June 1, 2018
On 26 March 2018, the Federal High Court (FHC) held, in a case between the Federal Inland Revenue Service (FIRS) and Mobil Producing Nigeria Unlimited (Mobil), that payments for gas flaring without the prior permission of the Petroleum Minister (the Minister) are not deductible for Petroleum Profits Tax (PPT) purposes. The FHC reached this decision on the grounds that Mobil’s action of flaring gas without Permit or Certificate was an invalid act and that it could not benefit from such an action by deducting the expenses incurred thereon for tax purposes.
Mobil made payments to the Department of Petroleum Resources (DPR) for gas flaring from 2006 to 2008, describing them as “gas flaring fees”. The DPR, in turn, issued receipts for the said payments with the description – gas flaring penalties. Notwithstanding, Mobil treated the expense as allowable deductions for tax purposes. However, the FIRS disallowed the deductions.
Consequently, Mobil challenged the FIRS’ position at the Tax Appeal Tribunal (TAT) and the TAT ruled in favour of Mobil, setting aside the additional liabilities imposed by the FIRS. Thus, the FIRS appealed to the FHC.
The crux of the issues before the FHC was whether the sums paid by Mobil to the DPR qualified as gas flaring fees under Section 3 of the Associated Gas Reinjection Act (AGRA) and whether the expenses are deductible for the purpose of determining Mobil’s Petroleum Profits Tax for 2006, 2007 and 2008.
The FHC held that the sums paid were illegal payments which could not be deductible for tax purposes because Mobil was wrong to have flared gas without obtaining either a Permit or Certificate. In reaching this decision, the FHC relied on Section 3(1) & (2) of the AGRA which requires a company to obtain a written permission or a Certificate from the Minister before it can flare gas. The issuance of this Certificate is subject to certain conditions and the AGRA provides that the payment of a sum may be prescribed by the Minister from time to time.
Furthermore, the FHC stated that Section 10 of the Petroleum Profits Tax Act (PPTA) provides that sums paid to the Federal Government by way of charges are tax deductible expenses. This suggests that payments made pursuant to Section 3 of the AGRA qualify as tax deductible expenses. In this case, however, Mobil made the payments after flaring gas without the prior issuance of a written permission or Certificate by the Minister and the FHC held that such payments were not made in line with Section 3 AGRA and are, therefore, illegal fees that should not qualify for tax deduction.
Based on this judgment, any sum paid for gas flaring without a Permit or Certificate from the Minister is not deductible for tax purposes. Although the AGRA provides that the Minister may issue a Certificate for flaring gas, the word ‘may’ only qualifies the discretionary powers of the Minister to issue or not to issue gas flaring certificate and does not mean that the gas flaring certificate is not mandatory. Thus, the failure of the Minister to issue a Permit or Certificate cannot be presumed to be an approval to flare gas.
Notwithstanding the foregoing, upstream companies that flare gas have established the practice of simply applying for the permission to flare gas, making relevant payments and taking deductions for such expenses for PPT purposes without necessarily awaiting the Minister’s approval. The TAT has also corroborated this position in a number of tax cases. Thus, this FHC judgment deviates from the age-long practice in the upstream sector of the oil and gas industry and seems to create a new judicial precedence that puts taxpayers in a precarious position, particularly since the Minister appears to have a discretion with respect to the issuance of the Certificate.
Unless the process for issuance of Permits/Certificates is modified and fast-tracked, taxpayers would be reluctant to adhere to the judgment as delay or denial in issuance of Permits/Certificates puts them in a prejudicial situation. We also expect that this judgment will be challenged at the Court of Appeal.