Nigeria: Expenses for petroleum operations are deductible, tribunal concludes

Deductible expenses in Nigeria

The Tax Appeal Tribunal, Lagos, found that taxation is strictly based on the statutory provisions, and not on contracts or agreements. Accordingly, the tribunal determined that all expenses wholly, exclusively, and necessarily incurred by the taxpayer for purposes of its petroleum operations were deductible, and were not limited to the extent of the taxpayer's 40% equity participation in a joint venture with the Nigerian National Petroleum Corporation.

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The case is: Chevron Nigeria Ltd. 

Overview

There were two questions at issue in this case: 

  • Whether the taxpayer could claim capital allowances (i.e.,  petroleum investment allowance and annual allowance) on the tangible costs incurred on behalf of its joint venture partner, the Nigerian National Petroleum Corporation (NNPC)? 
  • Whether the taxpayer could claim intangible drilling costs it incurred on behalf of NNPC as a deductible expense in its tax returns? 

The Federal Inland Revenue Service (FIRS) argued that the taxpayer could only claim capital allowances and tax deductions to the extent of its equity participation (40%) in the joint venture, regardless of the tangible and intangible drilling costs it actually incurred. In asserting this position, the FIRS relied solely on the joint operating agreement between the taxpayer and NNPC that set forth the equity participation of the partners. The FIRS did not argue on points of tax law. 

The taxpayer, on the other hand, contended that section 10 of the Petroleum Profits Tax Act (PPTA) specifies that all expenses—including intangible drilling costs, incurred wholly, exclusively, and necessarily by a taxpayer company for its petroleum operations—are tax-deductible. The taxpayer also looked to section 20 of the PPTA and paragraphs 5 and 6 of the Second Schedule to the PPTA, to assert that it was entitled to claim capital allowances on its qualifying capital expenditure. Therefore, the taxpayer concluded that its tax deductions and capital allowances could not be limited to its equity participation in the joint venture, but are to be based on its actual costs.  

The tribunal agreed with the taxpayer, finding that taxation is strictly based on the provisions of the law and not on contracts or agreements. Accordingly, the taxpayer was allowed to deduct all expenses wholly, exclusively, and necessarily incurred by it for the purpose of its petroleum operations.

 

Read a May 2016 report [PDF 92 KB] prepared by the KPMG member firm in Nigeria

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