

60

Joint Development Zone

61

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

62

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

63

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

64

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

65

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

67

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?

68

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

69

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!



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?

70

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?


3) Was the consultant not mischievous.

4) Should the government have sued for tax evasion?

5) Was the allegation necessary?

71

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?



3) Was the consultant not mischievous.

4) Should the government have sued for tax evasion?

5) Was the allegation necessary?

72

Thank you.

Azeez Alatoye

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