- 20 Marks
AT – May 2024 – L3 – SB – Q2 – Taxation of Specialized Businesses
Calculation of hydrocarbon tax payable by New Rain Petroleum and analysis of tax implications for deep offshore investment.
Question
New Rain Petroleum Company Limited has been operating in the onshore and shallow water areas of the Niger Delta region for over fifteen years. The company was granted a petroleum mining lease license in January 2021. In its bid to improve profitability, the company’s management intends to apply for a license to operate in the deep-sea area starting from 2025. The decision of the management is expected to be presented to the company members at the 2023 annual general meeting, scheduled in the second half of 2024.
The following financial data were extracted from the book of accounts of New Rain Petroleum Company for the year ended December 31, 2023:
| Income | N’ million |
|---|---|
| Fiscal value of crude oil sold | 191,100 |
| Value of condensate from associated gas | 84,474 |
| Value of natural gas liquid from associated gas | 55,328 |
| Other incidental income | 151 |
| Realized exchange gain | 38 |
| Gross total income | 331,091 |
| Expenses/Deductions | N’ million |
|---|---|
| Royalty incurred and paid | 86,200 |
| First exploration wells cost | 6,800 |
| First two appraisal wells costs | 18,700 |
| Joint cost – terminalling | 12,000 |
| Gas reinjection wells cost | 3,420 |
| Salaries and wages | 9,300 |
| Power cost | 1,650 |
| NDDC charge | 125 |
| Concessional rentals | 60,430 |
| Depreciation of assets | 13,860 |
| Allowance for doubtful debts | 2,400 |
| Host community trust fund contribution | 4,800 |
| Stamp duty | 16 |
| Staff welfare | 350 |
| Travelling | 180 |
| Donations and subscription | 6 |
| Decommissioning and abandonment | 1,300 |
| Environmental remediation fund contribution | 1,250 |
| General expenses | 500 |
| Finance costs | 1,750 |
| Total Expenses | 225,037 |
| Net Profit | 106,054 |
Additional Information:
- Data on Crude Oil, Condensate, and Natural Gas Sales:
Category Quantity (million barrels) Actual Price (USD) Fiscal Price (USD) Crude oil 5.25 70 72 Condensate from associated gas 3.61 45 44 Natural gas liquid from associated gas 2.80 38 40 - Omitted Record:
- A balancing charge of N1,500,000 was made from the disposal of an old oil equipment platform, which was omitted from the records.
- Allowance for Doubtful Debts:
Type of Provision N’ million Specific provisions 900 General provisions 1,500 Total 2,400 - Donations and Subscription:
Recipient N’ million Recognized orphanage homes 3.0 Host community’s cultural group 2.0 Subscription to oil and gas association 1.0 Total 6.0 - General Expenses:
Expense N’ million Penalty for gas flare 250 Printing of stationery items 140 State government levy 110 Total 500 - Agreed Capital Allowances:
Category N’ million Brought forward 167 For the year 2,105 Total 2,272 - Production Allowance:
Type of Operation N’ million Onshore operations 900 Shallow water operation 1,700 Total 2,600 - Exchange Rate: The exchange rate averaged N520 to 1 USD during the year.
- Assumption: Tax liabilities are to be paid in domestic (Naira) currency.
Required:
As the company’s Tax Manager, you are to advise the management, in accordance with the provisions of the Petroleum Industry Act 2021, on:
a. Hydrocarbon tax payable for the relevant assessment year (18 Marks)
b. Tax implications if the company decides to invest in deep offshore areas (2 Marks)
(Total 20 Marks)+
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