Capitulo 4: Investigación Empírica
4.2 Estudio exploratorio
In addition to JVs and PSCs arrangements discussed above, a third contractual arrangement in Nigeria’s petroleum industry is the service contracts (SCs).129 A SC could either be a risk-service,
pure-service or a technical assistance agreement.130 Under the risk-service arrangement, the oil producing country owns the concession as well as the petroleum discovered while the oil company who is engaged as the contractor bears all the risks.131 Pure-service and technical assistance agreements, on the other hand, are simply contracts for work - the contractor is brought in to perform defined services or tasks and is compensated accordingly. Unlike the risk-service contracts, the risks under the pure-service and technical assistance agreements are borne by the government.132
In 1987, Nigeria had eleven (11) SCs with IOCs and NNPC in the nature of risk-service contracts.133 However, SCs are no longer popular in the Nigerian oil and gas industry. Presently, the contract between the NNPC and Agip Energy & Natural Resources (AENR) which was first signed in 1979 is the only active risk-service contract in Nigeria’s petroleum industry.134 Under the Nigerian SCs, the concession is held by the NNPC while the oil company (contractor) provides the required technical expertise and finances the exploration and development operation.135 The initial term of the contract is two (2) or three (3) years and is renewable at the option of the NNPC for an additional term of two (2) years.136 If commercial discovery is made within the term of the contract, the exploration and development costs are recoverable and the contractor is entitled to compensation for the risk taken and remuneration for the services rendered.137 Conversely, if there
129 Nlerum, supra note 111 at 161. Note that an oil company may have different arrangements with the government. 130 Ibid.
131 Omorogbe, Oil and Gas, supra note 88 at 42.
132 Ibid at 43-4. The pure-service or technical assistance agreements are usually used in the areas of proven reserves
such as the oil rich Middle East countries like Saudi Arabia, Qatar, Venezuela, Kuwait, and Bahrain. See Nlerum,
supra note 111 at 162.
133 Omorogbe, Legal Frameworks, supra note 95 at 281.
134 National Petroleum Investment Management Services, “Nigeria Dynamic Fiscal Regime”, NAPIMS, online:
<http://www.napims.com> accessed on 25 August, 2015.
135 Omorogbe, Legal Frameworks, supra note 95 at 281.
136 Lawrence Atsegbua, “Acquisition of Oil Rights under Contractual Joint Ventures” (1993) 37:1 J Afr L 10 at 21
[Atsegbua].
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is no commercial discovery within the initial term of the contract, the contract is terminated and the exploration costs are lost.138
Even though the SCs were designed for the purpose of improving PSCs, the SCs differ from PSC in some respects.139 The major distinctions are the duration and the modes of recovery of costs and remuneration under the two arrangements. Generally, SC arrangements are usually for shorter durations than the PSC arrangement.140 In terms of recovery of costs and remuneration, contractors under SCs are remunerated in cash (a fixed amount) derived from the sale of the concession’s available oil unlike PSC contractors that are remunerated with crude oil.141 However, there may
be provisions under the SC allowing the contractor to receive remuneration or recoup the capital expenditure and other operating costs in crude oil.142 In addition, the terms of a SC may also give a contractor “the first option to purchase the crude oil produced”.143 Nevertheless, the contractor does not have a participation share and does not acquire any title to the crude oil produced under the SC.144
As regards taxes, the contractor is treated differently under the SC as opposed to the JVs and PSCs. The contractor is not liable to tax under the PPTA because PPT is only payable by a company engaged in petroleum operation which is defined as “[t]he winning or obtaining … of petroleum in Nigeria … by a company on its own account…”.145 Given that the oil company under the SC
does not hold any participating interest in the concession, it does not win, or obtain the petroleum “on its own account”.146 Thus, the oil company’s status as a contractor is underscored and the oil
company is liable to tax on its remuneration under the CITA at the rate of thirty percent (30%).147 However, the NNPC is liable to pay PPT as well as all royalties due on the contract area since it holds the concession for the petroleum operations.148
138 Ibid. 139 Ibid.
140 Ibid. PSCs in Nigeria are usually for a term of 20 years while the term for SCs is about 5 years. 141 Atsegbua, supra note 136 at 20-1.
142 Omorogbe, Legal Frameworks, supra note 95 at 281-82. 143 Ibid.
144 Atsegbua, supra note 136 at 22. 145 Ibid.
146 Ibid.
147 Ibid; Omorogbe, Legal Frameworks, supra note 95 at 282. 148 Omorogbe, Legal Frameworks, ibid at 282.
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In addition to oil companies under SC arrangement, companies operating in the downstream and services sector of the Nigerian petroleum sector are also assessed to income tax at the rate of thirty percent (30%) of their chargeable profit under the CITA. Furthermore, activities of upstream companies (such as under JVs and PSCs arrangements) that are not covered under “petroleum operations” are also taxable under the CITA.149
Where an oil and gas corporation is a resident company in Nigeria, the corporation is liable to tax on its worldwide income which includes profits accruing in, derived from, brought into or received in Nigeria.150 On the other hand, a non-resident oil and gas corporation is liable to tax at the rate
of thirty percent (30%), only on the income derived from its operations in Nigeria.151 To determine the income attributable to a non-resident corporation’s “operations in Nigeria”, a deemed profit rate of 20% is applied on the corporation’s total revenue derived from Nigeria in a particular tax year,152 thus, resulting in an effective tax rate of 6% of turnover for non-resident companies. 153 Even though companies taxed under the CITA also have deductible expenses for determination of taxable income, the range of such expenses is not as wide as deductible expenses under PPTA. However, the CITA compensates for the limited deductible expenses through its lower tax rate and its wide range of fiscal incentives for gas utilization projects. For instance, downstream companies involved in gas utilization have a tax holiday period for an initial three years which can be extended for an additional two years subject to performance of the business. 154 In addition to the tax holidays, companies involved in gas utilization projects also have an investment capital allowance at a rate of 15% for qualifying capital expenditure (QCEs).155
149 KPMG Brief, supra note 76 at 12
150 CITA, supra note 73 at s. 105 defines a “Nigerian company” as any company incorporated under the CAMA while
a “foreign company” is defined as any company that is established under any law in force in a territory or country outside Nigeria. These foreign companies are generally referred to as non-resident entities. See also, CAMA, supra note 73 at s 54.
151 CITA, supra note 73 at s. 55.
152 PricewaterhouseCoopers, “Taxation of foreign companies operating in Nigeria”, online: PricewaterhouseCoopers
< http://www.pwc.com>. That is, there is a presumption that the company’s deductible expenses and capital allowance amounts to 80% of its turnover.
153 CITA, supra note 73, s 30. That is, 30% (CIT rate) on 20% deemed profit results in an effective tax rate of 6% of
turnover of the non-resident company.
154 CITA, supra note 73 at s 39. 155 Ibid.
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2.2.2 Royalties and Other Applicable Taxes
In addition to the taxes above, royalty payments are levied on corporations involved in petroleum operations upon commencement of production.156 The applicable rate of royalty depends on the water depth in which the upstream corporation carries out its petroleum operations. The highest applicable rate for royalty in Nigeria’s oil and gas industry is 20% for on-shore production and the lowest rate is 0% for water depths in excess of 1,000 metres.157 As mentioned earlier, royalties are paid under PSC arrangements by allocating royalty oil to the federal government through the NNPC.158
In addition to corporate taxes and royalty payments, oil and gas companies are subject to certain indirect taxes and levies. The major indirect taxes include Tertiary Education Tax (TET), Withholding Tax (WHT), Value Added Tax, Niger-Delta Development Commission levy and import duties to mention a few.159
Resident oil and gas corporations are liable to pay TET on assessable profits in each tax year.160 However, non-resident corporations and unincorporated entities are exempted from TET. This tax is assessed at 2% of a company’s assessable profits in addition to the PPT or corporate income tax liability of a company. However, this tax is an allowable deduction for purposes of arriving at adjusted profits for companies liable to tax under the PPTA.
Another indirect tax is the WHT. WHT is an advance payment of tax levied on certain income for which payers are entitled to demand a withholding tax credit note. Such income include dividends, interest, fees, commissions and certain payments in respect of contracts.161 Resident and non- resident companies that make a payment of an eligible income to another party are required by law to deduct withholding tax (WHT) from the payment and remit the sum to the relevant tax authority.162 The applicable WHT rate is either five percent (5%) or ten percent (10%) depending on the type of payment (i.e., the nature of transaction) and whether the beneficiary of such payment
156 Petroleum (Drilling and Production) Regulations, LFN 1990, c 350, reg 61 [PDRR] and buttressed by s 9 of PPTA. 157Ibid.
158 Supra note 121.
159 This list above is not exhaustive and only includes the most common taxes and levies.
160 This is levied pursuant to Nigerian Tertiary Education Trust Fund (Establishment) Act, LN 2011, s 1.
161 The legal basis of the imposition of this tax include Withholding Tax Regulations being s 78-81 of CITA as well
as PPTA, supra note 69 at s 56 for upstream companies.
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is a natural or artificial person.163 However, a reduced WHT rate of seven point five (7.5%) is applicable to non-resident companies where Nigeria has a double tax treaty with the recipient country.164 The WHT deducted at source from non-resident companies in respect of interest, rent, dividend, and royalty constitutes the final tax liability due from such companies.165 However, WHT is not applicable to dividends that are declared from profits on which PPT has been paid as such income is regarded as franked investment income.166
Value added tax (VAT) is also applicable to the oil and gas corporations at the rate of 5% on taxable goods and services.167 Like the GST applicable in Canada, some supplies are VAT exempt
while some have a 0% tax rate.168 For instance, oil exports, supply of plant, machinery and equipment that are purchased within or outside Nigeria for gas utilization in the downstream petroleum operations are exempted from VAT.169
Additionally, oil and gas corporations are also liable to pay the Niger-Delta Development Commission (NDDC) levy. Due to the environmental degradation in the Niger-Delta (the major oil producing area of Nigeria), the NDDC imposes a levy of 3% on the total annual budget of all onshore and offshore oil producing companies as well as gas processing companies operating in the Niger-Delta area of Nigeria.170 The objective of the levy is to compensate the residents of the Niger Delta area for the environmental degradation caused by oil exploration activities.