Petroleum has become the number one resource in the world because of its universality. All other resources are demanded in varying scales, but not petroleum. However the catch is that while demand increases, existing production of this pearl declines. In Nigeria, the problem appears to be a double-edged sword. Declining production and the apparently doubted efficacy, and confused state, of the fiscal laws relating to petroleum operations in the country remain intractable problems which the government is grappling with. This calls for a re-examination of fiscal policy.
Thus taxation is an inherent element of fiscal policy. The petroleum industry as a major revenue earner for the government is not immune from this inherent element. However, concerns surround the efficacy of the fiscal law relating to petroleum operations having regard to the hackneyed calls for, and untiring efforts at discovering, cheaper alternative sources of energy, in a world whose economic activities are now unleashing backlash effects in the form of ozone layer depletion, global warming and other environmental concerns. More than this fear however, the government itself recognises that something is wrong somewhere regarding the beneficial effects or rewards of petroleum to the Nigerian people, having decried the porosity of the fiscal regime relative to the petroleum sector.
Yet the fiscal regime of petroleum operations in Nigeria appear to be ‘very strong’ when viewed against the backdrop of plethora of legislations specific to this area. The PPTA, the CITA, the PSC Act and the Incentives Act, apart from other related legislations which have elements of fiscal policy, are principal legislations here. Natural with man to find walk around for impediments, it would appear that some of these legislations are hewn in such a way that it amounted to emasculating the Nigerian economy, sabotaging the rights of the Nigerian people to development and impeding economic independence of the nation, so that, on account of the latter, the economic structure of the country is perpetually neo-colonialist. Aware of these dangers, the government embarked on a reform agenda of petroleum operations in Nigeria, propped by the well conceived Petroleum Industry Bill (PIB) 2008.
With the passage of the FIRS (Establishment) Act 2007, the stage appears set for marked improvement in the revenue to be generated from this prime economic resource. The Act and the PIB 2008 (if eventually passed into law) will undoubtedly concatenate to deliver a measure of transparency, responsibility and accountability with respect to fiscal regime governing this sector. But this is as far as administrative and legal framework is concerned. Sadly, in a desperate bid to save the system, the government adopts carrot-and-stick measures. In the alternative, what is needed, among others, is a responsible political system where infrastructural facilities are not epileptic or waning, where energy supply (in terms of power) is steady and stable, where security of lives and property is not a daydreaming fantasy and where good governance framework is the avowed commitment of the government. These are the key elements of realising and sustaining the efficacy of the fiscal regime attending to petroleum operations in Nigeria.
TABLE OF CONTENTS
CHAPTER ONE – GENERAL INTRODUCTION
1.1Statement of the Problem
1.2Objective of the Research
1.3Scope of the Research
1.4Methodology of the Research
1.5Justification of the Research
1.7Organisation of the Research
CHAPTER TWO – THE NIGERIAN PETROLEUM INDUSTRY
2.1History of Nigerian Petroleum Industry
2.1.1First Phase – 1900 to 1959
2.1.2Second Phase – 1960 to Date
2.2.1The Petroleum Act
2.3The Structure of Petroleum Operations in Nigeria
2.3.3Natural Gas Operations
2.3.4Petroleum Industry Reform
2.4Ownership, Environment and Community Issues
2.5Contractual Arrangements in Petroleum Operations
CHAPTER III – FISCAL LAWS RELATING TO UPSTREAM OPERATIONS
3.1Petroleum Profits Tax Act (PPTA)
3.1.1.Overview of the PPTA
3.1.2Scope of the PPTA
3.1.3Basis of Assessment under the PPTA
3.1.4Ascertaining Profits and Tax Computation under the PPTA
3.1.5Assessment under the PPTA
3.1.6The PPTA and Memorandum of Understanding (MOU)
3.1.7Donations and Contributions under the PPTA
3.1.8Collection, Penalty and Interest Payments under the PPTA
3.2The PSC Act (CAP D3 LFN 2004)
3.2.1Qualifying Capital Expenditure under the PSC Regime
3.2.2Collection and Payments Procedure under the PSC
3.2.3Criticisms of the PSC Act
3.3The Incentives Act
3.4Other Fiscal Matters Relating to Upstream Operations
3.4.4Oil Terminal Dues
4.1Constituents of Downstream Operations
4.2Charge to Corporate Income Tax
4.3Basis of Assessment
4.4Ascertaining Adjusted Profits of Downstream Companies
4.4.1Statutorily Prescribed Allowable Expenses
4.4.2Ministerial Prescribed Allowable Expenses
4.5Determining the Total Profits of Downstream Companies
4.5.1Treatment of Losses
4.6Investment Tax Credit
4.7Incentives to Downstream Companies under CITA 2004
4.8Rate of Income Tax of Downstream Companies
4.9Returns Filing by Downstream Companies
CHAPTER FIVE – AMINISTRATION AND ENFORCEMENT OF THE FISCAL
LAWS RELATING TO PETROLEUM OPERATIONS
5.1Federal Inland Revenue Service
5.2Assessment Function of the FIRS
5.4Powers in Aid of Enforcement
5.4.1Customer Account Information
5.4.2Right of Access
5.4.4Whistle Blower Provision
5.4.5Powers of Investigation
5.4.6The Role of the Tax Appeal Tribunal (TAT)
CHAPTER XI – SUMMARY, CONCLUSIONS AND RECOMMENDATIONS
FISCAL as a word has two etymologies,1 and it relates to taxation, public revenues or public debt management and policies.2 Normally, we speak of fiscal policy, which is a deliberate governmental action that attempts consciously to control the actions of individuals and companies by means of spending and taxation decisions. It has been stated that the expenditure side of fiscal policy could be achieved by spending money
in ways that stimulate other activity.3 Whereas fiscal policy as it relates to taxation can affect work, investment or production decisions by changing tax rates and levels.
Thus, fiscal policy effectually strikes a balance between the resources the government puts into the economy through expenditures and that it takes out through taxation, charges or borrowing. When government takes the bold step of concretising its fiscal policy the end product is laws, for instance tax laws, or policy statements, for instance budgets. For our purposes, we are concerned with the fiscal policy as it relates to what the government takes out through taxation. In other words, any reference to fiscal laws in this work means those laws that touch upon taxation, and more specifically the taxation of petroleum operations in Nigeria.
Taxation plays a central role in matters of fiscal policy. This role was emphasized by the United States Supreme Court when Justice Potter Stewart4 made an astute observation regarding the pervasive nature of taxation. According to the Learned Justice,
“virtually all persons or objects in this country… may have tax problems. Every day the economy generates thousands of sales, loans, gifts, purchases, leases, wills and the like, which suggest the possibility of tax problems for somebody. Our economy is “tax relevant” in almost every detail”.
No wonder, then, that the petroleum sector of the Nigerian economy is not immune from the pervasive tendencies of taxation, an inherent element of fiscal policy. However the reason for this is not farfetched: the petroleum industry is a major revenue earner for the government, through, among others, royalties, bonuses, rents, percentages from the production sharings contract, taxes, etc.5
Principally, the Nigerian petroleum industry is divided into two broad categories: upstream operations and downstream operations. There is an adjunct to the petroleum industry, natural gas operations. Upstream operations involve exploration and production of crude oil, under governmental grant of licence6 by companies for sale or disposal. On the other hand, downstream operations involve those activities which culminate in value addition and improvement upon the end product of upstream operations. In other words those companies engaged in refining and distribution of petroleum products are captured here. Natural gas is a colourless, highly flammable gaseous hydrocarbon consisting primarily of methane and ethane and it is a type of petroleum that commonly occurs in association with crude oil. Thus both natural gas and crude oil are hydrocarbons. In this work natural gas is classified under petroleum operations, though as an adjunct and will be so treated.
Significantly, different regimes of fiscal laws relate the various outlined sectors of the Nigerian petroleum industry.7 For instance, the Petroleum Profits Tax Act CAP. 354 L.F.N. 1990; CAP. P13 L.F.N. 2004 (as amended) relates to upstream operations; the Companies Income Tax Act CAP. C21 L.F.N. 2004 (AMENDED BY COMPANIES INCOME TAX (AMENDMENT) ACT NO. 11 2007) applies to downstream operations; and the Nigeria LNG (Fiscal Incentives, Guarantees and Assurances) Decree No. 39 of 1990. This latter Decree was amended by Nigeria LNG (Fiscal Incentives Guarantees and Assurance Decree 113 of 1993, now CAP N87 LFN 2004. It is intended therefore to undertake an analysis of the above laws in order to discover whether or not they are efficacious by bringing about the naturally and reasonably intended results for their enactment, to wit enhanced revenue base of the government of Nigeria.
The above point leads to confirm the “interest factor” which underpinned, motivated and inspired the researcher in this area to undertake an analysis of the efficacy of such laws. Laws do not exist in a vacuum but exist within a socioeconomic context, in this case the context of petroleum operations. Thus, despite the existence of fiscal laws, for instance relating to upstream petroleum operations in Nigeria, the government has had to take certain steps which unwittingly are meant to “help” the law – for example, the regime of production sharing contracts, which significantly varied PPTA tax rates from 85% to 50%. Does it mean that the fiscal law is a disincentive to investment, and thus revenue in this area of petroleum operations in Nigeria? There is the myriad of incentives granted, under a statute, to the Nigeria LNG. One of the guarantees which the government of Nigeria undertook is that “the Nigeria LNG and its shareholders shall not be subject to new laws, regulations, taxes, etc, which are not generally applicable to companies incorporated in Nigeria”.8 In other words different tax regimes cannot be made to apply to it, like for instance, the case of other upstream operators. Now that the world market price of crude continues to take a downward spiral, is it not time that a second look was taken at this law? These are some of the burning issues which informed the choice of this area of the research.
1.1STATEMENT OF THE PROBLEM
Apart from being one of the largest economies in Africa, the Nigerian economy has since the late 1960s been based significantly, and almost entirely, on the petroleum industry. This attitude of the Nigerian government, overtime, showed up its dysfunctional consequences on the economy. In fact, this caused agricultural production to stagnate to such an extent that cash crops like palm oil, peanuts (groundnuts), and cotton were no longer significant export commodities while Nigeria was forced, till date, to import such basic commodities as rice for domestic consumption. This untoward system worked well as long as revenues from petroleum remained constant. This is one of the serious problems that this research sets out to address.
Today, the story is no longer the same, because there has been unabated fluctuation in world oil market prices, with incessant call for concerted efforts for alternatives to petroleum. Market fluctuation, whether upwards or downwards, does not augur well for fiscal policy, because it tends to distort governmental programmes. Sadly, the frequency of market fluctuation is normally not directly correlated to fiscal law in place. That is, when market price fluctuates that impinge upon governmental plan, the law does not change mutatis mutandis to reflect the new market direction and thus shield government revenue from such changes. Secondly, there has been increasing call for less dependence on oil by developed economies of the world, the main market for our oil exports. Leading in this call and search for alternative source of energy is the world’s largest economy, the United States with the present administration of President Obama appointing a Harvard Scientist to lead the way in this search. If the above picture becomes true to type, then the revenue available to the Nigerian government will, without doubt, plummet with its adverse effects upon an already dysfunctional economy. Thus, this research will address the problem which this will throw up and how the fiscal laws relating to petroleum will be proactively directed at mitigating the impact of this imminent paradigm shift of global proportions.
Further and related to the above problem is important questions thrown up and sought to be addressed by this Research:
That is, in the face of plummeting revenue from petroleum operations, what role does, or will, the fiscal laws thereto play to shield the government from its adverse repercussive effects?
The above question will lead yet to another problem, whether the fiscal laws as presently constituted, existing and operational with respect to petroleum operations in Nigeria are potent enough to ensure that the government generates sufficient revenue and thereby build formidable foreign
reserve which will enable the government to develop its untapped and neglected agricultural potentials, its manufacturing sector, and its infrastructural framework in order to build an economy, nay a society where her people will have comparable and meaningful standard of living. In other words, what is the extent of the efficacy of the fiscal laws relating petroleum operations in Nigeria, as it relates to revenue/financial security of Nigeria and her people?
1.2OBJECTIVE OF THE RESEARCH
All hands must be on deck to avert the imminent danger posed to the revenue of the Nigerian government, by dwindling resources from petroleum operations. This danger will probably be exacerbated by the future prospect of a more efficient source of energy. In other words, as a people we must evolve a creative, workable and effective ways of overcoming the problem. Thus this Research came out with a proposal (or recommendation) for workable fiscal mechanisms which will enable the government whittle down the likely consequences on the Nigerian economy that will ensue from revenue crisis due to marked drop in world market for crude oil.
To attain the above overall objective, this Research identified and analysed the fiscal laws pertaining to petroleum operations in Nigeria, which involve upstream, downstream and natural gas operations. Thereafter, an attempt was made to establish a nexus between the fiscal laws and the revenue derivable from petroleum operations in Nigeria. To do this, the Research distiled and articulated operational and implementation issues, with respect to the fiscal laws. It is hoped that an analytical consideration of these issues will dovetail into the overall objective.
1.3SCOPE OF THE RESEARCH
This research was not intended to be open-ended, and thus it is not anticipated that the scope of the research will extend to cover all aspects of the subject. Thus, the research focussed on the analysis of the efficacy of the fiscal laws relating to petroleum operations in Nigeria. These include:
The Petroleum Profits Tax Act CAP. 354 L.F.N. 1990; CAP. P13 L.F.N. 2004 (as amended) that relates to upstream operations;
Part VIII – Fiscal Provisions of the Petroleum Industry Bill, 2008
The Companies Income Tax Act CAP. C21 L.F.N. 2004 (AMENDED BY COMPANIES INCOME TAX (AMENDMENT) ACT NO. 11 2007) that applies to downstream operations; and
The Nigeria LNG (Fiscal Incentives, Guarantees and Assurances) Decree No. 39 of 1990, as amended by Nigeria LNG (Fiscal Incentives Guarantees and Assurance Decree 113 of 1993, now CAP N87 LFN 2004, that is applicable to natural gas operations.
The scope of this research does not include coverage of other tax laws in Nigeria. It was not intended also to veer into double taxation agreements, tax planning, etc. As much as relevant to the research certain specific tax offences will be covered.
The methodology to be used in this research is doctrinal: the statutes dealing on fiscal laws relating to petroleum operations, in line with the scope of the research, as a primary source, have been consulted, analysed and inferences drawn there from. The secondary sources are textbooks, journals publications, and internet resources.
The topical significance, and thus justification of this research needs not be overemphasised. First and foremost, it will be an instrument for sound fiscal policy. Fiscal policy helps the government to achieve its allocative efficiency through proper tax system. Since the research focussed on analysing the efficacy of fiscal laws relating to petroleum operations in Nigeria, it is hoped that the results of this research would in no small measure enhance government’s revenue by identifying the strengths and weaknesses of the laws as presently constituted and proffering remedial actions. This research would also benefit practitioners, lawyers and accountants, and students. For practitioners it would be an easily available and current reference manual for their practice of taxation as it relates to petroleum operations in Nigeria. For students, it will open up their understanding and regenerate their interest in the technical field of petroleum taxation, which, it is hoped, will ultimately lead to increased research in this area.
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