January 13, 2021 Nigeria's Government considers Petroleum Industry Bill 2020, a new framework for the oil and gas sector Executive summary The Nigerian President, President Muhammadu Buhari, presented the reworked Petroleum Industry Bill (PIB or the Bill) to the Nigeria Legislature for consideration after many delays in the legislative review process over the past 15 years. The Bill, which is intended as a complete overhaul of the Nigerian oil and gas sector, seeks to, among others, ensure an increased level of transparency and accountability in the sector by strengthening the governing institutions to attract investment capital through changes to the governance, administrative, regulatory and fiscal framework of the Nigerian oil and gas industry. This Alert summarizes the key changes introduced to the fiscal framework of the Bill. Detailed discussion The key objectives of the fiscal aspect of the Bill is to encourage investment in the petroleum industry while optimizing revenues accruing to the Government. It also seeks to ensure that transparency is achieved in the administration of the petroleum sector and Nigerian content is promoted through an efficient and effective regulatory framework. The following sections outline some of the key changes made with respect to the proposed fiscal framework of the Bill. Introduction of a new tax regime and tax rate The Bill proposes to replace the existing Petroleum Profits Tax (PPT) with the National Hydrocarbon Tax (NHT). According to Section 260 (1) of the Bill, the NHT is expected to be charged only to oil production, condensates, and natural gas produced from associated gas in an oil field. Associated and non-associated natural gas will not be subject to the NHT. The NHT rates are categorized below:
In addition to the NHT, companies involved in upstream petroleum operations will also be subject to Company Income Tax (CIT) at the rate of 30%. A company that intends to be involved in all the value chains of the sector, i.e., upstream, midstream and downstream of the petroleum operations will be required to register a separate company for execution of such operations. Furthermore, the NHT will not be deductible in arriving at the CIT payable for any company. The Bill also provides that a newly incorporated company that is yet to commence bulk or disposal of chargeable oil is now required to file its audited accounts and returns within 18 months from the date of its incorporation. Allowable and non-allowable deductions In addition to the requirement under the PPT Act for allowable expenses to be wholly, exclusively and necessarily incurred to be tax deductible, the Bill proposes the introduction of a reasonability test for the purpose of determining adjustable profit. Additional deductions allowed now include:
Deductions not allowed now include:
Assessable profits, chargeable profits and allowances Section 265 of the Bill provides that assessable profit is to be determined after deducting losses incurred in prior years from the adjusted profit. Chargeable profits is to be determined after deducting the allowances granted to the company from the assessable profits. In determining the chargeable profit, the total cost shall not exceed the cost price ratio (CPR) limit of 65% of gross revenues determined at the measurement points. Any excess costs that exceed the CPR limit upon termination of any upstream petroleum operations related to crude oil shall not be deductible for the purpose of calculating the NHT. Any unutilized cost is to be carried forward to a future period provided that the actual costs to be deducted do not exceed the actual costs. For the acquisition cost on petroleum rights, the value of the rights and the value of the assets acquired will be reported separately. Value of the rights will be eligible for an annual allowance of 10% while the value of the assets will enjoy the usual capital allowance rate of 20% with 1% remaining until disposal. Production incentives In place of the current Investment Tax Credit (ITC) and Investment Tax Allowance (ITA) as applicable, there will be a production allowance for crude oil production by leases which are converted to oil mining leases based on a conversion contract and their renewals which is the lower of US$2.50 per barrel and 20% of the fiscal oil price. The production allowance for new acreages will be determined as follows:
Consolidation of costs and taxes Companies engaged in upstream petroleum operations related to crude oil across different terrains can now consolidate costs and taxes for the purpose of the hydrocarbon tax only across assets in which it holds licenses and leases. Royalties All production of petroleum, including production tests shall be subject to royalties. For royalty purposes, condensates shall be treated as crude oil and natural gas liquids shall be treated as natural gas.
For Deep offshore fields with production during a month of not more than 15,000 barrels per day, the royalty rate will be 7.5%. Production above 15,000 barrels per day will be at the rate specified in the table above. Royalties for onshore fields and shallow water fields, including marginal fields with crude oil and condensates production of not more than 10,000 barrels per day (bpd) during a month shall be calculated on a tranche basis as follows:
In addition to a royalty payable on production, the Bill also sets aside a royalty payable based on price for crude oil and condensates:
Between US$50 and US$100 and US$100 and US$150, the royalty rate by price will be determined by interpolation, e.g., if the price is US$75 per barrel, the royalty rate per price will be 2.5%. The price benchmarks are adjusted annually for inflation by adding 2% to the benchmark price and these royalties based on pricing do not apply to gas production and frontier acreages. Penalties The Bill proposes an increase in penalties for not filing income tax returns from NGN10,000 on the first day of default and NGN2,000 for every other subsequent day to NGN10,000,000 and NGN2,000,000, respectively. With regards to penalties on non/late payment of tax, the company will be subject to a penalty of 10% and interest at the prevailing LIBOR or any other successor rate plus 10% as against the previous rate of 5%. Furthermore, the Bill also provides that a person who fails to comply with the provisions or any regulations therein for which no specific penalty has been provided, shall be liable to an administrative penalty of NGN10,000,000. Where default continues, there would be a further administrative penalty of NGN2,000,000 or such sum as may be prescribed by the Minister of Finance. Implications The following are key implications from the proposed changes under the Bill:
It has become imperative for the Federal Government of Nigeria to ensure the passage of the Bill given the decreasing revenue base from oil activities and the immediate need to buffer this with the right policies to attract investment. It is pertinent for companies engaged in petroleum operations to begin to evaluate the impact of adopting the fiscal framework of the PIB before the mandatory adoption on their businesses and for stakeholders to continue to engage with the Government on the grey areas in the Bill before it is passed into law. ——————————————— For additional information with respect to this Alert, please contact the following: Ernst & Young Nigeria, Lagos
Ernst & Young Société d'Avocats, Pan African Tax – Transfer Pricing Desk, Paris
Ernst & Young LLP (United Kingdom), Pan African Tax Desk, London
Ernst & Young LLP (United States), Pan African Tax Desk, New York
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