New Fiscal Regime Under PIB

Gbenga Oyebode, founding partner of Aluko and Oyebode, was the keynote speaker at the recent British Nigeria Law Forum Annual Lecture on the Petroleum Industry Bill (PIB) held at Linklaters in London.

Speaking on the PIB, Mr Oyebode took some time to explain the fiscal regime under the Petroleum Industry, which may be among the reasons that the multinational oil companies have been reacting negatively to the bill.

Mr Oyebode explained that under the PIB a new tax, the Nigerian Hydrocarbon Tax (“NHT”) will be introduced to replace the existing petroleum profits tax and it will apply to the profits of companies engaged in upstream petroleum operations.

The tax rates under the PIB are fixed at 50% for onshore and shallow areas of not more than 200 metres depth or 25% for bitumen, frontier acreages or deep water areas.

Most of the non-deductible expenses under the PIB are the same as prescribed under the Petroleum Profits Tax Act. However, some new non-deductible expenses have been added.

Expenditure for the purchase of information relating to the existence and extent of petroleum deposits will no longer be allowable. In a bid to discourage the flaring of associated natural gas, any expenditure for the purpose of paying a penalty or fee relating to gas flaring and domestic gas supply obligations will also become non-deductible.

The PIB will not allow signature bonuses, production bonuses or other bonuses due on a lease to be tax-deductible. Also, general, administrative and overhead expenses incurred outside Nigeria in excess of 1% of the total annual capital will become non-deductible expenditure under the PIB.

Other non-deductible expenses are:
20% of any foreign expenses other than general, administrativeand overhead expenses except where such expense relates to the purchase of goods and services approved by the Nigerian Content Development and Monitoring Board.
Any legal and arbitration costs related to cases against the Federal Inland Revenue Service or the Government, unless specifically awarded to the company during the legal orarbitration process.
Any costs incurred prior to the establishment of the company in Nigeria.
Any costs resulting from any arrangement or event that arises from fraud or willful misconduct or negligence on the part of the company.
Insurance costs where such costs are earned by the company or an affiliate of the company.
Any costs or fees incurred in obtaining and maintenance of a performance bond under a Production Sharing Contract.
The deductible expenses under the Petroleum Profits Tax Act have been replicated in the PIB with the addition of contributions made to the Petroleum Host Communities Fund.

A great deal of uncertainty persists however because the PIB states that royalties, fees and rentals payable are to be prescribed by the Minister. The multinational oil companies, who are still the biggest investors in the oil and gas industry in Nigeria, have complained about this provision saying that they cannot be expected to continue with planned investment unless they know in advance what their fiscal obligations will be.

Companies income tax is introduced for the first time and applies to companies engaged in both upstream and downstream operations. The rate of tax is 30 per cent of the profits of the company.

The non-deductible expenses prescribed under the Companies Income Tax Act are applicable under the PIB. In addition, the PIB provides that in determining the company income tax payable, NHT will not be considered a deductible expense.

The deductible expenses prescribed under the Companies Income Tax Act are applicable under the PIB. However, it is proposed that the provisions of the Companies Income Tax Act in relation to deductible expenses will be amended to include “any rents and royalties payable on Upstream Petroleum Operations”.

Once again, for companies involved in both sectors, royalties, fees and rentals payable are to be prescribed by the Minister.

Gbenga Oyebode is a founding partner of Aluko & Oyebode is one of Nigeria’s largest integrated Law Firms, providing a comprehensive range of specialist legal services to a highly diversified clientele. The Firm has 12 partners and a total of 65 lawyers in 3 office locations – Lagos, Port Harcourt and Abuja.

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