In a land of myth and a time of magic, the destiny of a great Country rested on the shoulders of its agrarian produces, by name – Cash crops.

Cocoa, groundnut, timber, rubber, palm produce among others were famous for enhancing the local industries as raw materials and major exportation by Nigeria and they sustained the Nations coffers.

Oil was discovered by the British in Oloibiri, Bayelsa State in 1956 and the consequent economy boom that followed drastically shifted the focus from the agricultural policy to Oil- the biggest foreign exchange earner doling in about 90% of total export earnings. Nigeria became a member of Organization of the Petroleum Exporting Countries (OPEC) in 1971 and the rest, they say, is history.

The Oil boom unsurprisingly brought key players into Nigeria’s field – the International Oil Companies (IOCs). In ensuring that we the Host Communities (HC’s) get a good deal since they need what we have – Oil, Taxes come into play.

The Federal Government owns all petroleum resources, mineral oils, minerals and natural gas on the land, in the territorial waters and the Exclusive Economic Zone of Nigeria by virtue of Section 44(3) of the 1999 Constitution (as amended) and Section 1 of the Petroleum Act.

To retain important control of resources and the economy, and because we also need what the IOCs have – Oil Exploration and Production Infrastructure, taxes are used to regularize the heavy production of our Oil and to reinvest into the economy.

So in getting at our Oil, they are Taxed by the Federal Government directly and indirectly under the Petroleum Profits Tax Act, Companies Income Tax Act, Personal Income Tax Act, Value Added Tax Act, Tertiary Education Tax Act and through royalties, bonuses, premiums, dues, fees, rents among other things. The focus is on Petroleum Profits Tax (PPT).



The Petroleum Industry in Nigeria is divided into two main segments: Upstream and Downstream Petroleum Operations.

The Upstream sector finds, mines and produces crude oil and natural gas. It is also called the Exploration and Production (E&P) Sector.

Downstream sector is involved in simple sale, distribution and marketing of processed oil products by local corporations.

Petroleum Profits Tax is a Tax on the profits of Companies engaged in petroleum operations. It is taxable under the Petroleum Profits Tax Act (PPTA). PPT is administered solely by the Federal Inland Revenue Service (FIRS).

PPTA is the law responsible for governing the taxation of companies engaged in Upstream petroleum operations.

Companies Income Tax Act (CITA) is the law responsible for governing the taxation of companies engaged in Downstream petroleum operations.

The Current rate of PPT in Nigeria varies according to whether the Oil producing company is in a Production Sharing Contract (PSC) with the Government or not.

  • Thus for petroleum operations under a PSC with the Nigerian National Petroleum Corporation (NNPC), the PPT rate is at 50%;
  • For non- PSC operations, including joint ventures, in the first five years of production and sales during which company has not fully paid back all pre-production capitalized expenditure, the PPT rate is 65.75%; and
  • For non- PSC operations after the first five years, the PPT rate is 85%.


PPT is levied on Upstream Petroleum Operations Companies within an ‘accounting period’ which is January 1 – December 31 or a shorter period from when the company starts selling Oil anytime during the year till December 31 or any period from January 1 to anytime during the year when the company ceases Upstream Petroleum Operations.

For the purpose of PPT, the profits of an Upstream company during an accounting period are deemed to be the proceeds from selling Oil, the value of chargeable oil disposed by the company and all income from the company arising from all its Upstream operations.

Not all this profit is taxed though. There are deductions allowed to be made from the profits of the Upstream Company within an accounting period which include:

  1. Rents incurred for land or buildings under an oil mining or oil prospecting lease
  2. Non- productive rents;
  3. Royalties in respect of natural gas sold, delivered or disposed commercially;
  4. Royalties in respect of crude oil or casinghead petroleum spirit;
  5. Customs or Excise duty and similar charges in respect of Upstream equipment;
  6. Sums incurred as interest on money borrowed for Upstream operations;
  7. Expenses incurred for repair, renewal or alteration of premises or equipment for Upstream Operations;
  8. Bad debts;
  9. Tangible or intangible expenses relating to Upstream Operations;
  10. Pension, scheme, fund contributions;
  11. Sums incurred to the Federal, State or Local Government by way of customs and excise duties, stamp duties, education tax, other taxes, rates, fees or charges.
  12. Such other deductions as may be prescribed by the Act.

Some deductions are also expressly not allowed. They mainly deal with expenses incurred in respect of matters not wholly or not exclusively related to the Upstream operations, income tax, profits tax, depreciation of premises, buildings, p among other things.

Excluded profits from PPT are profits made by an Upstream company in transporting chargeable oil to other countries by ocean going oil-tankers.

There are also Capital Allowances which will be deducted from the profits. They are incentives granted to the IOCs for an accounting period. The total amount of Capital Allowances due are to be computed from the provisions of the Second Schedule of the PPTA.

The amount allowed for capital allowance deduction is the total amount computed under the Second Schedule or 85% of the assessable profits of the accounting period minus 170% of the total amount of deduction allowed as petroleum investment allowance under the Second Schedule, whichever is less.

The Capital Allowance is granted for qualifying capital expenditure at a rate of 20% for the first four years and 19% for the 5th year. 1% is retained in the account books till it is disposed with the approval of the Minister of Petroleum who will issue a certificate of disposal.

After the allowable deductions and capital allowance are removed from the total profit of the Upstream Company, the remaining is called Chargeable Profit. That is the amount that the PPT rate is applied to and taxed.

PPT is payable by equal monthly installments and installments not timeously paid attract a penalty of 5% of the amount of the installment due.

Returns must be filed not later than two months after the commencement of each accounting period of the Upstream company.

Penalty for late filing of returns is 10,000 in the first instance and 2,000 for everyday failure continues.

Appeal from grievances or objections go to the appropriate Appeal Commissioners and then to the Federal High Court.



The Petroleum Industry Bill (PIB) is the long awaited Champion of the Nigerian Petroleum Industry.  It was estimated by the National Extractive Industries Transparency Initiative (NEITI) that Nigeria loses at least $215 billion yearly because of the delay in passing the PIB. Groundbreaking reforms are anticipated once it is passed.

For Ease of passage, the PIB was divided into four parts – Petroleum Industry Governance Bill (PIGB), Petroleum Industry Administration Bill, Petroleum Industry Fiscal Bill and Petroleum Host Community Bill. The PIGB was passed by the House of Representatives on 11 January 2018 and is currently awaiting Presidential assent.

The PIB proposes abolition of the Petroleum Act, Petroleum Profits Tax Act (PPT), Deep Offshore and Inland Basin Production Sharing Contracts Act, the establishment of several statutory bodies, among other things.

Under the PIB, the PPT will be replaced with the Nigerian Hydrocarbon Tax (NHT). NHT will be at a rate of 50% for onshore and shallow water areas and 25% for bitumen, frontier acreages and deep water areas.

Upstream Petroleum Operations will also be subject to Companies Income Tax (CIT) of 30% under the NHT. The NHT will not be deductible for CIT purposes.

The 85% of assessable profits less 170% of petroleum investment allowance restriction of the Capital Allowance under PPTA is removed under the PIB. In addition to the Capital Allowance, an Upstream company can claim Production Allowance (PA) which is applicable to crude oil, natural gas and condensate production. PA will be determined based on production volume, water depth and specified price thresholds. General Production Allowance (GPA) is also to be claimable by a company that has executed a Petroleum Service Contract (PSC) with the NNPC. GPA will be computed based on production volume and specified price thresholds.

These and many more novel provisions are contained in the bills which make up the PIB. Undoubtedly, the PIB will remarkably enhance the petroleum industry and encourage investment, but till the bills forming the PIB is passed into law, the Petroleum Profit Tax holds the forte.

In light of this, TSE had a recent discourse on Voluntary Assets and Income Declaration Scheme (VAIDS). VAIDS applies to PPT and as such, companies involved in Upstream Petroleum Operations defaulting in filing their monthly PPT returns should seize the opportunity of the VAIDS amnesty period to regularize their tax defaults before June 30.