Tax and Transfer Pricing


The Petroleum industry   is widely known as the largest contributor to the revenue of the Federal Government of Nigeria. In an economic report released by the Central Bank of Nigeria for the fourth quarter(Q4) of 2017, it was disclosed that revenue from oil represented 69 per cent of the total federation revenue. Thus, it is not surprising that the government over the years has created different schemes just to capitalize on this booming sector. One of the successful schemes is the petroleum profit tax  which contributes immensely to the  economy of the country. The Federal Inland Revenue Service (FIRS) in a letter written by the FIRS Chairman, Mr Babatunde Fowler to the Minister of Finance stated that it  generated N1.17 trillion in the first quarter of 2018 from the collection of taxes.  A closer look at the letter clearly shows that Petroleum Profit Tax Collection rose by 91 percent from N338.29billion in the first quarter of 2017 to N644.76 billion in the first three months of this year.

Before going deep into what the Petroleum Profits Tax entails, it is pertinent to break down the term “Petroleum Profits Tax”.  “Petroleum” comes from the latin word “petra” meaning “rock” and oleum, meaning “oil”. The American Heritage Dictionary defines Petroleum as “a thick, flammable, yellow –to-black mixture of gaseous, liquid, and solid  hydrocarbons that occurs naturally beneath the earth’s surface, can be separated into fractions including natural gas, gasoline, naphtha, kerosene, fuel and lubricating oils, paraffin wax and asphalt and is used as raw material for a wide variety of derivative products”.

The term “profit” is defined  by the Business Dictionary as “ the surplus remaining after total costs are deducted from total revenue, and the basis on which tax is computed and dividend is paid while the word “tax” can be simply referred to as an amount levied on individuals and corporation and it is usually enforced by a  government agency so as to boost the revenue of the government.

Hence, it can be inferred from the definitions given above that the Petroleum Profits Tax is the form of tax imposed on the income  made from petroleum operations. In a presentation made by Mr Azeez Olatoye, a Partner at Ascension Consulting Services while talking to senior officers of the Economic and Financial Crimes Commission, he stated that the Petroleum Profits Tax is the “taxation imposed on the profits from the winning of petroleum in the course of petroleum operations in an accounting period”. The main legislation applicable to petroleum operation in the upstream sector in Nigeria is the Petroleum  Profits Tax Act( PPTA) CAP P13 LFN 2004 and the Petroleum Profits Tax Act, 2007 which became operative after the amendments of the Petroleum Profits Tax Act(PPTA) CAP. P13 LFN 2004 through the Petroleum Profits Tax ( Amendment) Bill, 2005.  The Act is one of the many heads through which the government levy charges to the petroleum industry. The Petroleum Profits Tax Act is an “an act to impose a tax upon profits from the winning of Petroleum in Nigeria, to provide for the assessment and collection thereof and for the purposes connected therewith”. 

It must be well noted that the Petroleum Profits Tax Act is only binding on companies involved in upstream petroleum operations as the Nigerian Petroleum industry is divided into three main sectors and these are: Upstream, Midstream& Downstream and Oil Servicing. The first sector which is the Upstream sector is the sector which engages in petroleum product exploration, mining and drilling, that is, the sector finds and produces crude oil and natural gas. The Midstream sector is the sector of petroleum industry which engages in the movement or  transportation of crude or refined petroleum products usually through pipelines, oil tanker or rail and lastly, there is  the downstream sector  which is involved in the refining of the crude oil and the  distribution of the processed oil products. The Downstream sector of the petroleum industry is subject to the Companies Income Tax Act (CITA), Cap C21, LFN, 2004 ( as amended by the CIT ( Amendment) Act, 2007).

The Petroleum Profit Tax rate is 65.75% for a company in its first five years accounting periods of production and sales after which the PPT is 85%. The PPT rate for Production Sharing Contracts which is a contract between the NNPC and one or more contractor is 50%. The current rate of petroleum profits tax is 50% for operations in the deep offshore and inland basin. The rate is 85% for operations in the onshore and shallow waters.

In conclusion, unlike some others acts that have been   made in Nigeria which are not being implemented by the executive arm of government. The Petroleum Profits Tax has proved to be  one of the exceptions to this as it is evident that Nigeria has consistently gained from the implementation of the Petroleum Profits Tax Act  as seen  in the N644.76 billion the Federal Inland Revenue Service recorded.  It hereby submitted that the Federal Government should takemore steps as regards implementing  other legislations which have been made and that are also capable of boosting the income of the country .

Written By: Arojojoye Adebola

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