OVERVIEW OF PETROLEUM PROFITS TAX

RETURNS, COMPUTATIONS AND CAPITAL

ALLOWANCE TREATMENT.

TECHNICAL SESSION AT MONTHLY MEETING OF MONITORING COMMITTEE FOR ACCELERATED REVENUE GENERATION AND

ENHANCEMENT OF PETROLEUM PROFITS TAX AND ROYALTY (INTER-AGENCY).

June, 2018

OUTLINE• Introduction

• Filing of PPT Returns

• Basis of Assessment

• Accounting Period

• Format: PPT Computation

• Capital Allowance

• Condition for Granting Capital Allowance

• Type of Capital Allowance

• Annual Allowance

• Petroleum Allowance

• Restriction on Capital Allowance

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INTRODUCTION

• The Petroleum Profit Tax (PPT) is chargeable upon the profit of any company engaged in petroleum operations in Nigeria.

• Petroleum operation is defined as operations involving petroleum exploration, development, production and sale of crude oil.

• The trading result from the petroleum operations would be subject to petroleum profits tax

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CLASSES OF COMPANIES/ BUSINESS ARRANGEMENTS

Joint Venture Arrangement (JV):

• This type of arrangement is between the Nigerian Federal Government through its National OilCompany (NOC), i.e NNPC in the Nigerian case and one or more International Oil Companies(IOCs). The arrangement requires Government and other partners to contribute cash call basedon their equity to fund the total costs of petroleum operations. The operations are governed by aJoint Operating Agreement. The IOC is usually appointed the operator who implements approvedwork programs and budgets. Each party lifts its equity crude. Activities are consolidated from alllocations for accounting and tax returns filing purposes.

Production Sharing Contract (PSC):

• Under this arrangement, the Corporation (Government through the NOC who is theConcessionaire) or the Holder (A Nigerian Company who is concessionaire) appoints a contractor(IOC) for the purpose of carrying out petroleum operations in a particular Contract area. Thecontractor bears the risk of exploration and production. The contractor must have both technicaland financial competence in implementing work programmes in line with the PSC Agreementsigned. IOC is appointed as operator and is also responsible for the accounting records. Crude Oilrecovered (produced) in a PSC is allocated in the following priority

• Royalty Oil

• Cost Oil

• Tax Oil

• Profit Oil

• Where the NNPC is the Concessionaire, the arrangement is tagged PSC. If a Nigerian Holder is theConcessionaire, it is referred to as a PSA for ease of identification. Activities are ring-fenced alongcontract areas.

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CLASSES OF COMPANIES/ BUSINESS ARRANGEMENTS

SERVICE CONTRACTS:

• This is similar to PSCs except that the Service Contractor has no title to the oil. Hiscosts could be reimbursed either in cash or in kind. The Contractor is paid a feefor his services instead of profits (It is a Cost-plus arrangement). However, thecontractor has the first option to buy back the crude oil produced from theconcession.

MARGINAL FILEDS/SOLE RISKS:

MARGINAL FIELDS: These are fields left unattended by IOCs (JVs) for at least ten(10) years. Government seizes such fields and reallocate to Nigerian Companies.Beneficiaries enter into agreement with the JV Company and they pay OverridingRoyalty to the IOC on production in addition to usual Royalties to Government.There is no government participation.

SOLE RISK: These are generally those operations in concession areas that do notinvolve government participation The operator bears all the risks, pays royalty onproduction and PPT. Sole risk operation can also occur in a JV scenario where apartner single-handedly undertakes petroleum operations based on theunwillingness of other parties in a project.

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FILING OF PPT RETURNS

Upstream companies are to forward their PPT Returns on or before 31st May of each year and assessment notices are issued thereon by

FIRS

All companies are obligated under law to file tax returns (Income Tax, VAT, WHT, CGT)….Section 55 of CITA, Section 31 of PPTA

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FILING OF PPT RETURNS : CONTENT OF PPT RETURNS

Documents Required For Filing Tax Returns

Audited Financial Statement

Tax computation (PPT / CITA)

Tax computation supporting schedules (Capital allowance computation, EDT computation, Schedule of crude lifting / Turnover, Schedule of Royalties etc )

A declaration signed by a duly authorized officer of the company that the information contained therein is true and complete.

Evidence of Payment of Tax computed.

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BASIS OF ASSESSMENT

• BASIS OF ASSESSMENT

• Profits of any company engaged in any petroleum operation in Nigeria in any Accounting period shall be assessed to tax in the year of assessment in which the profit accrued. That is the profit of petroleum companies are assessable to tax on Actual Year Basis (AYB)

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ACCOUNTING PERIOD

• a period of one year commencing on 1st January and ending on 31st

December of the same year: or

• the day the company first makes a sale or bulk disposal of chargeable oilunder a program of continuous production and sales, domestic, exportor both and ending on 31st December of the same year; or

• any period of less than a year commencing on 1st January of any year andending on the date in the same year when the company ceases to beengaged in petroleum operations.

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FORMAT: PPT Computation

Computation of Assessable Tax for JV, Sole Risk/Marginal Field Operators

• FISCAL VALUE OF CHARGEABLE OIL XXXX

• ADD: INCIDENTAL INCOME XX XXX

• DEDUCTIONS

• SECTION 10 DEDUCTIONS:

• ADMIN&PRODUCTION EXP. XXX

• ROYALTY XXX

• EXPL. & INTANGIBLE DRILLING COSTS XXX

• LESS: TOTAL SEC. 10 (1) DEDUCTIONS (XXX)

• ADJUSTED PROFIT XXXX

• LESS: LOSSES B/FWD Sec.16 XX (XX)

• ASSESSABLE PROFIT XXXX

• LESS: EDUCATION TAX @2% XX (XX)

• ASSESSABLE PROFIT AFTER EDT XXXX

• PRIOR YEAR CAPITAL ALLOWANCE B/FWD XX

• CURRENT YEAR CAPITAL ALLOWANCE Sect.20(2) XX

• INVESTMENT TAX ALLOWANCE (ITA) XX

• LESS: TOTAL CAPITAL ALLW Subject to Sect 20(4) restriction (XX)

• Section 20(4): 85% of Assess Profit less 170% of ITA

• CHARGEABLE PROFIT XXX

• ASSESSABLE TAX @85%/65.75/ 50% of Chargeable Profit(Sect 22.2) XX

• TAX OFFSETS-Prior Year (ITC) B/FWD (Sect 22(3)) XX

• CURRENT YEAR INV. TAX CREDIT (ITC) XX

• LESS: TOTAL INVESTMENT TAX CREDIT (XX)

• UNRECOUPED ITC XX

• CHARGEABLE TAX

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CAPITAL ALLOWANCES

• Capital allowances are the reliefs claimed on qualifying capital expenditure incurred by the petroleum companies as contained in the provisions of second schedule of the PPTA.

• Any amount that has been treated as allowable expenses in accordance with the provision of section 10 of the PPTA cannot be treated as a qualifying capital expenditure.

• Qualifying capital expenditures are capital expenditure incurred in an accounting period on which capital allowance is claimable by the petroleum company.

• In PPT, Qualifying Capital Expenditures (QCE) incurred in any year of assessment can only be grouped under any of the following categories:

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CAPITAL ALLOWANCE CONT….

• Qualifying plant expenditures. i.e. capital expenditures incurred on plant, machinery or fixtures.

• Qualifying pipelines and storage expenditure. i.e. capital expenditures incurred on pipelines and storage tanks.

• Qualifying building expenditures. i.e. capital expenditures incurred on construction of buildings, structures or work of a permanent nature.

• Qualifying drilling expenditures. This include expenses incurred on:

• • The acquisition of rights in (or over) petroleum deposits • Searching, discovering and testing petroleum deposits or winning access thereto • Construction of any works or building which are likely to be of little or no use or value when the petroleum operations for which they were constructed were no longer carried on

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Conditions For Granting Capital Allowances

• Before any capital allowance can be granted, the following condition must be satisfied:

• There must be ownership and usage at the end of the particular accounting period.

• An asset is deemed to be in use during a period of temporary disuse.

• The qualifying capital expenditure must be wholly, exclusively and necessarily incurred for the purpose of petroleum operations carried on by the company.

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Types of Capital Allowance

• The following are the types of capital allowances available under the PPT:

• Annual Allowances,

• Balancing Allowance (if any), and

• Petroleum Investment Allowance

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Annual Allowances

• Annual allowances is granted annually on cost at a flat rate of 20% until the residue of the item (i.e. the TWTDV) is 1% of the original cost. That is the tax (estimated useful) life of assets representing a qualifying capital expenditures incurred by Petroleum Company is 5 years.

• Therefore, the cost of the asset is amortized over the period of five years in an equal amount except in the fifth year when 1% of the amount is retained (i.e. only 19% of the cost is claimable in the fifth year). The 1% of the original cost is retained in the book until the item is disposed.

• Assets on which capital allowance has been granted can only be disposed on the authority evidenced by the issue of certificate of disposal by the Minister or any other person authorized by him. Annual allowance rates are

• Year 1 20% Year 2 20% Year 3 20% Year 4 20% Year 5 19% (1% retained in the book)

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Petroleum Investment Allowance (PIA)

• Petroleum investment allowance is granted only once in the useful life of life of the item representing the qualifying capital expenditure and it is usually in the first year of use.

• This allowance is similar to and share the same characteristics with initial allowance. Prior to 1995 YOA, it is called investment tax credit and treated as a tax offset.

• However, WEF 1995 Tax Year, investment tax credit is to be known as petroleum investment allowance and to be treated like capital allowance. Also

• PIA Rates

• The rate at which investment allowance is claimed depends on the location of the qualifying capital expenditure as follows:

• (1) On shores operations 5% (2) Off shore operations:

• (i) Areas up to and including 100 metres continental waters - 10% (ii) Between 100 and 200 metres continental waters - 15% (iii)Beyond 200 metres continental waters - 20%

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Restriction on Capital Allowance

• The capital allowance claimable in any particular year of assessment shall be the lower of:

• (a) The full amount of capital allowance including balancing allowance and petroleum Investment Allowances, and (b) 85% of Assessable profit less 170% of the Petroleum Investment Allowance (which used to be l70% of tax offset prior to 1995 YOA).

• Note: Any unutilized Capital Allowance as a result of the restriction may be carried Forward till indefinitely.

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FEEDBACK

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