November 24, 2020
Nigeria’s oil and gas sector, the mainstay of Nigeria’s economy, is still largely governed by the Petroleum Act and the Petroleum Profit Tax (PPT) Act, enacted since 1969 and 1959 respectively. Since the enactment of these laws, the global oil and gas industry has changed significantly from an investment, governance and fiscal perspective. Although certain obsolete aspects of the aforementioned Acts have been amended, their inadequacies are evident, contributing to the development of the Petroleum Industry Bill (PIB or “the Bill”), which was first presented to the National Assembly in 2008. Over 10 years later, the Bill is yet to be enacted, leading to increased uncertainty and hindering the flow of the desired investments to the Nigerian oil and gas sector.
On 28 September 2020, the President presented the PIB to the National Assembly for consideration. The Bill seeks to introduce pertinent changes to the governance, administrative, regulatory and fiscal framework of the Nigerian oil and gas industry, in order to ensure transparency, strengthen the governing institutions and attract investment capital, among other objectives.
In this article, we focus on the key changes that the PIB proposes to introduce to the fiscal framework of the Nigerian petroleum industry.
Requirement for Companies and Taxation of Income from Petroleum Operations
Based on the existing laws, nothing precludes an entity from operating in more than one sector (i.e. Upstream, Midstream and Downstream sectors) of the Nigerian oil and gas industry. For instance, a company engaged in upstream petroleum operations e.g., the production of crude oil, may also invest in the processing of the associated gas (downstream/ midstream operation). However, with the introduction of the PIB, a company shall not be involved in more than one stream of petroleum operation and would have to register a separate company for each stream of petroleum operations.
The Bill also provides that HT shall not be payable on associated and non-associated natural gas, as well as condensates and natural gas liquids produced from non-associated gas in fields or gas processing plants, regardless of whether the condensates or natural gas liquids are subsequently comingled with crude oil. However, HT will apply to crude oil, condensates and natural gas liquids produced from associated gas.
Furthermore, a newly incorporated company that is yet to commence the bulk sales or disposal of chargeable oil is now required to file its audited accounts and returns within 18 months from the date of its incorporation.
Ascertainment of Assessable Profits for HT and CIT Purposes
Although a significant portion of the provisions of the PPT Act was imported into the fiscal section of the Bill, the PIB amends several of these provisions as it relates to ascertaining the assessable profits of companies with upstream petroleum operations. The proposed changes include the following:
To ascertain the assessable profits of companies engaged in petroleum operations for CIT purposes, the PIB introduces new provisions to apply to such companies, in addition to the provisions of the CIT Act. For instance, rents and royalties incurred and paid, contributions to abandonment and host community funds, and other deductions that may be prescribed by the Ministry of Finance will be deductible expenses. However, signature bonuses paid for the acquisition of rights, penalties and gas flare fees will not be deductible expenses for CIT purposes.