August 14, 2018
Perhaps, one of the most common quotes regarding taxes is that which is usually credited to Benjamin Franklin, “…but in this world, nothing can be said to be certain, except death and taxes”. Despite this, it would appear that, within Nigeria, the purported exemption from uncertainty may be limited to only death given the inherent uncertainties in the Nigerian tax laws and regulations.
Uncertainties in tax laws and/ or their application limit economic growth as they result in disruptions of investment plans for private sector participants (including those in the oil and gas sector). The crippling effect of uncertainties in the tax laws on global investment decisions and worldwide prosperity was further affirmed at the 2017 G20 meeting in Germany, where the G20 political and finance leaders advised policy makers to take practical steps to enhance tax certainty in their domestic legal frameworks and international tax treaties.
In 2016, the Ministry of Petroleum Resources released the National Petroleum Fiscal Policy (the NPFP) which, amongst other things, intends to shift the focus of government revenue generation from tax to royalties. It is instructive to note that royalties are paid on production rather than profits. Thus, the Federal Government still receives its revenue from royalties as long as there is production unlike tax which is based on profits. It is equally important to note that the NPFP proposes that taxes and royalties should be paid at the same time.
Royalty payment is a key area of contention in the taxation of upstream business in Nigeria. Specifically, the modality for its computation has been subject to uncertainties amongst industry players over the years. Thus, this article seeks to discuss the inherent uncertainties in royalty payment for exploration and production companies in Nigeria.
Under the current fiscal regime, upstream companies operating in deep waters are able to pay zero percent royalty when they operate in water depths in excess of 1,000 metres. However, the NPFP provides for a change of the parameter for computing royalties from water depth to both price and volume. Based on the NPFP, producers may be liable to a royalty rate of 20% for those who produce more than 50,000 barrels per day, at a price of over $100 per barrel or even as much as 40% in some other cases. Notwithstanding, the NPFP provides a flat royalty rate of 5% to “small fields” even though it does not define what constitutes a small field.