TAX ALERT
Sole Risk and Marginal Field
Operators to File Returns
on the
Basis of Equity Interests &
Other News from the FIRS
JANUARY 2015
Introduction
As part of Federal Inland Revenue Service (“FIRS” or
the “Service”)’s efforts to boost what it termed “accurate
voluntary tax compliance” in the upstream division of oil
and gas industry and to further provide clarity on
transfer pricing issues recently introduced, the FIRS
organized a seminar for Sole Risk (SR) and Marginal
Field (MF) operators.
All Companies are
therefore required to
register for taxes as provided for in section 55 of
the Companies Income Tax Act, 2004 (as
amended) (CITA) and section 26 (1) of the FIRS
(Establishment) Act 2007.
Below are the highlights of the issues raised
and our comments thereon:
clarification. It eliminates doubts on the side of
Area Tax Offices and Taxpayers who might
have been under the impression that multiple
registrations is the way to go. Besides, a unique
registration saves time and costs of compliance.
It is hoped that this would migrate to the Unique
Tax Identification Number (UTIN) that the FIRS
is running on a parallel basis and Taxpayers
would have only one number for both Federal
and all States taxes rather than having one Tax
Identification Number for the Federal and
another ones for each States. It is our view that
the process of UTIN should be sped up in the
interest of simplifying the tax system.
1. Tax Registration: The FIRS disclosed that it is a
misconception that registration for Income tax is
different from the registration for Value Added Tax
(VAT). It confirmed that there is one time
registration for all taxes payable to the FIRS. That
is, once registration for tax is made and Tax
Identification Number (TIN) is issued, it covers all
taxes within the jurisdiction of the FIRS. Multiple tax
registration by a single company is unacceptable.
Our Comments: This is a very good
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2. Filling of CIT Return: Companies in petroleum
operations but not yet producing are enjoined to file
annual returns under Companies’ Income Tax Act
during the pre-production period. CITA is the
principal Act for all companies in Nigeria. The FIRS
is of the opinion that by virtue of section 55 of CITA
all companies including SR/MF are required to file
annual returns even where they have not
commenced production. Hence, companies not yet
producing petroleum need to file CIT returns during
pre-production period. Section 55 of CITA provides
thus:
“Every company, including a
company granted exemption from
incorporation, shall, at least once
a year without notice or demand
thereof, file a return with the
Board in the prescribed form and
containing prescribed information
together
with the following
information…”
3. Revenue and Cost Reporting by Joint
Interest Holders: The FIRS indicated that it will
no longer accept joint filings of PPT returns by
upstream companies under farm-in and farm out
arrangements unless such is approved by the
Minister of Finance as provided in section 24 of
Petroleum Profits Tax Act 2004 (as amended)
(PPTA). The FIRS has further posited that equity
interest rather than economic interest should be the
basis for oil revenue and costs reporting for PPT
purposes. It insisted that government recognises
only equity participation and not economic interest
(or whatever nomenclature) hence; the financial
interest should not be the basis for sharing and/or
allocating revenues and preparation of financial
reports. Petroleum companies must therefore file
returns on their percentage of equity participation
even if another company funded all the interest.
Our Comments: It is common for a partner in
a marginal field to seek fund in order to meet its
financial obligations by contracting with its
partner or a third party to carry its economic
interest. Accordingly, each partner would report
its revenue based on its financial interest in the
field until post cost recovery. Since the FIRS has
posited that oil revenues should be reported
based on the equity interest, the concerned
companies will have to adjust their financial
reporting for PPT purpose to reflect the FIRS’s
directive.
We are aware that many of the companies in the
petroleum industry report their revenues on
economic basis. Hence, it may be difficult for
them to suddenly switch to reporting based on
equity. We therefore suggest that the FIRS give
the affected operators sufficient time to adjust to
the FIRS’s directive. Otherwise, this may create
extreme difficulty in the financial structure of the
companies. In addition, we suggest that the
FIRS should leave the option of reporting on
either equity or economic basis open and only
demand written agreement as a commitment of
both parties to making the existing practice to
continue unhindered.
4. The Meaning of Connected Persons
Expanded: The FIRS has redefined connected
persons in the case of Sole Risk companies to
include a risk service contractor and regarded
Marginal Field partners in a Joint Venture as
connected persons to one another. Any party
connected with a partner in the field with respect
to dealings of the Marginal field is also
considered a connected person.
Our Comment: It appears that the FIRS has
departed from the principles of connected
persons as enshrined in the relevant provisions
of tax laws, regulations and conventions when it
mentioned that risk service contractors to sole
risk operators and partners in marginal fields are
related parties.
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We believe that in line with the Regulation 10 of
Income Tax (Transfer Pricing) Regulations,
2012 which defines “connected persons” in the
light of Article 9 of the Organisation for
Economic Co-operation and Development
(OECD) Model Tax convention, two parties are
related if one of the parties participates directly
or indirectly in the management, control, or
capital of the other or if the same persons
participate directly or indirectly in the
management, control, or capital of both
enterprises (i.e. if both enterprises are under
common control). We therefore do not expect
the FIRS to set different rules for SR/MF
operators.
5. Tax Holiday (pioneer status): It is obligatory
for the upstream companies in tax holiday
(pioneer status) to file returns on a yearly basis
notwithstanding the non-payment of PPT during
pioneer period. This will enable the FIRS to
determine the net tax re-investment in oil and
gas assets, unutilized capital allowances and/or
additions to assets accumulated during the
pioneer period. Otherwise, relief and allowances
may not be granted in respect of net losses and
qualifying capital expenditures (QCE) incurred
during the pioneer period.
Our Comment: It is expected that the affected
companies will file necessary returns and
information with the FIRS to guide it in
determining relevant values as it wishes. It is
important to note that the net tax re-investment
to date is less than 3% of the PPT collectible.
The NIPC has recently not been issuing new
approvals
to
companies
in
petroleum
operations. There is need for clarity on what the
government wants to do so as to avoid
uncertainty in practice.
6. Reported Value of crude oil sold should
be the higher of NNPC’s official selling
price and Sales proceed of the
companies: The recognised value of crude oil
sold shall be the higher of the company’s Sales
Proceeds and Official Selling Price (OSP) of
Nigerian National Petroleum Corporation
(NNPC) in line with “posted price” determination
in sections 9 and 23 of the PPTA.
Our Comment: We believe that this position
may not be applicable to companies in
Production Sharing Contract (PSC) in the light of
section 13 (1) of Deep Offshore and Inland
Basin Production Sharing Contracts Act Cap D3,
LFN 2004 (DOIBPSC) which states that:
“The realisable price as defined in
the PSC established by the
Corporation or the holder in
accordance with the provisions of the
PSC shall be used to determine the
amount payable on royalty and
petroleum profit tax in respect of
crude oil produced and lifted
pursuant to the PSC.”
In effect, the OSP of NNPC will NOT be the
basis of reporting revenue for PPT purposes in
the case of companies in PSC notwithstanding
that the actual sales proceed is lower than the
OSP. The superiority of the Act is established in
section 15 (2) of DOIBPSC which provides thus:
“If the provisions of any other
enactments or laws, including but not
limited to the enactments specified in
subsection (1) of this section, are
inconsistent with the provisions of this
Act, the provisions of this Act shall
prevail and the provisions of that other
enactment or law shall, to the extent of
that inconsistency, be void.”`
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7. Gas is taxed under Companies Income
Tax Act (CITA) and not PPTA: This is in line
with section 11 (2) PPTA which expressly
exempts Gas from PPT and Royalty. Therefore,
dividends payable to shareholders are
withholding tax (WHT) deductible.
Our Comment: The Tax Appeal Tribunal
(TAT) in a very recent case between Agip vs
FIRS ruled that income from gas is chargeable
under CITA and therefore the dividends payable
to shareholders thereon is subject to WTH. The
decision holds unless a higher court decides
otherwise in an appeal process.
8. The FIRS outlined some of the tax
incentives for SR/MF companies as
follow:
 65.75% tax rate for Marginal field
operators yet to fully amortize its preproduction costs;
 0% tax rate for Gas transferred from
Natural Gas facility to Gas-to-Liquidfacilities;
 30% tax rate for Upstream Gas Income;
 Accelerated annual allowances at 20%
and Petroleum Investment Allowance
from 5%-20% depending on the water
depth;
 Loss incurred
indefinitely;
is
carried
forward
 Exemption from further taxes in the form
of WHT on dividend paid;
 All investments necessary to separate oil
from gas from reserves into suitable
product is considered part of oil
development; and
 Capital expenditures allowed for 100%
write off in the year incurred with respect
to the first two appraisal wells, intangible
drilling costs, exploratory & well
development costs.
Conclusion
Considering the foregoing, we understand that
the FIRS may become more aggressive in its
quest to boost tax revenue in the name of the
purported accurate tax compliance. We are of
the opinion that the FIRS would still achieve its
objective by conducting its drive within the
bounds of law.
Disclaimer
Please note that this memorandum is not
intended to give specific technical advice and it
should not be construed as doing so. It is
designed to alert clients to some of the issues. It
is not intended to give exhaustive coverage of
the topic.
Professional advice should always be sought
before action is either taken or refrained from as
a result of information herein.
In any case, Ascension does not accept any
responsibility for any decision whatsoever made
based thereon or any liability incurred for failure
to consult with professionals on any specific
areas of issues raised.
For
further
enquiries
please
contact:
Azeez Alatoye
08099934520
azeez.alatoye@ascensioncsng.com
Ademola Olanrewaju
08098568889
Ademola.olanrewaju@ascensioncsng.com
Adeniyi Sunmola
08099934537
Adeniyi.sunmola@ascensioncsng.com
Abbas Iromini
08172074294
abbas.iromini@ascensioncsng.com
Sola Dada
08099934529
sola.dada@ascensioncsng.com
Ascension Consulting Services
178B, Prince Ade Odedina Str, Off Sinari Daranijo Str,
Victoria Island, Lagos, Nigeria
.
Tel: +234 1 761 4701 Mobile: +234 805 401 2394
Info@ascensioncsng.com