Petroleum Profits Tax Act (PPTA)
 
 
The Principal Act governing the taxation of profits from petroleum operations in Nigeria is the Petroleum Profits Tax Act 2007.
 
Petroleum Operations
 
Section 2 of PPTA defines petroleum operations as “the winning or obtaining and transportation of petroleum chargeable oil in Nigeria by or on behalf of a company for its own account by any drilling, mining, extracting or other like operations or process, not including refining at a refinery, in the course of a business carried on by the company engaged in such operations, and all operations incidental thereto and any sale of or any disposal of chargeable oil by or on behalf of the company”.
 
 
 
 
 
 
 
1
          The main activities involved in petroleum operations
            From the foregoing definition, these activities are:
 
1.         Exploration
2.         Appraisal
3.         Drilling/Mining
4.         Extraction
5.         Transportation by Pipelines
6.         Sale of chargeable oil
7.         All other operations incidental to any of the above
 
            Another name for Petroleum Operations is Upstream Operations
 
            Major companies in Petroleum Operations in Nigeria
1.         Chevron Nigeria Limited
2.         Shall Petroleum Development Company Limited (SPDC)
3.         Shell Nigeria Exploration and Production Company Limited (SNEPCO)
4.         Nigeria Agip Oil Company (NAOC)
5.         Elf Petroleum Nigeria Limited EPNL)
6.         Mobil Producing Nigeria Limited (MPN)
7.         Addax Petroleum Exploration Limited
8.         Consolidated Oil Nigeria Limited
9.         Moni-Pulo Limited
10.       Famfa Oil Limited.
 
            Petroleum Activities are not covered under Petroleum     Operations
            These operations, which are also known as downstream operations,             include:
 
1.         Petroleum Products Marketing
2.         Crude oil refining
3.         Gas refining and distribution
4.         Crude oil transportation by ocean going vessels
 
            Examples of companies in Downstream Operations
1.         Total
2.         Conoil
3.         Nigeria Liquefied Natural Gas Limited (NLNG)
4.         Nigeria Gas Company
5.         PortHarcourt Refineries Company
 
            Downstream Operations: Applicable Tax Regime
            Downstream operations are not taxable under PPTA. They are taxable       under  CITA.
 
2
 
PPT Returns
 
            The two types of PPT Returns and when they must be filed
 
            Oil producing companies file 2 types of returns under PPTA in following an           accounting period; these are:
 
a.         Estimated PPT returns; this must be filed not later than 28/29 February in an                      accounting year (Section 33)
 
b.         Annual PPT returns; This must be file not later than 31st May in the following        accounting year (Section 30)
 
            What is an accounting period under PPTA? (Section 2)
 
1.         A normal accounting period runs from January - December
 
2.         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.
 
3.         For a company which ceases business it is from 1st January to the day the company
            ceases business in the year of cessation.
 
 
            When PPT is Payable
 
1.         In respect of Estimated Returns PPT for any accounting period is payable in 12     equal installments commencing from March of that accounting period and ending in  February of the following accounting period.
 
2.         For the annual returns, the PPT payable is the PPT computed less estimates already            paid; this is called 13th or final installment and is payable not later than July of the       following accounting period.
           
3.         The Penalty for late payment of PPT
 
            Late payment of PPT attracts penalty of 5% payable with the PPT due not later than         one month after the receipt of Demand Note.
 
 
 
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PPT Computations under PPTA
 
Chargeable Income (Sections 9 & 23) & other Incidental Income                        xxx
 
Deduct Section 10 Deductions: & adjust for Transport (shipping) Sec. 14
 
Royalty on exported crude                                                                                         xxx
 
Admin & Prod Exp                                                                                                     xxx
 
Intangible Drilling Exp                                                                                               xxx
 
Exploration Costs and Expenditure on first two appraisal wells                                xxx
 
Adjusted Profits                                                                                                        xxx
 
Losses recouped (Section 16)                                                                                     xxx
 
Assessable Profit                                                                                                         xxx
 
Capital Allowances (Section 20) and PIA                                                                  xxx
 
Chargeable Profits                                                                                                      xxx
 
Assessable Tax (Chargeable Profit & Tax Rate)                                                         xxx
                                                                                               
Income chargeable under PPTA (Section 9)
 
This includes:
 
a.         Fiscal value of chargeable oil
 
b.         All incidental income, except income from oil shipping activities, wet cargoes        (section 12)
 
            Note that natural gas is no longer taxable under PPTA since 1998, by the grace of the provisions of section 10A (2) of PPTA; is now taxable under CITA.
 
            Examples of Incidental Income
 
1.         Rental Income
 
2.         Interest Income
 
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How the Fiscal Value of Chargeable oil is determined
 
By the provisions of sections 9 and 23 of PPTA, the fiscal value of chargeable oil for the purpose of PPT computations is the higher of.
 
a.       Volume of oil lifted multiplied by actual sales price and
 
b.       Volume of oil lifted multiplied by posted price (realizable price0
 
Posted price and realizable price are derived official prices of chargeable oil. They help to prevent under-pricing of chargeable oil by oil companies.
 
What Adjusted Profits is under PPTA
 
Adjusted Profits as defined in section 9 is the fiscal value of chargeable oil less deductions under section 10 and after adjustment under section 14.
 
Deductions under section 10 include:
 
a.       Operating expenses such as royalty paid, admin & production expenses.
 
 
b.       Some capital expenditure like intangible drilling expenses, exploration expenses           and expenses for the appraisal of the first two wells.
 
From the above, we can see that some capital expenses are allowable under PPTA unlike in CITA.
 
Adjustment under section14 is the exclusion of income from transportation of chargeable oil by ocean going oil tankers from taxable income under PPTA; such income is taxable under section 14 of CITA.
 
 
 
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Deductions not allowed under PPTA
 
i.        expenses not being wholly, exclusively and necessarily expensed for        the purpose of the operations;
 
ii.       any sum employed as capitals except as allowed under section10.
 
iii.      any amount employed as improvements as distinct from repairs;
 
iv.      sum recoverable under an insurance or contract of indemnity;
 
v.       rent of or cost of repairs to any premises not incurred for the purpose of           the operations;
 
vi.      amounts incurred in respect of any income tax, profit tax or other similar tax within Nigeria or elsewhere;
 
vii.     depreciation of any premises, building, structures, works or a permanent          nature, plant, machinery or fixtures;
 
viii.    payment to any provident, pension, saving, or other society scheme or    funds not approved by the Joint Tax Board;
 
ix.      any expenditure for the purchase of information relating to the existence and extent of petroleum deposits;
 
x.       Interest on borrowed money where such money was borrowed to a          second company, if during that period;
 
          -        either company has an interest in the other company or
         
          -        both have interest in another company either directly or
 
          -        through other companies or
 
          -        both are subsidiaries of another company.
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Assessable Profits
Assessable Profits is defined in section 9 (4) as adjusted profits less deductions allowed by section 16, which are losses brought forward (if any). Therefore, under PPTA losses are deducted in arriving at assessable profits unlike in CITA.
 
Chargeable Profits
Chargeable Profits is defined in section 9 (5) as assessable profits less deductions allowed under section 20, which are annual allowances and petroleum investment allowances (PIA).
 
Capital Allowance Rates under PPTA
By the provisions of paragraph 5 and Table 1 of 2nd Schedule of PPTA Annual allowances are claimed on qualifying capital expenditure at the rate of 20% p.a for four years and 19% in the fifth year.
 
PIA rates under PPTA
By the provisions of paragraph 4 and Table II of 2nd Schedule of PPTA PIA rates applicable are:
 
a.       Onshore Operations                                                                5%
 
b.       Operations in Territorial Waters and continental shelf
          area up to and including 100m of water depth..                      10%
 
c.       Operations in Territorial Waters and continental shelf are
          between 100m and 200 m of water depth.                             15%
 
d.       Operations in Territorial waters and continental shelf area
          beyond 200m of water depth.                                                         20%
 
Assessable Tax
The tax rate is applied to the chargeable profits to get assessable tax.
 
The rates specified in section 21 are.
 
i.        For the first five accounting periods of a new company the rate is  65.75%.
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ii.                 For other accounting periods the rate is 85%
 
Main business/fiscal arrangements available under the upstream operations
 
The three Main business and fiscal arrangements are:
1.       Joint Venture Contracts (JVC)
2.       Production Sharing Contracts
3.       Sole risks (independent operators)
4.       Farm-in and Farm-out
5.       Alternative Funding.
 
          Main features of Joint Venture Contracts
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
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.
 
The existing JVCs in the country.
 
S/N
Operator
Members
Equity (%)
1
Shell (SPDC)
 
1.   NNPC
2.   SPDC
3.   Elf
4.   NAOC
55
30
10
5
2
Mobil
NNPC
Mobil
60
40
3
Chevron
NNPC
Chevron
60
40
4
NAOC
NNPC
NAOC
ConocoPhilips
60
20
20
5
Elf
NNPC
Elf
60
40
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Features of Production sharing contracts
i.        It is a contract between NNPC and one or more contractor
ii.       NNPC is the sole license holder unlike under PSC.
iii.      The contractor bears all the risks of operations.
iv.      The application of PPTA is moderated by the provisions of the Deep       Offshore and Inland Basin Act and PSC Agreements.
v.       Areas of operation are deep offshore and inland basins.
vi.      PPT rate is 50%
 
Features of PSC Continues
i.        Contract areas i.r.o. of contracts signed before 1999 are entitled to           investment tax credit at 50% on investments made.
ii.       But for contracts signed from 1999 what is applicable is petroleum          investment allowance at 50%.
iii.      Crude oil produced is allocated in this order.
 
·        Royalty oil to NNPC
·        Cost oil to contractor
·        Tax oil to FIRS, Abuja
·        Profit oil to NNPC and contractor
 
The major PSC fields in the country.
 
S/N
Main Contractor
Field
1
SNEPCO
Bonga
2
NAE
Abo
3
Mobil
Era
4
Chevron
Agbami
5
Adax
Okwori
 
Features of Sole Risk (Independent Operators)
 
▫ The license holder(s) also take all the risks.
▫ NNPC has no stake except that of regulation and supervision.
▫ They are all indigeneous companies like Conoil, Moni-Pulo, Atlas and 
    Amni.
▫   No special tax incentives outside PPTA.
9
Farm-in and Farm-out in Petroleum Operations
 
Farm-out is a situation where an oil block license owner releases part of his interest but retains the operatorship. The owner is termed Farmee while the new entrant is Farmor.
 
Farm-in is an arrangement in which a new investor takes over part of the interest in an oil block; ownership still resides with license holder.
 
Explain Alternative Funding Arrangement in Petroleum Operations.
 
This is an arrangement in which the international oil companies in JVC agrees to fund all the capital costs of a project; that is no cash call is made upon NNPC for its own equity participation. NNPC pays back its share of the capital costs through allocation of additional crude oil produced.
 
NNPC in this arrangement is termed the carried partner while the IOC is called the carrying partner