By; Marlon Ayakpo
“A century ago, petroleum – what we call oil – was just an obscure commodity; today it is almost as vital to human existence as water.”
The Nigerian petroleum industry stands as a vital cornerstone of the country’s economy, holding significant influence both domestically and globally. It is an industry marked by its extensive oil and gas reserves, making Nigeria one of the largest producers and exporters of crude oil in Africa. At the heart of this multifaceted industry lies the intricate system of hydrocarbon taxation, a crucial framework that governs revenue generation, investment, and regulation within the sector.
The taxation structure in the Nigerian petroleum industry is pivotal not only for the government’s fiscal policies but also for multinational corporations and local stakeholders involved in exploration, production, and distribution of oil and gas. It delineates the financial landscape, shaping the incentives and obligations for companies operating within this sector and affecting the country’s economic dynamics as a whole.
This overview aims to delve into the complex terrain of hydrocarbon taxation in Nigeria, highlighting the various components, policies, and challenges within the system. By understanding the tax framework governing the Nigerian petroleum industry, one can gain insights into the significant roles it plays in shaping the economy, fostering investment, and addressing the sustainable development goals of the nation.
The analysis will encompass an exploration of the historical evolution of hydrocarbon taxation in Nigeria, the current tax structure, key policies, challenges, and future prospects. Understanding the nuances of this system is essential for stakeholders, policymakers, and investors to navigate and contribute effectively to this vital sector that holds immense promise and potential for Nigeria’s economic growth and development.
- HISTORICAL EVOLUTION OF HYDROCARBON RELATED TAXATION IN NIGERIA:
The history of hydrocarbon taxation in Nigeria is deeply intertwined with the evolution of the country’s oil and gas industry. Since the discovery of oil in commercial quantities in Oloibiri, in Nigeria’s Bayelsa State, in 1956, the Nigerian government has continually adapted its fiscal policies to regulate the sector’s operations and maximize revenue generation. Initially, the fiscal regime was more lenient, offering favorable terms to attract foreign investment. However, over time, it evolved to strike a balance between attracting investment and ensuring a more equitable return for the nation.
In the early years, Production Sharing Contracts (PSCs) and Joint Venture Agreements (JVAs) were established between the Nigerian National Petroleum Corporation (NNPC) and international oil companies. These agreements formed the basis for profit sharing, royalties, and taxes, shaping the initial tax framework.
Overtime, the tax structure in Nigeria’s petroleum industry is multifaceted and includes a combination of royalties, petroleum profit tax, signature bonuses, and other levies. The Petroleum Act (2004) Cap. (P10), Laws of Federation Nigeria enacted in 1969 introduced the Petroleum Profit Tax (PPT) which was a significant component, levied on the profits generated from oil and gas operations.
The Deep Offshore and Inland Basin Production Sharing Contract Act, was established as a decree in 1993 (referred to as DOIBPSCA), to serve as the statutory framework governing Nigeria’s deep offshore oil production, encompassing areas with water depths exceeding 200 meters.
On the 4th of November 2019, His Excellency, President Muhammadu Buhari, GCFR, granted his assent to the Deep Offshore and Inland Basin Production Sharing Contract (Amendment) Act, 2019 (“the Amendment Act”) subsequent to its approval by the National Assembly in October 2019.
The recent Petroleum Industry Act, 2021 (PIA) has brought about alterations in the fiscal policies, replacing the previous Petroleum Profits Tax (PPT) with the Nigerian Hydrocarbon Tax (NHT) and Companies Income Tax (CIT) as the applicable taxes on profits earned by companies involved in upstream petroleum operations. The NHT is set at a rate of 50% for operations conducted in onshore and shallow water regions, while the deep water zones, frontier acreages, and bitumen operations attract a 25% NHT. Concurrently, the CIT stands at 30% of the company’s net profits.
- CURRENT HYDROCARBON TAX (HT) STRUCTURE
The Petroleum Industry Act (PIA) enacted in August 2021, introduces new tax
and fiscal provisions that are different from the Petroleum Act (“PA”) and Petroleum Profits Tax Act (“PPTA”) regimes.
It’s important to highlight that the petroleum industry seemingly functions under two distinct legal systems. Those possessing the Oil Mining Lease (OML) and Oil Prospecting License (OPL) fall under the PPTA.
Section 262 of the PIA introduces the Hydrocarbon Tax (HT) for companies involved in upstream petroleum activities. This tax specifically applies to crude oil, field condensates, liquid, and natural gas liquids derived from associated gas, with a maximum chargeable rate set at 30%. Holders of a Petroleum Prospecting Licence and Petroleum Mining Lease will be subject to both CIT at 30%, and Hydrocarbon Tax (HT).
HT rates are as follows:
i. Converted/renewed onshore and shallow offshore Petroleum Mining Lease – 30%
ii. Onshore and shallow onshore Prospecting Petroleum Licence and Marginal Fields – 15%
Deep offshore is exempt from HT.
This means that the highest headline tax rate for companies in the upstream oil and gas industry will be 60%. HT does not apply to Deep Offshore acreages.
Current Oil Mining Licence and Oil Prospecting Licence holders will continue to be taxed in line with the Petroleum Profits Tax Act (PPTA) unless a conversion contract is executed in line with the provisions of the PIA.
Section 263 (1) and 264(1) respectively of the PIA introduced an expanded list of deductible items, supplementing the existing deductible expenses and the list of non-deductible items. The delineation of deductible and non-deductible items for Hydrocarbon tax calculation, as prescribed under the PIA, marks a substantial shift in the fiscal landscape of the Nigerian petroleum industry.
- STATUTORY BODIES RESPONSIBLE FOR HT ADMINISTRATION
Section 259 of PIA entrusted the Federal Inland Revenue Service (“FIRS”) with the responsibility of assessing and collecting Hydrocarbon Tax (HT).
Additionally, the Nigerian Upstream Petroleum Regulatory Commission is tasked with regulating the determination and collection of royalties, signature bonuses, rents, and associated payments within the upstream petroleum sector.
- CHALLENGES AND RECOMMENDATIONS
- The Non-Incorporation of Production Sharing Contracts in Section 92 of the PIA:
In order to align with the convertible status accorded to OPLs and OMLs, it is advisable to include Production Sharing Contracts through an amendment to Section 92 of the Act.
- Legal Hierarchy: The Interplay of Regulation and Rules:
In legal practice, both Regulations and Rules emanate from a principal Act. The Act confers authority upon the Minister to establish Regulations, while the FIRS is mandated to formulate Rules in accordance with said Regulations. This results in a three-tier legal framework, comprising the PIA, Regulation, and Rules. Given the extensive nature of the Principal Act, the provision for Regulation is ostensibly sufficient. However, the scenario in which the Minister formulates Regulations, while the FIRS subsequently awaits to craft Rules in conformity with the Regulation, introduces complexity. This situation undermines the accessibility of legal positions for ordinary business individuals, hindering their ability to interpret provisions related to Hydrocarbon tax and companies’ income tax within the Principal Act without considering the accompanying Regulation and Rules. We recommended that FIRS makes both the Regulations and Rules subject to the approval of the Minister of Petroleum and Finance joint committee approval.
- Navigating Disparate Provisions: Section 302 and Companies Income Tax:
The stipulations of Section 302, governing the general requirements for companies engaged in petroleum operations to pay companies income tax, imply a potential inhospitality in the business environment for the upstream sector. Additionally, concerns arise regarding the disjointed nature of the legal provisions. The Act mandates the synchronization of Section 24 and 27 of the CITA with Sections 302 (10) and (11), respectively. It is therefore proposed that the CITA undergoes amendment to incorporate Section 302 (10) and (11) of the Act, mitigating the current fragmented state.
- Penalties for non-payment of Tax and Enforcement of Payment(Section 292 of the PIA):
In light of the strict construction of revenue law, it is recommended that its provisions be precise and defined. Granting extensive discretion to the FIRS, or any other government agency, in determining the validity of reasons for defaulting on tax payments is an undue reliance in a society grappling with financial indiscipline, transparency deficits, and accountability challenges within government institutions, ministries, departments, and agencies.
- Regulatory Oversight: Section 304 and Hydrocarbon Tax Matters:
Efficiency in the administration of Hydrocarbon tax and companies’ tax matters necessitates the establishment of a regulatory framework. It is recommended that FIRS, subject to Ministerial approval, be entrusted with the formulation of regulations. This approach aims to avert conflicts arising from regulations and rules made in pursuance thereof, contributing to a more streamlined regulatory landscape.
The landscape of hydrocarbon taxation in the Nigerian petroleum industry represents a critical juncture in the nation’s economic trajectory. As Nigeria continues to navigate the complexities of a dynamic global energy market, the efficacy of its hydrocarbon taxation framework plays a pivotal role in fostering sustainable development, attracting investments, and ensuring fiscal responsibility.
The recent legislative enactments have introduced significant changes to the hydrocarbon taxation system. As Nigeria charts its course towards economic diversification, reducing dependency on oil revenues, the evolution of hydrocarbon taxation stands as a critical component in shaping the resilience and adaptability of the petroleum industry. It is imperative for policymakers, industry stakeholders, and regulatory bodies to collaborate seamlessly, addressing challenges, fostering transparency, and aligning fiscal policies with the broader goals of sustainable economic growth and social development. In navigating the future of hydrocarbon taxation, Nigeria has the opportunity to position itself as a responsible and attractive investment destination in the global energy landscape.
- Obi, C. (2021). “Impact of the Petroleum Industry Act on Hydrocarbon Taxation in Nigeria.” Journal of Energy Economics, 25(2), 123-145.
- Federal Inland Revenue Service, Information Circular (2022). “Clarification On Taxation Of Production Sharing Contract (Psc) And Incorporated Joint Venture Companies (Ijvc) Operations Under The Petroleum Industry Act”.
- Nigerian Upstream Petroleum Regulatory Commission (2022), “Petroleum Royalty Regulations”.
- Petroleum Industry Act of Nigeria 2021, Act No.6.
- Smith, J., & Jones, M. (2020). “Fiscal Policies and Challenges in the Nigerian Oil and Gas Sector.” Energy Policy Review, 18(3), 215-230.