Taxation in the Oil & Gas Sector

Opportunities for Tax Professionals Presented by Banke Akanni Senior Manager/Head Transfer Pricing Team Federal Inland Revenue Service Large Tax Office – Oil & Gas (Upstream

)

5/1/2020

Outline

        Introduction Structure of the Oil & Gas Industry Tax Regime FIRS Roles Tax Compliance in the Oil & Gas Sector New Developments Tax Services Conclusion By Banke Akanni, FIRS LTO - oil & Gas (Upstream)

5/1/2020

Introduction

Oil & Gas industry is the cash cow of the Nigerian economy. Taxes from this sector account for over 60% of total FIRS revenue collection on a yearly basis.

The business has so many complex business arrangements that have implications for tax compliance.

There are also unique fiscal and tax regimes applicable to the sector.

A tax professional that has good understanding of the technicalities of the industry and the applicable fiscal/tax regime will no doubt be very relevant.

By Banke Akanni, FIRS LTO - oil & Gas (Upstream)

5/1/2020

Structure of the Oil & Gas Industry



Upstream – prospecting, exploration and production



Midstream – Petrochemicals, Refineries, Lube plants



Downstream – Marketing, Transportations (Tankers, pipelines or ocean going tankers)



Oil Servicing – Survey(geological & geophysical), Drilling, etc.

By Banke Akanni, FIRS LTO - oil & Gas (Upstream)

5/1/2020

Structure of Oil & Gas Industry Cont’d

Companies in Upstream are also segmented under different business arrangements namely: 

Joint Venture

Under this arrangement, the Companies operating a Joint Venture contribute participation in an oil block.

towards costs and subsequently derive benefits based on their equity NNPC or Government is the owner of the concession liaising with the parties involved through an appointed Operator.

By Banke Akanni, FIRS LTO - oil & Gas (Upstream)

5/1/2020

Structure of Oil & Gas Industry Cont’d

The existing JVs in the country are : i. SPDC(NNPC 55%,SPDC 30% - operator, Total 10% & NAOC 5%) ii. Mobil(NNPC 60%, Mobil-operator 40%) iii. Chevron(NNPC 60%, Chevron-operator 40% iv. NAOC(NNPC 60%, ConocoPhillips 20%, NAOC 20% operator) v. Total(NNPC60%, Total 40% - operator) vi.Conocophillips(NNPC 60%, ConocoPhillips - operator 40%) By Banke Akanni, FIRS LTO - oil & Gas (Upstream)

5/1/2020

Structure of Oil & Gas Industry Cont’d



Production Sharing Contract

Companies that engage in PSC arrangement have title to the oil and the recovery of cost in terms profit oil and cost oil which is entirely dependent on the discovery of oil. The oil discovered is shared between NNPC on behalf of the Government and the company using a predetermined sharing formula.

The evolution of PSC arose because the Petroleum Act(PA) and PPTA did not encourage investments going deeper into Nigeria territorial waters but PSC operates beyond 200m water depth.

Fiscal regime is the Deep Offshore Inland Basin Production Sharing Contract Act.

By Banke Akanni, FIRS LTO - oil & Gas (Upstream)

5/1/2020

Structure of Oil & Gas Industry Cont’d

i.

The major

PSCs

are:

SNEPCO

OML118 - Bonga field; commenced Dec 2005; 1993 agreement;

ii.

iii.

iv.

ESSO NAE

Erha field; commenced April 2006; 1993 agreement; OML133 – Abo field; commenced Aug 2003; 1993 agreement; OML125

Statoil

- Agbami Tract 2; commenced Dec 2008; 1993 agreemt; v.

OML128

APENL

– Okwori; commenced July 2005; 1998 agreemt; OML126/137

vi. APDL

– Antan Brass; commenced May 1998;1998 agreemt;

vii.

OML123/124

Total Upstream(Tupni)

/Sapetro/CNOOC – Akpo; commenced Mar viii. IX. 2009; 2005 agreemt, OML 130

Sterling Global

: Okwuebume; TMP; 2005 agreemt; OML143

Usan:

Usan field; 1993 agreement; OML139 By Banke Akanni, FIRS LTO - oil & Gas (Upstream)

5/1/2020

Structure of Oil & Gas Industry Cont’d

 

Production Sharing Arrangements

This is very similar to the Production Sharing Contacts except that the concessionaire is an indigenous holder and not NNPC. The existing

PSAs

i.

are: Famfa/

stardeep

/PetroBrass – Agbami Tract 1 ii.

iii.

Sapetro/

total Upstream

/Brassoil CAMAC/

NAE

/Allied Energy Operators are highlighted.

Marginal field Operators

This is an arrangement where the Contractor /Operator bears all the risk. This is common with marginal field and indigenous operators who have all the money and

own the concession

because the which has been farmed out to them by IOCs fields have not been commercially viable to IOCs. Marginal field operators pay overriding royalty to the IOC as well as the royalty to government.

By Banke Akanni, FIRS LTO - oil & Gas (Upstream)

5/1/2020

Structure of Oil & Gas Industry Cont’d



Sole Risk

This is an arrangement where the Contractor /Operator bears all the risk.

o

Risk Service Contract

Contractor has no title to the oil produced but undertakes exploration, development and production activities on behalf of the concession holder. The contractor is reimbursed and remunerated from the sale of the oil produced By Banke Akanni, FIRS LTO - oil & Gas (Upstream)

5/1/2020

Tax Regime

Applicable Taxes Enabling Acts/Fiscal Regime Tax Authority

Petroleum Profits Tax Petroleum Profits Tax Act, MOU, Deep Offshore & Inland Basin Production Sharing Contract Act FIRS Company Income Tax Company Income Tax Act Value Added Tax Value Added Tax Act FIRS FIRS Capital Gains Tax Withholding Tax Stamp Duties Capital Gains Tax Act FIRS/SIRS Company Income Tax Act, Personal Income Tax Act Stamp Duties Act FIRS/SIRS FIRS By Banke Akanni, FIRS LTO - oil & Gas (Upstream)

Tax Regime Cont’d

Applicable Taxes Enabling Acts/Fiscal Regime

Personal Income Tax (PAYE) Personal Income Tax Act

Tax Authority

FIRS/SIRS 5/1/2020 By Banke Akanni, FIRS LTO - oil & Gas (Upstream)

5/1/2020

FIRS Roles

FIRS has in recent times restructured in order in order to serve this important sector better.

The Large Tax Department has been created to exclusively serve the industry. Three offices under this department take care of the different classes of the industry: i. Large Tax Office – Upstream: companies in the Exploration and Production category.

ii. Large Tax Office – Oil & Gas (Downstream) This handles all companies in marketing, haulage, petrochemicals and refining iii. Large Tax Office – Oil & Gas (Servicing) This office handles companies in Service Contracts. Under this arrangement , the Contractor’s participation is limited to the rendering of specific service for an agreed fixed fee.

By Banke Akanni, FIRS LTO - oil & Gas (Upstream)

5/1/2020

FIRS Roles

The functions of the office include:  Returns Processing: ensuring arithmetical accuracy of returns filed, registering the assessments and raising assessment where applicable      Payment processing: generate receipts on payments received, issuance of withholding tax credit notes, Taxpayer services: information, advice and enlightenment to taxpayers and tax consultants, TCC processing, Tax audits: ensuring compliance with taxpayers’ self assessments Tax accounting: record of company’s payment and assessment in company’s tax records (k-cards) Filing and Debt Enforcement: to ensure compliance with filing (persuasion and seizure of documents), debt management (demand notes, approval of installment payments, interest and penalties), and enforcement By Banke Akanni, FIRS LTO - oil & Gas (Upstream)

5/1/2020

Tax Compliance in the Oil & Gas Sector

i.

 ii.

iii.

iv.

v.

vi.

vii.

viii.

Petroleum Profits Tax- submission of estimated tax and annual returns

Petroleum Profit Tax (PPT) is usually assessed when returns are filed by E & P Companies.

E & P Companies are usually

required by law to file their estimated tax not later than 28th of February and commence payment of monthly equal installment not later than 31st of March every year.

The estimates are subject to revision based on the changes in the parameters (Production, Costs and Prices).

Annual returns should be submitted 5 months after the end of the accounting period while the final instalment (13 th instalment ) would be paid 21 days after the date of service of the notice of assessment.

The tax professional should advise prompt compliance with filing whilst paying attention to details : the appropriate tax rate should be used depending on the business arrangement.

All expenses incurred before production should be amortized over a 5 year period when production starts.

Incidental income must be fully reported.

Fiscalised value of crude at the higher of realisable price and actual sale proceed By Banke Akanni, FIRS LTO - oil & Gas (Upstream)

5/1/2020 v.

i.

ii.

iii.

iv.

Tax compliance in the Oil & Gas sector

Deductibility of capital expenses as first line deductions for PPT –IDC, exploration costs, first 2 appraisal wells Oil companies should not be subject to any other tax and where paid e.g

EDT,POL, stamp duty be allowed as a deduction.

AA is granted on straight line basis of 20% for 4years and 19% for 5 th year. PIA is granted based on graduated rates. The amount to be allowed as deduction in respect of the said allowances shall be: - The aggregate amount computed of all allowances due to the company - A sum equal to 85% of assessable profits of the accounting period

less

170% of the total amount of the deduction allowed as PIA

whichever is the less.

Incentive for gas utilisation shall be treated for tax purposes as part of capital investment for oil development.

Applicability of ITC as an offset against tax in PSC executed with NNPC in 1993 while ITA is not an offset for companies in PSC executed after 1993 By Banke Akanni, FIRS LTO - oil & Gas (Upstream)

5/1/2020

Tax compliance in the Oil &Gas sector



Withholding Tax – submission of WHT schedules and collection of credit notes

i.

ii.

Disclosure of deductions and remittances of withholding tax on contracts, fees and other relevant transactions on a monthly basis.

Disclosure should be in the form of a schedule specifying the transaction, WHT charged, name and address of beneficiary, percentage of WHT charged etc Tax professionals can ensure that companies in the oil & gas sector comply with the disclosure by getting this schedule to the RTA within 21 days of the succeeding month whilst ensuring that payment is made within 30 days of the succeeding month. In addition, credit notes are generated for the beneficiaries and these can be collected for prompt delivery to the companies ( agents of deduction) By Banke Akanni, FIRS LTO - oil & Gas (Upstream)

5/1/2020

Tax compliance in the Oil & gas sector

i.

ii.



Value Added Tax – submission of VAT returns

Companies in this sector are required to file VAT returns monthly. Companies in this sector have a dual responsibility in disclosure of VAT deduction and remittance to the tax office. This return would capture collection of VAT deducted from their various vendors accompanied with a schedule-S.13 VATA CAP 6 LFN 2004 and VAT charged on their own products/transaction. This might not be applicable in the sale of crude(Companies in Upstream), but definitely applicable to marketing companies in the downstream sector on sale of lubricants and to services rendered by the oil servicing companies The returns must get to the tax office within 21 days of the month following the month of transaction whilst payment should be made within 30 days of the month following.

By Banke Akanni, FIRS LTO - oil & Gas (Upstream)

5/1/2020

Tax compliance in the Oil & Gas sector Tax professionals can advise/ensure that companies in the oil & gas sector perform this dual responsibility and comply with the disclosure by getting the VAT return to the RTA within 21 days of the succeeding month whilst payment is made within 30 days of the succeeding month.

By Banke Akanni, FIRS LTO - oil & Gas (Upstream)

5/1/2020

Tax compliance in the oil & gas sector

i.

ii.

 iii.

iv.

v.

Company Income Tax & Education Tax – Submission of annual returns

Compliance is stressed on filing the returns as at and when due in line with the dictates of the self assessment regulation.

Prompt payment should also be advised to avoid penalties, interests and other enforcement measures Installmental payments when advised should be strictly in line with the self assessment regulation.

Companies in E&P that are yet to commence production of crude are to submit annual returns in CITA format too.

Companies in E&P are to submit returns on gas income in CITA format alongside the returns on crude income.

Tax professionals can advice/ensure prompt compliance with correct disclosures and prompt filing.

By Banke Akanni, FIRS LTO - oil & Gas (Upstream)

5/1/2020

Tax compliance in the Oil & Gas sector



Capital Gains Tax

Gains arising from disposal of assets must be promptly reported in the year of disposal.

Farm in arrangements and other disposal of concessions which generate CGT must be promptly identified and disclosed.



Stamp Duties Stamp duties

arising from the disposals must be disclosed and paid to FIRS By Banke Akanni, FIRS LTO - oil & Gas (Upstream)

5/1/2020

Tax compliance in the Oil & Gas sector

     

Personal Income Tax: submission of annual return, PAYE remittance & processing TCC

Ascertain chargeable income of staff : consolidated income less (consolidated relief-Tax exempt items) Apply correct tax income rates as graduated Apply minimum tax where chargeable income is less than1% of consolidated income or gross emolument Employer to file returns with RTA of all emoluments paid to its employees in its employ in the preceding year not later than 31 January.

Monthly remittance of PAYE not later than 10 the month of deduction to SIRS and to FIRS in case of spy police in the Oil companies th day after By Banke Akanni, FIRS LTO - oil & Gas (Upstream)

5/1/2020

Tax Compliance in the Oil & Gas sector

Payments

 All foreign payments are made to FIRS/CBN Dedicated  Domiciliary Accounts with J.P Morgan Chase Bank Companies are expected to notify FIRS on the  payments made to J.P. Morgan Chase Bank.

FIRS issues receipts to companies on the confirmation     of payments made from CBN Statement.

PPT is paid in US Dollar.

Other tax payment made to the bank Issuance of e-ticket from bank presented to FIRS Receipt is issued on payments which are captured on the FIRS tax portal By Banke Akanni, FIRS LTO - oil & Gas (Upstream)

5/1/2020

New Developments

i.

ii.

 iii.

Transfer Pricing and Other International Tax Issues – disclosures ,documentations and advisory.

The Nigeria TP regulation requires that MNC give disclosures of dealing with their related parties and this certainly include companies in the oil & gas sector. This requirement takes effect from the month following that in which the regulation takes effect.

Disclosure requirements will be made on the TP disclosure forms which would be submitted alongside the annual returns Where the tax administration identifies a potential TP case, documentation would be required on the transaction meaning that documentation must be in place for submission once requested by FIRS The tax professional should ensure necessary TP disclosure along with the annual returns and meet documentation requirements. By Banke Akanni, FIRS LTO - oil & Gas (Upstream)

5/1/2020

New Developments

    

Petroleum Industry Bill

The unbundling of NNPC Incorporation of Joint Venture Companies Consolidation of all the fiscal regime Introduction of the Nigeria Hydrocarbon Tax It is imperative to state that the above are just proposals to the National Assembly.

By Banke Akanni, FIRS LTO - oil & Gas (Upstream)

5/1/2020 i.

ii.

iii.

iv.

v.

vi.

vii.

viii.

ix.

x.

xi.

Services

Tax returns filing Accounting services for marginal field operators Tax advisory Tax computation particularly for marginal fields and passive E & P companies Tax audit representatives WHT credit notes tracking and recording PAYE management services Developing tax compliance manual/ tax desk Staff training Interface with National Assembly Interface with other agencies in the Oil & Gas sector – license from DPR, investigations and audits by NEITI By Banke Akanni, FIRS LTO - oil & Gas (Upstream)

5/1/2020

Conclusion

There is no doubt that opportunities abound for tax professionals in the Oil & Gas Sector, however, the technicalities in this sector requires that tax professionals give time to understand the different business arrangements, fiscal regime and the various enabling Acts in order to make effective contributions especially in the upstream businesses.

To this end, tax professionals must be adequately informed in order to be on top of their game .

By Banke Akanni, FIRS LTO - oil & Gas (Upstream)

5/1/2020

Thank you

.

By Banke Akanni, FIRS LTO - oil & Gas (Upstream)

5/1/2020

Questions, Comments.

By Banke Akanni, FIRS LTO - oil & Gas (Upstream)