Sunday, February 17, 2013 10:10 PM / Olumide Olusegun-Obayemi
No one would doubt that the taxation of severed mineral interests as well as oil and gas production is an important issue as governments hope to capitalize on this burgeoning industry, while maintaining an attractive environment for business expansion. In Nigeria, as we expect the passage of the long awaited Petroleum Industry Bill ("PIB”), the prevailing law governing taxation of petroleum products are the PETROLEUM PROFITS TAX ACT (PPTA) CAP P13 LFN 2004 and the Petroleum Profits Tax Act, 2007 which emerged after the amendments of the Petroleum Profits Tax Act, Cap.P13 LFN 2004 via the Petroleum Profits Tax (Amendment) Bill, 2005.
In Nigeria, we have both Upstream and Downstream petroleum operations. Upstream refers to petroleum product exploration, mining and drilling. Downstream refers to the simple sale and distribution of processed oil products by local corporations. Thus, corporations engaged in upstream exploration are subject to the PPTA, while downstream corporations are subject to Companies Income Tax Act (CITA), Cap C21, LFN, 2004 (as amended by the CIT (Amendment) Act, 2007)
The current rate of petroleum profits tax is 50% for operations in in the deep offshore and inland basin. The rate is 85% for operations in the onshore and shallow waters.
In the United States, oil and gas operators pay a variety of state and local taxes. For instance, in Ohio, there is the Commercial Activity tax (CAT) which is a 0.26% excise tax on all Ohio-based gross receipts. The CAT is paid by the recipient of the gross receipt—e.g., landowners on rent, drillers on drilling fees, and operators on mineral production.
Under PPTA, Section 2, an accounting period is defined as (a) A normal accounting period that runs from January – December of each calendar year; (b) For a new company it is a period beginning from the day the company makes the first sale to 31 December of the year of commencement; and (c) For a company which is ceasing/stopping to operate as a business it is from 1st January to the day the company ceases business in the year of cessation
PPTA, at Section 9(1) states that profits are to be calculated based on petroleum operations within each accounting period and that profits are to be based on (a) proceeds of sale of chargeable oil sold by the company during that accounting period; (b) value of all chargeable oil disposed of by the company during that accounting period; (c) value of all chargeable natural gas in that accounting period as determined in accordance with the 4th Schedule to the PPTA and (d) all income of the company for that period incidental to and arising from one or more of its petroleum operations. Thus, corporations engaged in oil exploration in Nigeria must file two types of returns under PPTA in an accounting period (a) Under Section 33 of the PPTA, Estimated PPT returns must be filed not later than February 28/29 in an accounting year; (b) Under Section 30 of the PPTA, Annual PPT returns must be filed not later than May 31st in the following accounting year
Under PPTA, section 14, adjusted profits are calculated by the value of Profits minus the company’s outgoings and & expenses which were wholly, exclusively &necessarily incurred within or outside Nigeria listed in S.10 as well as the cost of transportation of chargeable oil by sea-going tankers as provided in S.14
In Ohio, there are no deductions are permitted for costs, although some related-party exceptions apply. Whereas, in Nigeria, deductions are limited by PPTA. Section 13 lists expenses that are not allowed as deductible. PPTA, section 15 also empowers the board to disallow the deduction of expenses of transactions it considers being artificial, fictitious or not sufficiently independent from the petroleum operations.
Ohio has Property (ad valorem) taxes. Thus, all real property in Ohio is subject to the real property tax administered by counties for the benefit of public schools, counties, cities, libraries, and other local governmental entities. In general, Ohio real property taxes average 2.25 to 2.75% of fair market value per year. Ohio counties do not use a consistent method for assessing oil and gas properties. In the future we expect to see some standardization for taxing severed mineral estates—for example, separate parcel numbers used and/or more efforts to tax minerals even if not being actively produced.
In addition, oil exploration corporations in Ohio are also subject to the following additional taxes: (a) State unemployment and workers’ compensation taxes like other employers; (b) State sales and use taxes on taxable purchases of goods and services; (c) Municipal income taxes on company’s taxable income in some locales; (d) Drillers’ and operators’ employees pay state and local income taxes like other employees; (e) Ohio severance taxes: (i) 20 cents per barrel of oil; (ii) 3 cents per MCF (thousand cubic feet) of natural gas; and (iii) No tax on severance of "natural gas liquids” including benzene and butane
Under the proposed Nigerian PIB, there is going to be a total repeal of the PPTA as well as substantial amendments to the CITA. In particular, the PIB abolishes the Petroleum Act, Petroleum Profits Tax (PPT) Act, Deep Offshore and Inland Basin Production Sharing Contracts Act. Further, Sections 299 – 352 of the PIB replaces the present petroleum profit tax with the Nigerian Hydrocarbon Tax (NHT). Section 313 of the PIB provides that NHT will be computed on the chargeable profits for the relevant accounting period at 50% for onshore and shallow water areas, and 25% for bitumen, frontier acreages and deep water areas.
Under Section 353 of the PIB, in addition to the NHT, the PIB also provides for companies income tax at the rate of 30% on upstream petroleum operations as opposed to the PPTA not subjecting upstream operations to CITA. However, Companies involved in both upstream and downstream petroleum operations will be required to compute CIT separately on the profits from both operations. The NHT will not be tax-deductible for CIT purpose. Under the PIB, companies involved in upstream petroleum operations are required to settle their CIT liability on actual year basis using a similar estimate’ mechanism to that provided for NHT in the PIB.
For upstream operations, under the presently-existing PPTA, there are five main business and/or financial arrangements permitted and these are: (a) Joint Venture Contracts (JVC); (b) Production Sharing Contracts; (c) Sole risks (independent operators); (d) Farm-in and Farm-out; and (e) Alternative Funding.
Under the PPTA, the main features of Joint Venture Contracts are as follows: (a). It is a contract between NNPC and one or more International oil companies; (b) The members are Joint concessionaires of the oil blocks; (c) The contract is governed by a Joint Operating Agreement (JOA); (d) One international oil company is appointed the operator of the JVC Projects are funded through cash calls; (e) Cash call are payable on the basis of equity participation; (f) Crude oil produced is also lifted by each partner on the basis of equity participation; and (g) JVC companies used to enjoy special tax incentives packaged under an agreement termed Memorandum of Understanding (MOU). MOU was suspended by FG in early 2008.
Also, under the PPTA, the main features of Production sharing contracts are that: (a) It is a contract between NNPC and one or more contractor; (b) NNPC is the sole license holder unlike under JVC; (c) The contractor bears all the risks of operations; (d) The application of PPTA is moderated by the provisions of the Deep Offshore and Inland Basin Act and PSC Agreements; (e) Areas of operation are deep offshore and inland basins; (f) PPT rate is 50%; (g) Contract areas in respect of contracts signed before 1999 are entitled to investment tax credit at 50% on investments made; and (h) But for contracts signed from 1999 what is applicable is petroleum investment allowance at 50%.
Concerning Production Allowance (PA) and Capital Allowance (CA), the present PPTA, limits a company’s claim, as the total capital allowance (CA), in an accounting period to 85% of its assessable profits less 170% of its petroleum investment allowance (PIA). The PIB not only completely abolishes the limitation, Section 312 of the PIB makes provisions for the claim of Production Allowance (PA) to be computed as provided under the Fifth Schedule to the PIB. This allows a company to claim PA and the CA claimable by upstream petroleum producing companies. The Fifth Schedule of the PIB provides that the PA is applicable to crude oil, natural gas and condensate production. The PIB further provides that the PA is to be determined based on production volume, water depth and specified price thresholds.
Under the new PIB, there is the General Production Allowance (GPA). The introduction of the GPA claimable pertains to a company that has executed a production sharing agreement (PSC) with the NNPC. Thus, the Fifth Schedule of the PIB specifies the General Production Allowance (GPA) which qualifying companies will be entitled. An oil company that had executed a PSC with the NNPC prior to July 1st, 1998, would be entitled to claim an investment tax credit (ITC) at the rate of 50% of the qualifying capital expenditure (QCE), i9ncurred by that company –either wholly or exclusively or necessarily for the purposes of its petroleum operations.
Further, an oil company that had executed a PSC with the NNPC after July 1st, 1998, would be entitled to claim an investment tax allowance (ITA) also at the rate of 50% of the qualifying capital expenditure (QCE), i9ncurred by that company –either wholly or exclusively or necessarily for the purposes of its petroleum operations. An oil company
The question then turns to the difference between the ITC and ITA. As Tunde Fagbohulu, SAN and Chukwuka Ikwuazom have said—the difference between ITC and ITA is that while ITC offers a dollar for dollar credit which directly reduces the tax payable, ITA operates to reduce taxable profits before the tax rate is applied to determine the tax payable. The PIB now proposes to replace both ITC and ITA with GPA. Given that the GPA is intended to, much like the current ITA, reduce assessable profit (and not the tax payable), it is likely to impact more adversely on the take of PSC Contractors in the pre-July 1st 1998 PSCs.
The GPA is to be computed based on production volume and specified price thresholds. Companies in JV arrangements with the NNPC (at the time the PIB comes into force) will only be entitled to the GPA applicable to natural gas production.
In closing, we may permit the multiple taxes state under the PPTA, CITA and PIB based on the fact that Nigeria depends on foreign corporations to drill and explore its mineral resources. A review of comparableGas Severance Tax Rates in the United States shows that the taxes are manageable to encourage growth and expansion by the corporations while raking in revenue for the corporations: Texas 7.5%; Oklahoma 7%; Arkansas 5%; Michigan 5%; West Virginia 5%; Kentucky 4%; Tennessee 3%; Indiana 1%;b Louisiana $0.16/MCF; North Dakota $0.11/MCF; Ohio $0.03/MCF (assuming cost is $3.85/MCF, tax is 0.78%); Illinois 0.1%; Missouri 0; and in Pennsylvania 0.
In addition Oil Severance Tax Rates in several jurisdiction in the United States show the following: North Dakota 11.5%; Montana 9.26%; Kansas 8%; Oklahoma 7%; Wyoming 6%; Michigan 5%; Colorado 5%; Texas 4.5%; Nebraska 3%; Ohio $0.20/bbl (assuming cost is $85/bbl, tax is 0.24%); California $0.11/bbl and in Pennsylvania 0.
Would the PIB solve all the fiscal problems presently existing in Nigeria? This author does not believe in such a grandiose dream.
**Olumide K. Olusegun-Obayemi, an oil and gas law consultant, lives in California and can be reached vide email@example.com
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