Topic: Petroleum Profits Tax (PPT)

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ATAX – May 2016 – L3 – Q3 – Petroleum Profits Tax (PPT)

Analyze the taxation effects of incentives on Joint Ventures vs. Sole Risk operations, compute Tax Inversion Penalty, and explain Mineral Rights Acquisition Costs.

Question

Ugheli Limited is operating a Joint Venture with NNPC under the Year 2000 Memorandum of Understanding, while Eket Limited operates under the Sole Risk Operation agreement.

The following information reflects the two companies’ operations for the month of July 2014:

Required:

(a)
i. Using the above information, compare the effects of Incentives on Joint Venture Operation as against the Sole Risk Operation using the two companies’ operations. (7 Marks)

ii. What is the purpose of Tax Inversion Penalty (TIP)? (4 Marks)

iii. Determine the Tax Inversion Penalty and the Revised Government Take from the operations of the two companies. (Tax Inversion Rate is 35%) (3 Marks)

(b) Explain the term “Mineral Rights Acquisition Costs.” (3 Marks)

(c) Explain briefly the differences between Joint Venture and Sole Risk Agreements under the Year 2000 Memorandum of Understanding. (3 Marks)

Answer

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Level: Level 3

Topic: Petroleum Profits Tax (PPT)

ATAX – May 2016 – L3 – Q2 – Petroleum Profits Tax (PPT)

Compute assessable and chargeable profits, assessable and chargeable taxes, and tertiary education tax for Sky Petroleum Plc.

Question

Sky Petroleum Plc commenced operations over ten years ago and makes up accounts to December 31 annually. The following details have been extracted from the accounting records for the year ended December 31, 2014:

Details	Amount
Crude Oil Exported	3,500,000 barrels
Crude Oil Used Locally	1,200,000 barrels at ₦100 per barrel
Incidental Income from Petroleum Operations	₦26,750,000
Exploration and Drilling Costs	₦30,000,000
Management and Administration Expenses	₦240,500,000
Non-Productive Rents	₦8,300,000
Allowance for Bad Debts – General	₦7,500,000
Allowance for Bad Debts – Specific	₦11,200,000
Depreciation	₦7,250,000
Losses Brought Forward	₦13,200,000

Qualifying Capital Expenditure:

Asset	Date Acquired	Location	Amount (₦)
Pipeline and Storage Tanks	March 2014	Continental Shelf (190m water depth)	₦48,000,000
Plant and Machinery	June 2012	Territorial Waters (90m water depth)	₦63,800,000
Furniture and Fittings	May 2011	Territorial Waters (95m water depth)	₦21,000,000
Building	April 2013	Onshore	₦71,000,000

Breakdown of Management and Administration Expenses:

Item	Amount (₦)
Donations to Political Parties	₦8,500,000
Expenditure for Petroleum Deposit Information	₦4,700,000
Companies Income Tax of an Associated Company	₦5,000,000
Interest on Inter-Company Loans (at market terms)	₦2,600,000
Staff Salaries	₦175,000,000
Royalties on Export Sales	₦6,200,000
Repairs and Renewals on PPE for Petroleum Operations	₦2,900,000
Rents Paid for Oil Prospecting License	₦3,600,000
Other Administrative Expenses	₦32,000,000
Total	₦240,500,000

Additional Information:

International market price of crude oil in 2014 was USD $75 per barrel.
Exchange rate: USD $1 = ₦280.

Required:

a. Compute the Assessable Profit. (11 Marks)
b. Compute the Chargeable Profit. (5 Marks)
c. Compute the Assessable Tax. (1 Mark)
d. Compute the Chargeable Tax. (2 Marks)
e. Compute the Tertiary Education Tax. (1 Mark)

Answer

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Level: Level 3

Topic: Petroleum Profits Tax (PPT)

AT – Nov 2016 – L3 – SC – Q6 – Petroleum Profits Tax (PPT)

Explain associated gas and downstream activities and compute petroleum profits tax for Bivenette Petroleum Company Ltd.

Question

a. 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)

b. Bivenette Petroleum Company Limited has been in the oil prospecting business for some years. Extracts from the financial statements for the year ended December 31, 2013, show the following information:

Details	Amount (₦’000)
Value of oil exported	1,030,000
Domestic sales	842,000
Chargeable gas sales	603,000
Other income	425,000
Operating costs	1,385,000
Intangible costs	142,800
Royalty on export sales	125,000
Royalty on local sales	96,500
Non-productive rent	102,000
Exploration incentives	313,500
Rental	101,200
Interest paid	98,000
Administrative expenses	265,000

Additional Information:
(i) The Petroleum Profits Tax rate is 85%.
(ii) Interest paid included ₦12,000,000 paid to an affiliated company.
(iii) Capital allowances were agreed at ₦253,750,000.
(iv) Included in the operating cost is ₦302,000,000 paid to a company for information on oil prospect in Adamawa State.
(v) The company is entitled to Investment Allowance of ₦173,000,000.

Required:
Determine the Assessable Profit, Chargeable Profit, Assessable Tax, and Chargeable Tax of the company for the relevant Year of Assessment. (11 Marks)

Answer

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Level: Level 3

Topic: Petroleum Profits Tax (PPT)
Series: NOV 2016

ATAX – May 2017 – L3 – Q7b – Petroleum Profits Tax (PPT)

Explain "Memorandum of Understanding" in PPT computation and highlight the Year 2000 MOU details.

Question

i. Describe briefly your understanding of the term “Memorandum of Understanding” as it applies to Petroleum Profits Tax computation. (3 Marks)

ii. State FOUR highlights of the Year 2000 Memorandum of Understanding. (4 Marks)

Answer

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Level: Level 3

Topic: Petroleum Profits Tax (PPT)

ATAX – May 2017 – L3 – Q7a – Petroleum Profits Tax (PPT)

List eight items disallowed by the Petroleum Profits Tax Act in ascertaining adjusted profit.

Question

As the newly appointed Tax Consultant to a company, you are required to make a presentation stating EIGHT items specifically disallowed by the Petroleum Profits Tax Act Cap. P13 LFN 2004 as amended, in ascertaining the adjusted profit of an accounting period. (8 Marks)

Answer

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Level: Level 3

Topic: Petroleum Profits Tax (PPT)

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.

Question

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:

Posted price for exported crude oil averaged $52/barrel (at an exchange rate of ₦306 to $1).
Included in other income: ₦38,000,000 from crude transportation (cost: ₦16,250,000).
Natural gas contract with Tommy Limited: value ₦655,000,000, load factor 54%.
Depreciation of ₦120,250,000 was included in production costs.
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

Capital allowances brought forward: ₦33,700,000; for the year: ₦88,500,000.
Admin expenses include ₦3,500,000 stamp duties for debentures.
Specific bad debts written off: ₦39,500,000.
Donations were wholly expended for petroleum operations.
₦12,250,000 was paid to retrieve petroleum-related data (included in miscellaneous expenses).
₦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)

Answer

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Level: Level 3

Topic: Petroleum Profits Tax (PPT)

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.

Question

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)

Answer

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Level: Level 3

Topic: Petroleum Profits Tax (PPT)

AT – Nov 2014 – L3 – SB – Q4 – Petroleum Profits Tax (PPT)

Analyze tax implications for Broadway Limited's pioneer status and relevant years of assessment.

Question

Broadway Limited was incorporated on 31 May 2004, as a manufacturer of plastic products. Four Lebanese shareholders invested substantially, intending to become members of the Board of Directors. The company applied for a Pioneer Status under the Industrial Development (Income Tax Relief) Act, Cap. 17, LFN 2004 and was granted a Pioneer Certificate, with a Production Day certified as 1 August 2004.

The following information has been extracted from the company’s records:

Details	Amount (N)
Net Profit for Financial Year Ended 31 July 2008	5,005,000
Depreciation	396,435

The Federal Inland Revenue Service (FIRS) certified the following expenditures up to and including the year ended 31 July 2007:

Expenditure Type	Amount (N)
Industrial Building	6,142,500
Non-Industrial Building	2,990,000
Plant and Machinery	4,631,250
Motor Vehicles	4,062,500

The promoters declined to apply for an extension of the Pioneer period.

Required:
Advise the management on the tax implications for the relevant years of assessment.

Answer

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Level: Level 3

Topic: Petroleum Profits Tax (PPT)
Series: NOV 2014

AT – Nov 2014 – L3 – SB – Q3 – Petroleum Profits Tax (PPT)

Calculate the total tax liabilities of Jisosi Petroleum Limited to aid in dividend decision-making.

Question

The Independent Auditors of Jisosi Petroleum Limited submitted the draft Audited Financial Statements for the year ended 31 December 2013 for management’s discussion. The executive summary revealed total revenue of N286,650,000 and Profit Before Taxation of N82,642,000.

To arrive at the proposed dividend for the consideration of the Board, there is a need to determine the total tax liabilities for the year. The draft Statement of Profit or Loss includes the following items among others:

Expense Item	Amount (N)
Royalty on Crude Oil sold	13,500,000
Cost of Well Drilling	25,000,000
Custom Duties	500,000
Clearing of Oil Spillage	7,500,000
Depreciation	32,000,000
Donations	4,500,000
Community Relations Expenses	10,000,000
Transportation Expenses for 2012	8,500,000

Additionally, the revenue includes:

Profit on Property, Plant, and Equipment sold: N48,000
Income from transportation of crude oil for the year ended 31 December 2012: N16,894,000

The officials of Federal Inland Revenue Service (FIRS) and the Company agreed as follows:

Item	Amount (N)
Annual Allowances on exploration	25,500,000
Balancing Charge on exploration	242,000
Capital Allowances on exploration b/f	11,000,000
Petroleum Investment Allowance	18,500,000
Capitalised Intangible Drilling Cost	14,000,000
Losses b/f	10,000,000
Capital Allowances on transportation	750,000

Required:
Determine the total tax liabilities of the company for the consideration of the directors to aid in the proposed dividend decision.

Answer

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Level: Level 3

Topic: Petroleum Profits Tax (PPT)
Series: NOV 2014

ATAX – May 2022 – L3 – Q7 – Petroleum Profits Tax (PPT)

Identify allowable expenses under the PIA and explain implications of mergers in upstream petroleum operations.

Question

In the last three years, some major oil producing companies have decided to divest their investments from the Nigerian oil and gas sector. One of the reasons for this might be the new global energy order, which seems to favour the evolution of a “green environment” as against the present use of hydrocarbons with its inherent environmental degradation and pollution.

Similarly, in response to the yearnings of various stakeholders in the oil and gas sector, the Federal Government enacted the Petroleum Industry Act (PIA) 2021. Generally, the Act provides the legal, governance, regulatory, and fiscal framework for the Nigerian petroleum industry, the development of host communities, and for related matters.

Notable commentators and professionals in the sector suggest that the divestment of major oil and gas operators in Nigeria could be beneficial to local investors if funds are sourced and deployed to businesses in the sector. Mergers and acquisitions of indigenously owned oil-producing companies have been noted as one valuable option in this regard.

Required:

a. In respect of the Petroleum Industry Act 2021, identify the expenses allowable in the computation of adjusted profit of a company in upstream petroleum operations. (6 Marks)
b. Identify and explain SIX implications of mergers and acquisitions in respect of a situation where a new company takes over an existing company. (9 Marks)

Answer

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Level: Level 3

Topic: Petroleum Profits Tax (PPT)

ATAX – May 2023 – L3 – Q4 – Petroleum Profits Tax (PPT)

Calculate Jaga Petroleum's hydrocarbon tax and income tax liabilities under the Petroleum Industry Act.

Question

Jaga Petroleum Limited was granted an oil mining lease (OML) in January 2001 for exploration of oil and gas in onshore and shallow water operations for twenty years and a further renewal of twenty years, if application is made.

At the expiration of the initial license on December 31, 2020, the company decided not to apply for an extension of its current license under the Petroleum Profit Tax regime and opted for automatic conversion on January 1, 2021, to the petroleum mining lease (PML) as enshrined in the Petroleum Industry Act 2021.

The following details were extracted from the financial statements of the company for the year ended December 31, 2021:

(i) Revenue:

Category	Type	Quantity (MB)	Actual Price ($)	Fiscal Price ($)
Crude oil sold	Bonny light	7.5	75	77
Crude oil sold	Forcados medium	5.2	69	70
Condensate from associated gas sold	ABC condensate	4.0	55	54
Gas liquid from associated gas sold	XYZ liquid	3.8	48	50

(ii) Expenses/Expenditure:

Item	N’million
Royalty incurred and paid for	118,900
Production cost	112,660
Concession rentals	25,200
Repairs of plant, machinery, and fixtures	2,680
First exploration well costs	2,770
Repairs of production implement utensils	1,850
Cost of gas reinjection wells	1,250
NDDC charge	200
Purchase of information on existence of petroleum deposits	305
Customs duties	106
First two appraisal wells costs	3,900
Decommissioning and abandonment	1,500
Depreciation	2,820
Environmental remediation fund	1,800
State government ground rent fee	22
Finance costs	25
Host community costs	1,400
Miscellaneous expenses	1,129
Administrative costs	1,980

The following additional information was also made available:

(iii) First two appraisal wells costs consisted of 60% tangible costs and 40% intangible costs.
(iv) Expenditure for the purchase of information on existence of petroleum deposits included:

Item	N’million
Acquisition of geophysical information	100
Geological data and information	120
Others	85
Total	305

(v) Miscellaneous expenses were:

Item	N’million
Gas flare fee	720
Donations to orphanage homes	132
Terminalling cost	169
Stamp duty	18
Signature bonus paid for petroleum deposits	90
Total	1,129

(vi) Agreed capital allowances for the year was N4,500 million.
(vii) Production allowances after commencement of the Act:

Operation Type	N’million
Onshore operations	800
Shallow water operations	1,100

(viii) Assume N440 is equivalent to US $1, and tax liabilities payable will be in local currency (Naira).

Required:

Compute for the relevant assessment year the company’s:

Hydrocarbon tax liability (16 Marks)
Companies income tax liabilities (4 Marks)

Answer

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Level: Level 3

Topic: Petroleum Profits Tax (PPT)

ATAX – Nov 2016 – L3 – Q6b – Petroleum Profits Tax (PPT)

Determines assessable profit, chargeable profit, assessable tax, and chargeable tax for Bivenette Petroleum Company Limited.

Question

Bivenette Petroleum Company Limited has been in the oil prospecting business for some years. Extracts from its financial statements for the year ended December 31, 2013 show the following information:

Additional Information:

Petroleum Profits Tax rate: 85%
Interest paid includes N12,000,000 paid to an affiliated company.
Capital allowances agreed at N253,750,000.
Operating costs include N302,000,000 paid to a company for information on oil prospect in Adamawa State.
The company is entitled to an Investment Allowance of N173,000,000.

You are required to:

Determine the Assessable Profit, Chargeable Profit, Assessable Tax, and Chargeable Tax of the company for the relevant Year of Assessment. (11 Marks)

Answer

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Level: Level 3

Topic: Petroleum Profits Tax (PPT)

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

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

Question

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)

Answer

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Level: Level 3

Topic: Petroleum Profits Tax (PPT)

ATAX – Nov 2016 – L3 – Q2c – Petroleum Profits Tax (PPT)

Compute and explain the significance of adjusted profit, chargeable profit, and chargeable tax for Joji Petroleum Company.

Question

Mr. Gillani Azurhi is considering investing in a petroleum company and has provided financial extracts of Joji Petroleum Company Limited for analysis.

Financial Data Provided:

Item	N’000
Current year capital allowances	6,080
Previous years’ capital allowances b/f	8,901
Custom duty	125
Royalties not included in accounts	1,638
Loss brought forward	6,250
Petroleum Profits Tax payable	1,336

Tax Rate: 85%

Required:

Compute and explain the significance of each of the following:

i) Adjusted profit (9 Marks)
ii) Chargeable profit (2 Marks)
iii) Chargeable tax (2 Marks)

Answer

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Level: Level 3

Topic: Petroleum Profits Tax (PPT)

ATAX – Nov 2021 – L3 – Q2 – Petroleum Profits Tax (PPT)

Tax computation for Debby Oil Limited, including adjustments, capital allowances, and tertiary education tax.

Question

Debby Oil Limited is an oil prospecting company that has been operating in the deep ocean of the Niger Delta since 1990. The company makes up its accounts to December 31 each year.

The company is in discussion with a consortium of five deposit money banks in Nigeria for the purposes of taking a medium-term (5 years) loan facility of USD 5 million to finance further expansion of its facilities and acquisition of a marginal field. As part of the documents required by the banks for processing the loan facility are the audited financial statements and tax computations for the last five financial years. The company is yet to submit the documents for the year ended December 31, 2020, to the consortium.

The extract from its activities for the year ended December 31, 2020, is as presented below:

Item	Amount (₦’000)
Oil inventory (Jan 1, 2020)	1,220,000
Oil inventory (Dec 31, 2020)	1,380,000
Sales – Export	9,524,000
Sales – Local	2,900,500
Other income	1,235,300
Production cost	3,440,000
Operating expenses	1,789,600
Intangible drilling cost	1,425,200
Tangible drilling cost	532,000
Traveling expenses	54,000
Salaries and wages	1,860,000
Pension fund contribution	175,000
Loan interest	150,000
General expenses	800,500
Depreciation	170,000
Royalties and production rentals	810,000
Donation	20,000
Bank charges	25,300
Harbour dues	15,000
Non-productive rent	350,000
Audit and accountancy fees	28,000
Customs duty on essentials	7,300
Income tax provision	865,860
Transfer to general reserves	900,000

Additional Information:

Posted prices of crude oil exported is USD 35 per barrel at the standard API gravity of 32°.
Actual realised price is adjusted for deviation from the standard API gravity. Each degree change in API results in a price adjustment of USD 0.20.
650,000 barrels of crude oil were exported during the year with an API gravity of 34°.
Other income of ₦735 million was generated from the company’s ocean tanker business. Associated expenses of ₦580.5 million were included in general expenses.
Operating expenses included ₦9 million for short lease renewal.
Pension fund contributions were approved by the State Internal Revenue Service.
Loan interest included ₦78 million paid to a subsidiary company, approved by the board.
A new pipeline and storage tank costing ₦150 million was acquired for offshore operations in a 180-meter deep area.
Transfer to general reserves was board-approved.
Capital allowances agreed with the tax authorities include an annual allowance of ₦120 million and a balancing charge of ₦8 million.
Assume USD 1 is equivalent to ₦420.

Required:
As the company’s Assistant Tax Manager, draft a report to the Tax Manager showing the company’s tax liability for the relevant assessment year according to the Petroleum Profits Tax Act, Cap P.13, Laws of the Federation of Nigeria 2004 (as amended).

Answer

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Topic: Petroleum Profits Tax (PPT)

ATAX – Nov 2020 – Q2 – Petroleum Profits Tax

Discuss the tax implications and appeals process for Sunny Oil Producing Nigeria Limited regarding its tax computation discrepancies.

Question

Sunny Oil Producing Nigeria Limited is engaged in petroleum exploration in the deep sea off the coast of Bight of Benin in the Niger delta region since 2005. It is involved in a production sharing contract with the Nigerian National Petroleum Corporation. In order to consolidate its position in the Nigerian oil and gas sector, the company intends to diversify its operations into the ocean-going oil tanker transportation business in the next few months.

The company submitted its annual returns and statement of tax computation in respect of the year ended December 31, 2018, to the Federal Inland Revenue Service office in April 2019, but there was a disagreement between the amount raised by the tax office and that of the company. A check by the financial accountant of the company revealed that capital allowances on plant and equipment acquired for N120.5 million during the year, as well as a donation of N50 million made to an institution of higher learning, were not taken into consideration in the determination of assessable profit. A letter explaining this discrepancy was written by the Managing Director to the FIRS, but instead of the issue being resolved, a notice, giving the company date and time for hearing before the Tax Appeal Tribunal was received.

In order for the company to be properly guided in the pursuit of the case before the tribunal, it was resolved that a competent firm of Chartered Accountants with a bias in oil and gas accounting and taxation should be engaged.

Your firm has been appointed as the company‘s tax consultants with the mandate of representing the company at the sittings of the Tax Appeal Tribunal. Relevant documents in respect of the acquisition of the plant and equipment and donation were made available to you.

The extract from the books of accounts of the company for the year ended December 31, 2018 revealed the following:
(i) Export sales:

Bonny light 150,000 barrels exported at 37° API
Forcados 100,000 barrels exported at 36° API
Bonny medium 90,000 barrels exported at 35° API

Price per barrel at 36° API:

Bonny Light: $63.03
Forcados: $65.00
Bonny medium: $64.53

(ii) Actual realised price is arrived at after adjusting for the variance in API. For every API, $0.03 is the variance in price at 36°.

(iii) Domestic sales: 80,000 barrels at N720 per barrel.

(iv) Expenses incurred include:

Description	Amount (N’000)
Operating expenses	255,000
Production and exploration	1,100,600
Intangible drilling cost	420,800
Administrative expenses	225,500
Non-productive rent	80,700
Bad debts written off	20,150
Repairs and renewals	92,600
Transportation and traveling	73,200
Royalties	222,900
Miscellaneous expenses	63,800
Salaries and wages	830,700
Pension fund contribution	74,450
Customs duty (non-essentials)	10,400
Harbour dues	3,300
Stamp duties on debenture	2,500
Interest on loan	52,350
Cost of 3 appraisal wells	120,000
Income tax provision	750,000
Transfer to special reserves	255,000

Additional Information:
(i) Production and exploration include N80 million incurred on tangible drilling operation and depreciation of N200.2 million.
(ii) Royalties include an amount of N22.5 million in respect of royalties on domestic sales.
(iii) Miscellaneous expenses include, among others, N12.75 million spent on obtaining information on the existence of oil in the Middle-Belt and N50 million donation to a public university in one of the states in the Niger delta region.
(iv) The Joint Tax Board gave approval for the operation of the pension fund contribution in the company.
(v) Interest on the loan includes N12.3 million paid to a subsidiary company. The transaction was made at the prevailing market rate.
(vi) The company entered into a gas contract with the following:

Company	Load factor	Amount (N’000)
Akin Gas Limited	66	220,000
Bollah Limited	71	350,000

(vii) Schedule of qualifying capital expenditure:

(viii) Unutilised capital allowance and loss brought forward from the previous year were N12.5 million and N750 million, respectively.
(ix) Capital allowance as agreed with the relevant tax authority was N130.25 million.
(x) The amount stated in respect of transfer to special reserves was approved by the company’s Board of Directors to be utilised for future investment opportunities.
(xi) Assume N305 is equivalent to US $1.
(xii) Profits from petroleum exported or sold domestically are taxable at 85%.

Required:
a. As the company‘s tax consultant, you are to draft a report to the Managing Director explaining the following:
i. The preparation which you and the company should make before the commencement of the proceedings at the tribunal. (2 Marks)
ii. Steps to be taken by the company if the decision of the tribunal is not acceptable to it. (2 Marks)
iii. The tax implication of the company‘s proposed transportation business. (1 Mark)

b. Re-computing the following:
i. Assessable profit (8 Marks)
ii. Chargeable profit (3 Marks)
iii. Assessable tax (1 Mark)
iv. Chargeable tax (1 Mark)
v. Total tax payable (2 Marks)

Answer

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Level: Level 3

Topic: Petroleum Profits Tax (PPT)

AT – May – 2018 – L3 – SC – Q5b – Petroleum Profits Tax (PPT)

Tax computation for Ayokunle Oil Nigeria Ltd., a petroleum company, including assessable and chargeable profit based on expenses and sales.

Question

Ayokunle Oil Nigeria Limited engages in petroleum operations. The company was incorporated in 2005 but commenced business in January 2010. It operates in the continental shelf at a water depth of 155 metres. The company makes up its accounts to December 31 each year.

The company has presented the following statement of activities for the year ended December 31, 2016:

Sales of crude oil:
- Exported at $52 per barrel: 120,500 barrels
- Domestic at N12,250 per barrel: 70,000 barrels
Chargeable natural gas sold: N300,800,000
Income from other sources: N6,770,000

Expenses incurred:

Expense Type	Amount (₦)
Operating costs	523,750
Non-productive rent	110,420
Intangible drilling cost	439,000
Custom duty	53,200
Salaries and other personnel costs	280,500
Interest paid	50,410
Royalty on oil exported	110,600
Royalty on local sales	41,200
Stamp duty	1,050
Donations	22,000
Transportation	72,070
Administration and general expenses	340,200
Bad debts	66,000
Pension contribution	21,000
Miscellaneous expenses	32,170

Additional Information:

Capital allowances were agreed at ₦133,000,000.
Plant and storage tank acquired and used during the year amounted to ₦80,000,000.
Depreciation of ₦105,000,000 was included in operating costs.
Custom duty on plant and storage tank, ₦2,250,000, was included in miscellaneous expenses.
70% of custom duty was on essential items.
The average exchange rate during the period was ₦365 to $1 (USA).

Required:

Determine for the relevant assessment year the following:

a. Assessable Profit (7 Marks)
b. Chargeable Profit (3 Marks)
c. Chargeable Tax (1 Mark)

(Total 15 Marks)

Answer

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Tags: Assessable Profit, Capital allowances, Chargeable Natural Gas, Depreciation Adjustments, Petroleum Profits Tax
Level: Level 3

Topic: Petroleum Profits Tax (PPT)
Series: MAY 2018

AT – May 2018 – L3 – SB – Q2b – Petroleum Profits Tax (PPT)

Calculate assessable profit, chargeable profit, chargeable tax, and total tax liability for Ibrahim Oil Nigeria Ltd.

Question

Ibrahim Oil Nigeria Limited is an oil prospecting company which commenced production in commercial quantity in 2008. Its accounting year end is December 31. The company has provided the following Statement of Profit or Loss for the year ended December 31, 2016:

Description	Amount (N’000)
Revenue (value of oil produced)	2,455,200
Operating costs	(952,500)
Non-productive rent	(63,200)
Royalty on export sales	(14,775)
Depreciation of Property Plant and Equipment	(65,400)
Tangible drilling cost	(53,800)
Donation	(2,500)
Stamp duties	(1,250)
Repairs and renewal of machinery	(2,000)
Exploration and drilling costs	(100,300)
Custom duties on Plant and Machinery	(1,130)
Bad and doubtful debts	(26,500)
Pension and provident funds	(30,600)
Interest paid	(26,200)
General expenses	(11,050)
Income tax provision	(120,000)
Net Profit	983,995

Additional Information:

Exploration and drilling costs are itemized for various wells totaling 100,300 N’000.
A breakdown of bad debts shows 16,500 N’000 as specific provision.
Capital allowances are agreed at N88,100,000.

Required: Determine for the relevant assessment year, the following:

(i) Assessable Profit (9 Marks)
(ii) Chargeable Profit (3 Marks)
(iii) Chargeable Tax (2 Marks)
(iv) Total Tax Liability (1 Mark)

Answer

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Tags: Assessable Profit, Capital allowances, Chargeable Profit, Chargeable Tax, Export Sales, Petroleum Profits Tax Act
Level: Level 3

Topic: Petroleum Profits Tax (PPT)
Series: MAY 2018

ATAX – Nov 2018 – L3 – Q7 – Petroleum Profits Tax (PPT)

Report on classification of mineral rights acquisition, development, and production costs in Nigeria's upstream oil and gas sector.

Question

The Petroleum Industry Governance (PIG) Bill, recently passed into law by both chambers of the Nigerian National Assembly, has rekindled interest among local and foreign investors in Nigeria’s oil and gas industry. A Chinese billionaire-investor, Mr. Wu Chen, while browsing the internet, came across the PIG Bill and the Petroleum Profits Tax Act (PPTA) Cap P.13 LFN 2004 (as amended). He downloaded and studied them but could not understand a particular section of the Act relating to the classification of costs in the upstream sector.

Mr. Chen then contacted his associate in Nigeria, Mr. Li Yen, to help find a reputable tax consultancy that could provide professional advice on the matter. The report is to be submitted to Mr. Chen’s subsidiary company in Nigeria, Wu Integrated Limited, Victoria Island, Lagos.

Required:

As the newly appointed tax consultant to Mr. Chen, write a report on the classification of costs in the upstream sector of the oil and gas industry in Nigeria. Specifically, your report should explain the following:

(a) Mineral rights acquisition costs (5 Marks)
(b) Development costs (5 Marks)
(c) Production costs (5 Marks)

Answer

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Tags: Cost Classification, Development Costs, Mineral Rights Acquisition, Petroleum Profits Tax, Production Costs, Upstream Oil and Gas
Level: Level 3

Topic: Petroleum Profits Tax (PPT)

ATAX – Nov 2018 – L3 – Q6b – Petroleum Profits Tax (PPT)

Explanation of two roles each of DPR, NNPC, and CBN in regulating Nigeria's oil and gas industry.

Question

A large proportion of the total foreign exchange earnings generated by the Federal Government of Nigeria is from petroleum-related activities. In the oil and gas industry, several regulatory agencies, such as the Nigerian National Petroleum Corporation (NNPC), National Petroleum Investment Management Services (NAPIMS), Department of Petroleum Resources (DPR), Central Bank of Nigeria (CBN), Federal Inland Revenue Service (FIRS), etc., have been established to ensure sanity and accountability in the upstream, midstream, downstream, gas utilization, and oil service sectors.

You are required to: Explain two roles each, of the following players in the oil and gas industry in Nigeria:

DPR
NNPC
CBN

Answer

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