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.

Question

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:

Value of crude oil sold:
- Type: Forcados
- Quantity (barrels): 6,200,000
- Actual Price ($): 70
- Fiscal Price ($): 72
Value of condensate from associated gas sold:
- Type: OSO condensate
- Quantity (barrels): 3,700,000
- Actual Price ($): 30
- Fiscal Price ($): 30
Value of gas liquid from associated gas sold:
- Type: Pennington
- Quantity (barrels): 2,800,000
- Actual Price ($): 35
- Fiscal Price ($): 34
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
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
Losses brought forward from last year: N655 million
Capital allowances computed:
- Brought forward: N320 million
- For the current year: N1,400 million
- Total: N1,720 million
Production allowances after commencement of the Petroleum Industry Act: N3,300 million
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)

Answer

Baba Tee & Co (Chartered Accountants)
Plot 5, Osara Road, Abeokuta

INTERNAL MEMO

Date: …….
From: Tax Manager
To: Managing Director
Subject: Computation of Hydrocarbon Tax and Companies Income Tax Liabilities Payable

I refer to your directive on the above subject and a draft report for your review and further action is hereby presented.

a. Determination of hydrocarbon tax liabilities for the 2021 assessment year

With losses relieved brought forward from last year and the grant of capital allowances and production allowances, the company made a chargeable profit of N150.622 billion. Hydrocarbon tax is at the rate of 15% of chargeable profit, which amounted to N22,593,300,000.

b. Determination of companies income tax liabilities for the 2022 assessment year

The company made a total profit of N90.872 billion. Companies income tax is 30% of total profit, which gives N27,261,600,000. The company is also to pay 2.5% of assessable profit as tertiary education tax (N2,330,375,000).

Thank you.

Tobby Babatolu