Hydrocarbon Tax: What You Need to Know

It is no news that the Petroleum Industry Act (PIA), 2021, introduced a new tax and fiscal regime thereby replacing the existing petroleum tax with a Hydrocarbon tax and Company income tax on oil companies. The primary purpose of these changes is to drive investment both locally and internationally. Notably, there is been increased participation in the oil industry since the  introduction of the PIA.

Below is what you need to know about the hydrocarbon tax. Per the provisions of the PIA, the hydrocarbon tax applies to crude oil as well as field condensates and liquid natural gas liquids derived from associated gas and produced in the field upstream of the measurement points. Hydrocarbon tax is payable by companies engaged in upstream petroleum operations onshore, shallow water and deep offshore. Hydrocarbon tax does not apply to associated natural gas,
including liquids produced in the fields and contained in the rich gas, and non￾associated natural gas. It also does not apply to condensates and natural gas liquids produced from non-associated gas in fields or gas processing plants.

Lastly, the hydrocarbon tax does not apply to any condensates and natural gas liquids produced from associated gas at gas processing or other facilities downstream of the measurement point.
The hydrocarbon tax shall be charged on the profits of any company engaged in upstream petroleum operations in relation to crude oil. The proceeds of chargeable oil adjusted to the measurement point are used in determining the crude oil revenue of a company which shall be charged for hydrocarbon tax in every accounting period.

The Federal Inland Revenue Service (FIRS) is the government agency which will oversee the administration, assessment and collection of hydrocarbon tax. A company liable to pay Hydrocarbon tax may deliver a self-assessment to the FIRS for any accounting period. The FIRS may accept or reject the self-assessment. Where the self-assessment is rejected, the FIRS may estimate the amount of tax to be paid and serve the same on the company. The company may object in writing by way of a Notice of Objection within thirty (30) days of being served with the assessment from the FIRS. Where the FIRS does not revise the assessment after objection, the company may apply to the Tax Appeal Tribunal.

Where a company has erroneously paid an excessive hydrocarbon tax to the FIRS, the company may apply to the FIRS for review within six (6) years from the accounting period in which the erroneous payment was made. The PIA also provides for appropriate penalties in the case of failure to remit any hydrocarbon tax due to be paid. The fiscal framework provides penalties for gas flaring from midstream operations. Revenues from these penalties will accrue to the Midstream and Downstream Infrastructure Fund and will be used to finance midstream and downstream infrastructure investment.

Finally, it is worthy of note that this new tax regime is only applicable to holders of new licences under the PIA. The holders of the previous licenses that is, the Oil mining license and Oil prospecting license will have to convert to the new licenses in order to benefit from the new fiscal regime otherwise, the provisions of the Petroleum Profit Tax Act, CAP P13, LFN 2004, shall apply till the
expiration of all the Oil mining licenses and Oil prospecting licenses.