Introduction
The tax system is an opportunity for the government to collect additional revenue needed in discharging its pressing obligations. The principal legislation governing petroleum operations in Nigeria is the PPTA and its fiscal instrument is the PPT. under the PPT tax is set at 67.5% for the first five years of operations by the oil company and 85% after the five years are up. Since petroleum has become the largest and the main generator of GDP Nigeria, since its discovery by the British in the 1950s, there has to be a tax system set up by the government to enable the effective mobilization of the nation’s internal resources. The circumstances are therefore such that the primary laws regulating the industry, the Petroleum Act, the Petroleum Profits Tax Act and the NNPC Act are 40, 50 and 32 years old respectively. The fact that these legislation are out-of-date means that sectors and aspects of the industry (such as natural gas utilization and environmental issues), which have gained prominence over the last forty (40) years have remained outside their purview and are therefore subject to the arbitrariness of regulatory authorities.
The purpose of the PPTA
The PPTA is applicable solely to upstream operations in the oil industry. It is particularly related to rents, royalties, margins and profit sharing elements associated with oil mining, prospecting and exploration leases. It is the most important tax in Nigeria in terms of its share of total revenue contributing 95% and 70% of foreign exchange earnings and government revenue respectively. The PPTA involves the charging of tax on the incomes accruing from petroleum operations.
The PPTA requires, under section 8, that every company engaged in petroleum operations is under an obligation to render returns, together with properly annually audited accounts and computations within a specified time after the end of its accounting period. The PPT is charged, assessed and payable upon the profits of each accounting period. The profits accrued from a company in relation to the accounting period is the aggregate of the following:
Proceeds of sale of all chargeable oil
Value of all chargeable oil disposed
Value of all chargeable natural gas
And all income of the company of that period incidental to and arising from any one or more of its petroleum operations
Under section 22 of the PPTA Individuals, either solely or in partnership jointly with another or others, is not allowed to engage in petroleum operations and is in fact guilty of an offence. It follows, therefore, that only companies either solely or in partnership with other companies under the terms of production sharing contracts, partnership, joint venture scheme or arrangement are chargeable to tax under the PPTA, either directly, through their managers or named persons resident in Nigeria (for foreign companies) or liquidators (for companies in liquidation). These companies must submit all accounts and computations within five months of the end of the accounting period.
The ascertainment of assessable tax and chargeable tax is administered under section 19 of the PPTA. Assessable tax for any accounting period of a company is an amount equal to 85% of its chargeable profits for that period. Conversely, chargeable tax is to be charges, assessed and paid by the company in cohesion to the assessable tax payable for that period. The chargeable tax of a company engaged in petroleum operations is the final amount in the computation process for petroleum profits for the relevant accounting period subject to any notice issued by the FIRS requesting the company or any other legal person to whom it may have transferred some assets, to complete and deliver to the board any returns specified in the notice, or any such information as the Board may require about the asset.
It has been made apparent that for the purpose of PPT crude oil sales are valued at prices actually realized by the oil producing company in the world oil market, nonetheless, this value has to be compared with the value at the posted price and if the posted price is higher tax is then based on the posted price.
It is necessary to note that the administration of the PPTA is by FIRS. Companies that only market petroleum products including companies engaged in petroleum operations are therefore taxable under CITA. Where a company is involved in both petroleum operations and the marketing of the product, the trading results from the petroleum operations would be subject to PPT while the results from the marketing activities would be taxed under the CITA.
The PPTA covers basically every area of petroleum operations. Covering imposition of tax and ascertainment of chargeable tax; persons chargeable; accounts and particulars; assessments; appeals; collection, recovery and repayment of tax; offences and penalties, the fourth schedule of the act goes as far as covering the operation of companies that produce liquefied natural gas.
The PPTA proves strict against any violation of its rules. The act construes as follows:
Any offence committed by a company under the Act and for which no specific penalty is prescribed makes the company liable to a fine of N10,000;
If the offence is that created under section 22(1), or where a company fails to make returns of estimated tax, or fails to deliver accounts, particulars, information or keep records under Part IV of the Act, then a fine of N2,000 for every day the offence or failure continues in addition to N10,000 standing fine are prescribed. Default of payment attracts six months imprisonment in spite of the eventual payment of the cash penalty;
Failure to comply with the requirements of a notice served under the Act; or to prepare and deliver accounts and particulars required by section; or failure to attend and answer questions in response to a notice or summons or failure to submit any returns required by either section 27 or section 32 of the Act attract an offence punishable same way as in the first two bullet points;
The making of incorrect accounts, such as understating profits or overstating losses; incorrect schedules overstating expenditure or royalties or other sums. (Understating amounts repaid, refunded, waived or released; or giving or causing to be given incorrect information relating to liability to pay tax makes the offending party liable to a fine of (a) N1,000.00 and twice the amount of tax undercharged in consequence of such incorrect accounts, schedules, statements or information, provided that the complaints concerning any such offence is made within six years after the end of the accounting period);
The making of or the aiding, abetting and counselling to make false statements and returns for the purpose of obtaining any deduction, rebate; reduction or repayment in respect of tax attracts a fine of N1,000.00, thrice the amount due for the accounting period, or imprisonment for six months or both.
Staffs of the FBIR and other unauthorized persons who are guilty of corruption are liable to a fine of N600 or three years imprisonment or both.
Significance and Changes Under the PIB
Under section 344 of the PIB the penalty for failure to pay tax is reduced to an insignificant amount. The PPTA put it that penalty for the failure to pay tax was 200% of that tax not paid plus interest under the PPTA. What the PIB proposes in now a significant decrease producing an insignificant figure amounting to 10% plus interest. This has an adverse effect on the purpose paying taxes, as it would be advantageous to avoid paying the tax since the rate of return on the tax amount not paid and retained may be higher than the penalty plus interest. Thus meaning, it pays not to pay tax.
The fourth schedule was retained with some improvements from the PPTA Act. Nevertheless, Table II was changed dramatically. Under the PPT Act companies were permitted allowances equal to 99% of the value of the capital assets, based on a 20% straight line for five years. This was a regular and normal procedure. Table II of the PIB 2012 extends the allowances indefinitely for year six and after. This means that i.e. the total allowances on an asset with a 20-year life would 346% of the initial value of the asset. With such enormous allowances it is likely that the NHT will in effect be reduced to zero. These allowances are not restricted by provision 6(2) of the fourth schedule, which requires retaining 1% of the asset in the books for accounting purposes (not for tax purposes). The specific mention of ‘year six and after’ clearly establishes this.
The Bill proposes a change in the tax regime for upstream operations and provides that upstream oil companies would pay both Companies Income Tax and Nigerian Hydrocarbon tax. The NHT would replace the Petroleum Profit Tax. The PIB will go further and repeal Deep Offshore and Inland Basin Production Sharing Contracts Act, as well as a host of other laws that presently govern the petroleum industry.
Conclusively, the provision of the PPTA has revealed a legal framework for taxation of the petroleum profits by companies engaged in petroleum operations as distinct from the taxing of other companies under the general tax regime in Nigeria i.e. the punishment must match the crime. It is clear that the PPTA has made all encompassing provisos regarding its assessment and collection and its management by FIRS. Nonetheless, the mechanism of punishment for violation is in need of revamping. That aside, the act has a lot of potential as an effective tax law. The PIB also lacks the competence to enforcing a stringent (but fair) tax regime for operators and the government. A healthy balance is really needed to be struck for efficiency in the industry.
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