Assessment of Petroleum Profit Tax Under the Nigerian Tax Laws

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1.1 Introduction

Petroleum Profit Tax Act provides that:

Assessment of tax shall be made in such form and in such manner as the Board shall authorize…

But neither the Petroleum Profit Tax Act nor any other tax law in Nigeria made any provision for the definition of the term “tax” or the phrase “assessment of tax” or “the assessment of petroleum profit tax”.

In an Australian case of Mathews v. Chicory Marketing Board2, a tax has been defined as “a compulsory exaction of money by a public authority for public purposes, or taxation is raising money for the purpose of government by means of contributions from individual persons.”3 In addition, Mr Justice Roberts, in an American case of United State v. Butler4, defined tax as follows:

A tax in the general understanding of the term and as used in the constitution signifies an exaction for the support of government.”

Accordingly, tax is not an optional payment or voluntary donation to the government. It is, rather, a kind of enforced contribution exacted in accordance with the legislative authority. Therefore tax, in the modern period, takes the form of a pecuniary burden laid upon individuals or property to support the government. It is normally imposed by statute.
As mentioned earlier, the terms “assessment” and “assessment of tax” also have no statutory definition. The word ‘assessment’ has been defined in the Oxford Dictionary as:

“(i) A carefully considered opinions and judgment…

(ii) The action of assessing somebody or something …

(iii) An amount fixed for payment….”

The Chamber Dictionary also defined ‘assessment’ as:

“(i) The examining of income and profit to calculate the amount of tax to be paid.

(ii) The valuing of property to calculate the amount to be paid in rate.

(iii) The amount of a tax or charge.”

Longman Dictionary also defined the word as:

“(i) A process in which you make a judgment about a person or situation

(ii) A calculation about the cost or value of something, e.g. tax assessment.”

Furthermore, many different words are synonymously applicable to the term. Determination, calculation, estimation, evaluation, consideration appraisal and judgment, inter alia, are all synonymous with it.

Therefore the term “assessment” in its literal sense has a broad meaning. It is a process for making decisions and final judgments about a person, situation, or anything else.

In its technical sense, the phrase ‘assessment of tax’ or ‘tax assessment’ in other words, has been defined as “the process of measurement of a taxable person’s tax obligation and putting him on notice in respect thereof.”

Another contribution to this issue came from a scholar Okonkwori. In his book, he categorically stated that “an assessment of tax could be defined as a process whereby the tax officers and tax payer come together and have discussion concerning the general state of the business in order to ascertain what to pay as tax”11 In the same vein, professor Ayua simply defined it as “the process whereby the taxable income of taxpayers is ascertained.”

Assessment of tax generally involves ascertaining the base of assessable profit of the tax, granting all the relieves and allowances as may be prescribed by law and applying the relevant tax rate. Therefore, the assessment of petroleum profit tax could also be defined as the process whereby profits, adjusted profit, assessable profits, chargeable profit, assessable tax, and chargeable tax of an oil-producing company are all ascertained.

Taxation emerges largely in our societies. It is now hard to see a government that does not rely on it. It is indeed of tremendous importance. It occupies a great space and a significant position in the economy of the country.

The search for oil began in Nigeria in 1908. A German company pioneered it when it drilled fourteen wells in Ajebandele dry hinterland in Lagos. World War 1 between 1914-1918 terminated this activity. But the establishment of the Shell Petroleum Development Company of Nigeria (ltd) in 1938 revived the interest in the possibility of discovering oil in Nigeria. The Royal Dutch Shell and British Petroleum formally owned the company. It was known before as Shell D` Arcy and was first situated at Owerri, Imo state. In November 1938, the company received an Oil Exploration License {OEL} covering the whole of Nigeria. The operation of the company was suspended due to the Second World War. It then later resumed fully into its petroleum operations in 1956 at Oloibiri which is now in

Bayelsa state. In 1957, the company reduced its acreage to 40,000 square miles of Oil Prospecting Licenses (OPLs). Only about 15,000 square miles of this acreage was converted into Oil Mining Licenses (OMLs) by Shell B.P. The residual was returned to the Nigerian government in 1960.15

Towards the end of 1960, about nine petroleum exploration and production companies held Nigerian concessions (i.e. OPLs and OMLs). These are:

  1. The Shell Petroleum Development Company of Nigeria Limited.

2. Gulf Oil Company Nigeria Limited.

3. Mobil Producing Nigeria Limited

4. Nigeria Agip Oil Company Limited.

5. Phillips Oil Company Nigeria Limited.

6. Safrap Nigerian Limited

7. Tenneco Oil Company of Nigeria Limited

8. Texas Overseas Oil Nigerian Petroleum Limited

9. Union Oil Nigeria.

From the angle of taxation, the profits of all Nigerian and foreign companies accruing in, derived from, brought into, or received in Nigeria are normally taxed under the Companies Income Tax Act. However, due to the peculiarities and complicated nature of oil industries, the profit of companies engaged in petroleum operations

are not taxed under the Companies Income Tax Act.18 They are rather, taxed under special and separate legislation, that is, the Petroleum

Profit Tax Act (PPTA).19 In other words, only the profit of the crude oil-producing companies is subject to the PPTA.20

It was in 1959 that the first legislation governing the taxation of revenue arising from the upstream oil sector was enacted, i.e. the Petroleum Profit Tax of 1959. It was the principal Act, which has been amended by the following legislation:

  1. Income Tax (Amendment) Act no.65 of 1966.

2. Petroleum Profit Tax (Amendment) Act no.1 of 1967.

3. Oil Terminal Dues Act no.9 of 1969.

4. Petroleum Profit Tax (Amendment) Act no. 15 of 1973.

5. Petroleum Profit Tax (Amendment) Act no.55 of 1977.

6. Petroleum Profit Tax (Amendment) Act no.4 of 1979.

7. Petroleum Profit Tax (Amendment) Act no. 95 of 1979.

8. Petroleum Profit Tax (Amendment) Act no.23 of 1979.

It should be noted that all of these Acts were consolidated into

the Petroleum Profit Tax Act. 21Furthermore, even some of the provisions of the PPTA of 1990 have been sequentially amended by the following decrees:

1. Finance and Miscellaneous Taxation Provisions (FMTP) Decrees of 1993

2. Finance and Miscellaneous Taxation Provisions (FMTP) Decrees of 1996

3. Finance and Miscellaneous Taxation Provisions (FMTP) Decrees of 1998

4. Finance and Miscellaneous Taxation Provisions (FMTP) Decrees of 1999

The current legislation in the taxation of crude oil-producing companies is the Petroleum Profit Tax Act 22.

1.2 Aims and Objectives

The research mainly examines the problems and identifies any loophole in the provisions relating to the tax assessment of the upstream oil sector under the Petroleum Profit Tax Act. This could be achieved by critically analysing the relevant provisions and then discussing the problems before finally giving some useful solutions and comprehensive suggestions. More light will be thrown into the recent development in this area of research.

The hope is that this research will be an important means and effective tool that simplifies the assessment of petroleum profit tax.

1.3 Problems of the Research

Many problems affect the petroleum profit tax in general and the petroleum profit tax assessment in particular. These include the problems relating to the PPT administration, the complexity of PPT/MOU calculation, and the problems of PPT avoidance and evasion.

There is no doubt about the significance of strong, able and effective administration in any system. It is widely agreed that one of the main aims of taxation is to raise sufficient revenue for the government to meet its needs of providing necessary services to the public. It is also agreed that tax evasion/avoidance cause the government to lose huge money. Consequently, there is the opinion that the loss of revenue due to widespread tax evasion/avoidance in Nigeria is due to the weak, inept and inefficient tax administration system.

In the oil sub-sector, the Federal Board of Inland Revenue (FBIR) is vested with the power to administer the petroleum profit tax. It is also responsible for carrying out all acts deemed necessary and expedient for – inter alia –the assessment of petroleum profits tax.

The major problem existing within the upstream oil sub-sectors of tax administration lies in the design of the tax administration system and the institution’s capability. These consequently lead to low efficiency and effectiveness of not only the assessments of petroleum profit tax but also the collection of the tax. This is a serious case considering the importance of the revenue that comes directly or indirectly from the sector. Furthermore, the issue of institutional capability is even more pervasive. This is because the tax officials dealing with the oil-producing companies must be elite teams of professionals that are able to carry out their tax assessment responsibilities at the highest standard of efficiency and integrity. Additionally, the widespread problems of the workforce, inadequate professional training, inadequate facilities and environment, low staff morale, lack of computerization, and lack of resources all affect the efficiency, effectiveness and performance in the administration of petroleum profit tax.

Indeed, PPT assessment entails ascertaining the profits of the oil-producing companies as well as the chargeable tax. Each of these can not be actually arrived at without indulging in the profit calculation, which is very involving. This is because petroleum operations are very complex in nature. The oil industry is capital-intensive with a high man-per-capital ratio. It requires the services of many different professionals, which – inter alia– include geologists, seismologists, surveyors, architects, engineers, economists, accountants, lawyers, and civil servants. Moreover, the statutes governing the taxation of oil-producing companies in Nigeria are just like the final outcome of many negotiations and agreements. The chargeable profits differ from the company’s statutory profits for different reasons. Partly because the chargeable profits are based on the tax reference price, which is known as posted price. In the past, the posted price was fixed by negotiation between the government and the oil companies. Now, the government fixes it unilaterally. On the other part, certain expenditure items are treated differently.

Although PPTA provides the basis for tax assessment and computation of any company engaged in petroleum operation, the taxation of Joint Venture (JVs) companies is governed by a relatively complex document of a Memorandum Of Understanding (MOU). MOU is a financial arrangement between the Federal Government and Joint Ventures companies. Under the MOU, two types of tax calculations are to be made. The first one is based on the Petroleum profit tax/royalty without any adjustment. The PPT/royalty base of calculation is referred to as Government Take (GT). The second type of calculation, referred to as Reversed Government Take (RGT), shall be based on MOU, which is rather complicated. It is allowed for the company to choose the lower of the two calculations.

It is worth noting that despite the MOU’s complexity, it is neither incorporated in the tax legislation nor is it codified or sufficiently clear and adequately administered by the tax authorities. This is a serious problem that requires an urgent solution.

Another problem that may also affect the petroleum profit tax and its assessment is tax evasion/avoidance. An oil company can evade tax by deliberately delivering false returns, refusing to pay the tax at the right time or refusing to pay the tax at all. It can also avoid tax by manipulating some Petroleum Profit Tax Act provisions. In other words, some oil companies may look for any lacuna in the PPT provisions so that they will make use of it to avoid tax. This serious matter may render a significant amount of revenue coming from this sector to reduce. Subsequently, the government may not have enough money to use for public services. It is, therefore, a critical problem that has to be tackled.

Theft and illegal oil bunkering by supposed criminal syndicates also reduce the country’s oil revenue, possibly by several billion dollars annually. On this ground, the amount normally generated from upstream oil companies’ taxation is negatively affected. In March 2003, for example, political turmoil resulted in force majeure declarations by Chevron, Texaco, and Shell, the major oil producers in the country.27 This has seriously affected the country’s economic and fiscal situations.

Crises in the Niger Delta area can also negatively affect the Petroleum Profit Tax and subsequently affect its assessment. For example, on January 19, 2006, a group called the Movement for the Emancipation of the Niger Delta (MEND) grabbed four oil workers and also attacked the pipelines and platforms of the Royal Dutch Shell Company. Shell is the biggest oil producer in the swampland of the Niger Delta. In February 2006, MEND kidnapped 11 employees of Willbros Group Inc. Of Houston and vowed to continue disruption in Nigeria’s oil production if foreign companies and the Nigerian military do not leave the Niger Delta. On March 9, 2006, militants in the volatile oil-producing Niger Delta kidnapped three foreign oil workers, including two Americans, in Nigeria as a disruptive campaign against the government. The MEND was also behind the kidnapping. The group has warned that t it will drive oil companies like Shell, Chevron and Exxon-Mobil out of the area.

The militant is sabotaging Nigerian crude oil exports in their effort to gain more benefits for people living in the oil-rich delta. They have threatened to step up attacks. After the February kidnapping, Nigeria’s production of oil dropped by 458,000 barrels per day. As of September 2006, Nigeria lost about $12 billion to the Niger Delta crisis in seven months alone. According to a United States-based organization, the militant steals about ten per cent of the

Nigerian daily crude oil output from pipes.29 The daily production output of the oil companies in the Niger Delta drops, so Nigeria loses revenue. Indeed, this is a tremendous problem for which an urgent solution should be provided.

1.4 Justification / Significance of the Research

An assessment of petroleum profit tax is one of the three fundamental duties vested on the Federal Board of Inland Revenue. However, in spite of this significant position occupied by the PPT assessment, the materials and information related to it are very scanty. For this reason, undertaking this research is very vital and relevant.

This research will be useful and beneficial to students of Law, Economics, Business, Finance and Accounting at both the undergraduate and postgraduate levels. Legal and accounting practitioners will also find this research work viable and useful for them.

Petroleum revenue, in general, plays an important role in the Nigerian economy and the development of the nation. It provides the bulk of funding for the three tiers of government. Thus, it has become the dominant driver of the nation’s economy. For instance, the oil and gas sub-sector annually provides over 70% of the government revenue and 95% of the nation’s foreign exchange earnings. Nigeria is one of the most influential oil exporters, not only among the Economic Communities of West African Countries {ECOWAS} but also among the entire nations of the African Union {AU} and Commonwealth nations. It was the sixth most important oil producer in the Organization of Petroleum Exporting Countries {OPEC}. At the end of June 2005, Nigeria occupied the 3rd position in the organization as a result of the Iraq war. It produces about two million and five hundred thousand (i.e.2.5 million) barrels of crude oil per day.

On the other hand, Petroleum Profit Tax is the major source of government revenue derived from taxation. For example, in the year 2001 alone, the Federal Government raised the sum of six hundred and thirty-nine billion, two million Naira (N639,002,000,000=) from petroleum profit tax and royalties.32 The amount was equivalent to 62.7% of the total revenue generated from taxation for that year. Therefore revenue from petroleum profit tax {PPT} is of the most important sources of revenue for the Government.

Like any other type of taxation, petroleum profit tax basically aims at raising sufficient revenue for the Government. This includes providing services like defence and security of the nation, maintaining law and order, and providing health services and education to the nation’s people. Revenue from taxation could also be used on capital projects, creating social and economic infrastructures which improve people’s lives and enable the country’s economy to grow. In other words, PPT can also be used to shape the nation’s economic growth and development. Furthermore, oil is treated as a patrimonial inheritance in many countries, belonging to the whole nation, including future generations. Therefore, taxing becomes a way of achieving the government’s objective of exercising right and control over this public asset. The government may impose a (very high) tax to regulate the number of participants in the Industry and discourage its rapid depletion to conserve some of it for future generations. This will also achieve the government’s aim of controlling the petroleum sector development.33 Moreover, petroleum taxation has become an instrument for wealth re-distribution between the wealthy and industrialized economies represented by the Multi-National Oil Companies (MNOCs) and the poor and emerging economies from where petroleum resources are extracted. The MNOCs own the technology, expertise and capital needed to develop the industry. They repatriate their earnings and often very huge profit to their wealthy countries. Extracting rent from them in the form of petroleum taxation is a way of achieving the objective of wealth re-distribution among these nations. Petroleum profit tax can also be utilized to guide the behaviors of economic agents. The high potential for environmental pollution and degradation stemming from industrial activities in the upstream oil sub-sector makes it a target for taxation. This can regulate its activity and promote the government’s quest for a cleaner and healthy environment. Cleaner production may be achieved by imposing a tax on it for pollution and other environmental offences.

1.5 Scope of the Research

Geographically, the research covers only Nigeria. It also contains the historical background of crude oil exploration in the country. The history and development of the Petroleum Profit Tax Act (PPTA), from the principal Act of 1959 to the recent amendment of 2004, are also incorporated into this thesis.

The term “ Petroleum” has been defined by the PPTA as “ any mineral oil or relative hydrocarbon and natural gas existing in its natural condition in Nigeria, but does not include liquefied natural gas, coal, bituminous shale or other stratified deposits from which oil can be extracted by destructive distillation.” 35 But for the purpose of research limitation, this thesis will not touch on the issues related to the taxation of gas even though the PPTA is applicable to it. It will only focus on the issues and problems that are specifically related to the petroleum profit tax assessment. As a matter of fact, these issues shall be traced and examined based on the Petroleum Profit Tax Act,36.

However, the Companies Income Tax Act [CITA], 37 may also be used. This is because of the strong link and close relationship that exist between the PPTA and the CITA. It is due to the peculiarities of the oil-producing companies that the Petroleum Profit Tax Act was enacted. Furthermore, references to the Nigerian cases which are relevant to the research will be made. English cases are also used where it becomes necessary.

1.6 Literature Review

In spite of a few textbooks available on Petroleum Profit Tax legislation, it is hard to see a book or legal research specifically bearing the title of this thesis. Tax assessment of the upstream oil sector and related issues are only available under some headlines in different books of taxation.


For instance, Oremade, T., in his book 38, discussed some vital issues connected to the PPT assessment. These include additional assessment, a notice of assessment, an objection to assessment and an appeal against an assessment.

Ali, B.E. Petroleum Profit Tax In Nigeria: Issues and Options. Nigerian Taxation, The Official Journal of the Chartered Institute of Taxation of Nigeria. Vol.4, No.3 & 4, July-Dec. (2000).

Kanyip, B.B. Taxation Issues in Foreign Investment. Modern Practice Journal of Finance and Investment Law. January (1998), Vol.2, No. 1.

Ochei, B.B. Tax Administration in Retrospect. Nigerian Tax News (2002), Vol.6, No.1.

Samorin, O.A. The Origin and Status of Revenue Board in Nigeria. The Nigerian Tax Journal, Oct.-Dec. (2002).

Assessment of Petroleum Profit Tax Under the Nigerian Tax Laws