The oil and gas industry is a cornerstone of Nigeria’s economy, contributing significantly to government revenue and foreign exchange earnings. Recognizing the importance of this sector, the Nigeria Finance Act 2019 introduced several changes to the taxation of oil and gas companies. These changes have implications for exploration, production, and other activities within the industry. In this article, we will delve into the key modifications to the taxation framework for oil and gas companies brought about by the Finance Act 2019.
1. Changes in Petroleum Profits Tax (PPT):
The Finance Act 2019 introduced adjustments to the Petroleum Profits Tax (PPT) regime. The Act now allows for the deduction of investments made in gas utilization projects from assessable profits, encouraging the development of the gas sector. This change promotes diversification within the oil and gas industry and aligns with Nigeria’s efforts to harness its gas resources for domestic and export purposes.
2. Deductibility of Gas Flare Penalties:
The Act also permits oil and gas companies to deduct gas flare penalties from their assessable profits. This measure incentivizes companies to reduce gas flaring, which has environmental and economic implications. By making penalties deductible, the Act encourages companies to invest in technologies and practices that minimize gas flaring and promote environmental sustainability.
3. Ring-Fencing Provisions:
The Finance Act 2019 introduced ring-fencing provisions for the purposes of petroleum operations. These provisions limit the offset of expenses incurred in one petroleum operation against income from another operation. The ring-fencing rules aim to prevent the excessive transfer of losses from one operation to another and promote accountability and transparency in reporting.
4. Transfer Pricing and Thin Capitalization:
Oil and gas companies engaging in related-party transactions must adhere to the transfer pricing rules introduced by the Finance Act 2019. These rules ensure that transactions between related parties are conducted at arm’s length, preventing profit shifting and tax base erosion. Additionally, the Act includes thin capitalization rules to restrict the deduction of interest expenses on related-party debt.
5. Tax Incentives and Investment Promotion:
While the Finance Act 2019 introduces changes to the taxation of oil and gas companies, it also includes provisions that promote investment and exploration activities. The Act provides incentives for companies engaged in marginal fields, encouraging exploration in less-explored areas. These incentives contribute to increased domestic oil and gas production and support Nigeria’s energy security.
6. Compliance and Professional Guidance:
The changes introduced by the Finance Act 2019 necessitate a comprehensive understanding of the evolving tax framework for oil and gas companies. Compliance with the new provisions, accurate tax calculations, and proper record-keeping are essential to avoid penalties and legal consequences. Seeking professional guidance from accounting and tax experts is crucial for navigating the complexities of the revised taxation regime.
The Nigeria Finance Act 2019 introduces important changes to the taxation of oil and gas companies, reflecting the government’s commitment to promoting responsible and sustainable development within the sector. The adjustments to the Petroleum Profits Tax regime, deductions for gas utilization projects, and incentives for exploration all contribute to the growth and efficiency of the industry.
By aligning with the new tax provisions and making informed investment decisions, oil and gas companies can contribute to Nigeria’s energy security, economic prosperity, and sustainable development goals. The changes introduced by the Finance Act 2019 create opportunities for the industry to thrive while supporting the country’s overall growth and development.
For professional advice on Accountancy, Transfer Pricing, Tax, Assurance, Outsourcing, online accounting support, Company Registration, and CAC matters, please contact Sunmola David & CO (Chartered Accountants & Tax Practitioners) at Lagos, Ogun state Nigeria offices, www.sunmoladavid.com. You can also reach us via WhatsApp at +2348038460036.