Question Tag: Oil and Gas Taxation

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  • 30 Marks

ATAX – May 2019 – L3 – Q1b – Petroleum Profits Tax (PPT)

Assess and compute the assessable profit, chargeable profit, chargeable tax, and total tax payable for a petroleum company, based on financial data.

b. Priceless Oil Limited commenced crude oil production in Nigeria in 2006. The company has provided the following financial report for the year ended December 31, 2018:

Additional Information:

  1. Posted price for exported crude oil averaged $52/barrel (at an exchange rate of ₦306 to $1).
  2. Included in other income: ₦38,000,000 from crude transportation (cost: ₦16,250,000).
  3. Natural gas contract with Tommy Limited: value ₦655,000,000, load factor 54%.
  4. Depreciation of ₦120,250,000 was included in production costs.
  5. Qualifying capital expenditures:
Type Date Location Amount (₦)
Storage tank March 12, 2018 On-shore 23,500,000
Plant and equipment November 15, 2018 Continental Shelf of 130
metres of water depth		 75,000,000
  1. Capital allowances brought forward: ₦33,700,000; for the year: ₦88,500,000.
  2. Admin expenses include ₦3,500,000 stamp duties for debentures.
  3. Specific bad debts written off: ₦39,500,000.
  4. Donations were wholly expended for petroleum operations.
  5. ₦12,250,000 was paid to retrieve petroleum-related data (included in miscellaneous expenses).
  6. ₦20,500,000 interest was paid to an associate company at market rate.

Prepare and submit a report on the following computations:
i. Assessable profit (12 Marks)
ii. Chargeable profit (6 Marks)
iii. Chargeable tax (6 Marks)
iv. Total tax payable (6 Marks)

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  • 2 Marks

ATAX – May 2019 – L3 – Q1a – Petroleum Profits Tax (PPT)

Assess and compute the assessable profit, chargeable profit, chargeable tax, and total tax payable for a petroleum company, based on financial data.

In line with provisions of the Petroleum Profits Tax Act Cap P13 LFN 2004 (as amended), explain “accounting period” of a petroleum exploration company. (2 Marks)

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  • 20 Marks

ATAX – May 2021 – L3 – Q3 – Taxation of Mergers and Acquisitions

Explaining acquisitions versus mergers, outlining tax implications for companies, and evaluating AfCFTA's impact on transactions.

The price of crude oil had fallen from over US$100 per barrel in the past few years to under US$40 per barrel recently in the international market. This has resulted in squeezed margins despite efforts to cut costs.

Krude Explora Nigeria Limited, an indigenous oil servicing company operating in the oil and gas sector for 23 years, faces a going concern risk due to falling profitability and liquidity challenges. It is probable that the company will default on its loan facility of US$122.5 million from B2B Energy Bank Plc. If this happens, the company will likely be taken over by Asset Management Corporation of Nigeria (AMCON).

Coincidentally, Wakanda Oil Exploration Limited, a multinational oil servicing company operating across Africa and the Middle East, has just sent an offer to acquire Krude Explora Nigeria Limited. The proposed acquisition will solve the liquidity problems in the short term, while efficiency and scale from the acquisition will hopefully return the company to profitability.

As the lead tax advisor for the proposed transaction, you are required to:

a. Explain the term “acquisition” as compared to a “merger” and give one example each of a recent merger and acquisition in the Nigerian petroleum industry. (4 Marks)

b. Outline and explain briefly the areas that may have tax implications for:
i. Krude Explora Nigeria Limited (4 Marks)
ii. Wakanda Oil Exploration Limited (4 Marks)

c. Discuss the likely impact of the African Continental Free Trade Area agreement and the local economy on a proposed acquisition or merger. (7 Marks)

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  • 4 Marks

ATAX – Nov 2016 – L3 – Q6a – Petroleum Profits Tax (PPT)

Explains concepts of Associated Gas and Downstream Activities under the Petroleum Profits Tax Act.

The administration of the Petroleum Profits Tax Act is under the charge and management of the Federal Inland Revenue Service with respect to Petroleum Profits Tax Act Cap P13 LFN 2004.

You are required to explain:

i) Associated Gas (2 Marks)
ii) Downstream Activities (2 Marks)

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  • 20 Marks

AT – Nov 2023 – L1 – SB – Q2 – Petroleum Profits Tax

Calculation of hydrocarbon and companies income tax for Brass Petroleum Producing Company Ltd under Petroleum Industry Act and Companies Income Tax Act.

Brass Petroleum Producing Company Limited has been operating as an oil prospecting company in Nigeria for fifteen years. The company operates in both onshore and shallow water in the Koko area of the Niger Delta region.

Following the provisions of the Petroleum Industry Act 2021, the company applied for, and was granted a petroleum prospecting license (PPL) on January 1, 2021.

Extracts from the company’s financial records for the year ended December 31, 2021, revealed the following:

Description N’million
Revenue:
Value of crude oil sold 184,450
Value of condensate from associated gas sold 47,175
Value of natural gas liquid from associated gas sold 41,650
Gross revenue 273,275
Balancing charge 32
Total Gross Revenue 273,307
Deduct:
Production cost 106,470
Cost of gas reinjection wells 600
Drilling cost incurred 4,360
Depreciation of plant, machinery, and fixtures 1,500
Decommissioning and abandonment 1,900
Repairs and maintenance 5,750
Royalty cost paid 40,990
Niger Delta Development Commission charge 250
Finance costs 510
Terminaling cost 1,380
Donations to recognised charity home 130
Concession rentals 20,470
Host community fund 1,000
Local government municipal levy 100
Environmental remediation fund 1,420
Cost incurred in seeking information for oil deposits 370
Total Deductible Expenses 187,200
Net Profit 86,107

Additional Information:

  1. Value of crude oil sold:
    • Type: Forcados
    • Quantity (barrels): 6,200,000
    • Actual Price ($): 70
    • Fiscal Price ($): 72
  2. Value of condensate from associated gas sold:
    • Type: OSO condensate
    • Quantity (barrels): 3,700,000
    • Actual Price ($): 30
    • Fiscal Price ($): 30
  3. Value of gas liquid from associated gas sold:
    • Type: Pennington
    • Quantity (barrels): 2,800,000
    • Actual Price ($): 35
    • Fiscal Price ($): 34
  4. Drilling cost incurred:
    • Tangible drilling cost for first exploration well: N2,800 million
    • Drilling the first two appraisal wells: N1,560 million
    • Total: N4,360 million
  5. Repairs and maintenance:
    • Repairs of plant, machinery, and fixtures: N2,750 million
    • Repairs or alteration of production implement utensils: N3,000 million
    • Total: N5,750 million
  6. Losses brought forward from last year: N655 million
  7. Capital allowances computed:
    • Brought forward: N320 million
    • For the current year: N1,400 million
    • Total: N1,720 million
  8. Production allowances after commencement of the Petroleum Industry Act: N3,300 million
  9. Exchange Rate: Assume N425 is equivalent to US$1.

Required:

As the company’s Tax Manager, you are to prepare a report to the Managing Director, showing in line with the provisions of Petroleum Industry Act 2021 and Companies Income Tax Act 2004 (as amended), the:

a. Hydrocarbon tax (14 Marks)

b. Companies income tax payable (6 Marks)

(Total: 20 Marks)

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  • 20 Marks

AT – Nov 2022 – L3 – Q2 – Petroleum Profits Tax (PPT)

Calculate Colamrud Petroleum’s adjusted and assessable profit for Q1 2022 based on allowable and non-allowable expenses under the Petroleum Industry Act 2021, and comment on the company's cost-price ratio in relation to regulatory standards.

Colamrud Petroleum (Nigeria) Limited, a subsidiary of a foreign oil and gas company, has been engaged in petroleum prospecting and exploration (upstream) operations for both local and foreign markets for over a decade. As part of corporate policy, the management reviews the quarterly performance reports in board meetings. Below is the financial summary for the first quarter (January – March) 2022, prepared by the Finance Controller:

Income (N’000):

  • Value of oil sold (export): 900,380
  • Value of oil sold (local): 223,300
  • Value of gas sold: 430,100
  • Other income: 7,200
  • Gross revenue: 1,560,980

Expenses (N’000):

  • Production cost: 210,730
  • Tangible drilling cost (first appraisal well): 18,800
  • Intangible drilling cost (first appraisal well): 17,600
  • Cost of gas reinjection wells: 4,000
  • Cost of drilling 3 appraisal wells: 24,000
  • Rent: 13,000
  • Royalties on export sales: 69,300
  • Royalties on local sales: 9,800
  • Salaries and wages: 170,500
  • Head office shared costs: 62,000
  • Repairs and maintenance: 8,930
  • Customs duty on essentials: 2,900
  • Depreciation: 66,000
  • Interest on loans: 4,400
  • Allowance for doubtful debts: 34,000
  • Administrative expenses: 79,200
  • Stamp duties on increase in share capital: 1,000
  • Bank charges: 900
  • Miscellaneous expenses: 22,500
  • Income tax provision: 90,000
  • Tertiary education tax provision: 6,000
  • Total expenses: 915,560
  • Net profit: 645,420

Additional Information:

  1. Fiscal oil and gas prices were approved on an export parity basis by the Nigerian Upstream Petroleum Regulatory Commission.
  2. Head office shared costs:
    • Research and development costs: 12,000
    • Indirect production costs: 50,000
  3. Repairs and maintenance:
    • Repairs of oil pipelines and storage tanks: 6,000
    • Repairs of plant: 1,500
    • Improvement to building: 1,430
  4. Allowance for doubtful debts:
    • Specific provision: 10,000
    • General provision: 20,000
    • Bad debt written off: 4,000
  5. Administrative expenses:
    • Natural gas flare fees: 10,000
    • Transport cost: 13,200
    • Cost of obtaining information on oil existence: 7,300
    • Expenditure for acquisition of geological information: 14,900
    • Other allowable expenses: 33,800
  6. Miscellaneous expenses:
    • Tenement levy paid to local government: 2,000
    • Contribution to Niger Delta Development fund: 5,500
    • Contribution to Host Community Development fund: 12,000
    • Donation to widows and orphans association: 3,000
  7. Unabsorbed losses brought forward: 35,000

Required:

As the company’s Assistant Tax Manager, prepare a report for the Tax Manager that includes:

  1. Adjusted Profit and Assessable Profit: Calculate the adjusted profit and assessable profit for the first quarter of 2022 in line with the Petroleum Industry Act 2021.
    (18 Marks)
  2. Cost-Price Ratio Commentary: Provide comments on the cost-price ratio of the company, referencing the Sixth Schedule of the Petroleum Industry Act 2021.
    (2 Marks)

Total: 20 Marks

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  • 30 Marks

ATAX – May 2019 – L3 – Q1b – Petroleum Profits Tax (PPT)

Assess and compute the assessable profit, chargeable profit, chargeable tax, and total tax payable for a petroleum company, based on financial data.

b. Priceless Oil Limited commenced crude oil production in Nigeria in 2006. The company has provided the following financial report for the year ended December 31, 2018:

Additional Information:

  1. Posted price for exported crude oil averaged $52/barrel (at an exchange rate of ₦306 to $1).
  2. Included in other income: ₦38,000,000 from crude transportation (cost: ₦16,250,000).
  3. Natural gas contract with Tommy Limited: value ₦655,000,000, load factor 54%.
  4. Depreciation of ₦120,250,000 was included in production costs.
  5. Qualifying capital expenditures:
Type Date Location Amount (₦)
Storage tank March 12, 2018 On-shore 23,500,000
Plant and equipment November 15, 2018 Continental Shelf of 130
metres of water depth		 75,000,000
  1. Capital allowances brought forward: ₦33,700,000; for the year: ₦88,500,000.
  2. Admin expenses include ₦3,500,000 stamp duties for debentures.
  3. Specific bad debts written off: ₦39,500,000.
  4. Donations were wholly expended for petroleum operations.
  5. ₦12,250,000 was paid to retrieve petroleum-related data (included in miscellaneous expenses).
  6. ₦20,500,000 interest was paid to an associate company at market rate.

Prepare and submit a report on the following computations:
i. Assessable profit (12 Marks)
ii. Chargeable profit (6 Marks)
iii. Chargeable tax (6 Marks)
iv. Total tax payable (6 Marks)

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  • 2 Marks

ATAX – May 2019 – L3 – Q1a – Petroleum Profits Tax (PPT)

Assess and compute the assessable profit, chargeable profit, chargeable tax, and total tax payable for a petroleum company, based on financial data.

In line with provisions of the Petroleum Profits Tax Act Cap P13 LFN 2004 (as amended), explain “accounting period” of a petroleum exploration company. (2 Marks)

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  • 20 Marks

ATAX – May 2021 – L3 – Q3 – Taxation of Mergers and Acquisitions

Explaining acquisitions versus mergers, outlining tax implications for companies, and evaluating AfCFTA's impact on transactions.

The price of crude oil had fallen from over US$100 per barrel in the past few years to under US$40 per barrel recently in the international market. This has resulted in squeezed margins despite efforts to cut costs.

Krude Explora Nigeria Limited, an indigenous oil servicing company operating in the oil and gas sector for 23 years, faces a going concern risk due to falling profitability and liquidity challenges. It is probable that the company will default on its loan facility of US$122.5 million from B2B Energy Bank Plc. If this happens, the company will likely be taken over by Asset Management Corporation of Nigeria (AMCON).

Coincidentally, Wakanda Oil Exploration Limited, a multinational oil servicing company operating across Africa and the Middle East, has just sent an offer to acquire Krude Explora Nigeria Limited. The proposed acquisition will solve the liquidity problems in the short term, while efficiency and scale from the acquisition will hopefully return the company to profitability.

As the lead tax advisor for the proposed transaction, you are required to:

a. Explain the term “acquisition” as compared to a “merger” and give one example each of a recent merger and acquisition in the Nigerian petroleum industry. (4 Marks)

b. Outline and explain briefly the areas that may have tax implications for:
i. Krude Explora Nigeria Limited (4 Marks)
ii. Wakanda Oil Exploration Limited (4 Marks)

c. Discuss the likely impact of the African Continental Free Trade Area agreement and the local economy on a proposed acquisition or merger. (7 Marks)

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  • 4 Marks

ATAX – Nov 2016 – L3 – Q6a – Petroleum Profits Tax (PPT)

Explains concepts of Associated Gas and Downstream Activities under the Petroleum Profits Tax Act.

The administration of the Petroleum Profits Tax Act is under the charge and management of the Federal Inland Revenue Service with respect to Petroleum Profits Tax Act Cap P13 LFN 2004.

You are required to explain:

i) Associated Gas (2 Marks)
ii) Downstream Activities (2 Marks)

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  • 20 Marks

AT – Nov 2023 – L1 – SB – Q2 – Petroleum Profits Tax

Calculation of hydrocarbon and companies income tax for Brass Petroleum Producing Company Ltd under Petroleum Industry Act and Companies Income Tax Act.

Brass Petroleum Producing Company Limited has been operating as an oil prospecting company in Nigeria for fifteen years. The company operates in both onshore and shallow water in the Koko area of the Niger Delta region.

Following the provisions of the Petroleum Industry Act 2021, the company applied for, and was granted a petroleum prospecting license (PPL) on January 1, 2021.

Extracts from the company’s financial records for the year ended December 31, 2021, revealed the following:

Description N’million
Revenue:
Value of crude oil sold 184,450
Value of condensate from associated gas sold 47,175
Value of natural gas liquid from associated gas sold 41,650
Gross revenue 273,275
Balancing charge 32
Total Gross Revenue 273,307
Deduct:
Production cost 106,470
Cost of gas reinjection wells 600
Drilling cost incurred 4,360
Depreciation of plant, machinery, and fixtures 1,500
Decommissioning and abandonment 1,900
Repairs and maintenance 5,750
Royalty cost paid 40,990
Niger Delta Development Commission charge 250
Finance costs 510
Terminaling cost 1,380
Donations to recognised charity home 130
Concession rentals 20,470
Host community fund 1,000
Local government municipal levy 100
Environmental remediation fund 1,420
Cost incurred in seeking information for oil deposits 370
Total Deductible Expenses 187,200
Net Profit 86,107

Additional Information:

  1. Value of crude oil sold:
    • Type: Forcados
    • Quantity (barrels): 6,200,000
    • Actual Price ($): 70
    • Fiscal Price ($): 72
  2. Value of condensate from associated gas sold:
    • Type: OSO condensate
    • Quantity (barrels): 3,700,000
    • Actual Price ($): 30
    • Fiscal Price ($): 30
  3. Value of gas liquid from associated gas sold:
    • Type: Pennington
    • Quantity (barrels): 2,800,000
    • Actual Price ($): 35
    • Fiscal Price ($): 34
  4. Drilling cost incurred:
    • Tangible drilling cost for first exploration well: N2,800 million
    • Drilling the first two appraisal wells: N1,560 million
    • Total: N4,360 million
  5. Repairs and maintenance:
    • Repairs of plant, machinery, and fixtures: N2,750 million
    • Repairs or alteration of production implement utensils: N3,000 million
    • Total: N5,750 million
  6. Losses brought forward from last year: N655 million
  7. Capital allowances computed:
    • Brought forward: N320 million
    • For the current year: N1,400 million
    • Total: N1,720 million
  8. Production allowances after commencement of the Petroleum Industry Act: N3,300 million
  9. Exchange Rate: Assume N425 is equivalent to US$1.

Required:

As the company’s Tax Manager, you are to prepare a report to the Managing Director, showing in line with the provisions of Petroleum Industry Act 2021 and Companies Income Tax Act 2004 (as amended), the:

a. Hydrocarbon tax (14 Marks)

b. Companies income tax payable (6 Marks)

(Total: 20 Marks)

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  • 20 Marks

AT – Nov 2022 – L3 – Q2 – Petroleum Profits Tax (PPT)

Calculate Colamrud Petroleum’s adjusted and assessable profit for Q1 2022 based on allowable and non-allowable expenses under the Petroleum Industry Act 2021, and comment on the company's cost-price ratio in relation to regulatory standards.

Colamrud Petroleum (Nigeria) Limited, a subsidiary of a foreign oil and gas company, has been engaged in petroleum prospecting and exploration (upstream) operations for both local and foreign markets for over a decade. As part of corporate policy, the management reviews the quarterly performance reports in board meetings. Below is the financial summary for the first quarter (January – March) 2022, prepared by the Finance Controller:

Income (N’000):

  • Value of oil sold (export): 900,380
  • Value of oil sold (local): 223,300
  • Value of gas sold: 430,100
  • Other income: 7,200
  • Gross revenue: 1,560,980

Expenses (N’000):

  • Production cost: 210,730
  • Tangible drilling cost (first appraisal well): 18,800
  • Intangible drilling cost (first appraisal well): 17,600
  • Cost of gas reinjection wells: 4,000
  • Cost of drilling 3 appraisal wells: 24,000
  • Rent: 13,000
  • Royalties on export sales: 69,300
  • Royalties on local sales: 9,800
  • Salaries and wages: 170,500
  • Head office shared costs: 62,000
  • Repairs and maintenance: 8,930
  • Customs duty on essentials: 2,900
  • Depreciation: 66,000
  • Interest on loans: 4,400
  • Allowance for doubtful debts: 34,000
  • Administrative expenses: 79,200
  • Stamp duties on increase in share capital: 1,000
  • Bank charges: 900
  • Miscellaneous expenses: 22,500
  • Income tax provision: 90,000
  • Tertiary education tax provision: 6,000
  • Total expenses: 915,560
  • Net profit: 645,420

Additional Information:

  1. Fiscal oil and gas prices were approved on an export parity basis by the Nigerian Upstream Petroleum Regulatory Commission.
  2. Head office shared costs:
    • Research and development costs: 12,000
    • Indirect production costs: 50,000
  3. Repairs and maintenance:
    • Repairs of oil pipelines and storage tanks: 6,000
    • Repairs of plant: 1,500
    • Improvement to building: 1,430
  4. Allowance for doubtful debts:
    • Specific provision: 10,000
    • General provision: 20,000
    • Bad debt written off: 4,000
  5. Administrative expenses:
    • Natural gas flare fees: 10,000
    • Transport cost: 13,200
    • Cost of obtaining information on oil existence: 7,300
    • Expenditure for acquisition of geological information: 14,900
    • Other allowable expenses: 33,800
  6. Miscellaneous expenses:
    • Tenement levy paid to local government: 2,000
    • Contribution to Niger Delta Development fund: 5,500
    • Contribution to Host Community Development fund: 12,000
    • Donation to widows and orphans association: 3,000
  7. Unabsorbed losses brought forward: 35,000

Required:

As the company’s Assistant Tax Manager, prepare a report for the Tax Manager that includes:

  1. Adjusted Profit and Assessable Profit: Calculate the adjusted profit and assessable profit for the first quarter of 2022 in line with the Petroleum Industry Act 2021.
    (18 Marks)
  2. Cost-Price Ratio Commentary: Provide comments on the cost-price ratio of the company, referencing the Sixth Schedule of the Petroleum Industry Act 2021.
    (2 Marks)

Total: 20 Marks

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