- 15 Marks
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
a. Definitions:
i. Associated Gas:
Associated gas is natural gas found in association with crude oil, either dissolved in the oil or as a free gas cap above the oil reservoir. It is a byproduct of crude oil extraction.
ii. Downstream Activities:
Downstream activities involve the refining, marketing, and distribution of petroleum products derived from crude oil and natural gas. This includes processes like fuel production, petrochemicals, and retail sales.
b. Computation for Bivenette Petroleum Company Ltd:
Step 1: Total Revenue
| Details | Amount (₦’000) |
|---|---|
| Value of oil exported | 1,030,000 |
| Domestic sales | 842,000 |
| Chargeable gas sales | 603,000 |
| Other income | 425,000 |
| Total Revenue | 2,900,000 |
Step 2: Allowable Deductions
| Details | Amount (₦’000) |
|---|---|
| Operating costs (adjusted)* | 1,083,000 |
| Intangible costs | 142,800 |
| Royalties on export sales | 125,000 |
| Royalties on local sales | 96,500 |
| Non-productive rent | 102,000 |
| Exploration incentives | 313,500 |
| Rental | 101,200 |
| Administrative expenses | 265,000 |
| Interest (adjusted)** | 86,000 |
| Total Allowable Deductions | 2,315,000 |
Notes:
- *Adjusted operating costs exclude ₦302,000 paid for information on oil prospecting in Adamawa, as it is capital in nature.
- **Adjusted interest excludes ₦12,000 paid to an affiliated company, as it is disallowed.
Step 3: Assessable Profit
| Details | Amount (₦’000) |
|---|---|
| Total Revenue | 2,900,000 |
| Less: Total Allowable Deductions | (2,315,000) |
| Assessable Profit | 585,000 |
Step 4: Chargeable Profit
| Details | Amount (₦’000) |
|---|---|
| Assessable Profit | 585,000 |
| Less: Capital Allowances | (253,750) |
| Less: Investment Allowance | (173,000) |
| Chargeable Profit | 158,250 |
Step 5: Assessable Tax and Chargeable Tax
| Details | Amount (₦’000) |
|---|---|
| Chargeable Profit | 158,250 |
| Petroleum Profits Tax Rate | 85% |
| Chargeable Tax | 134,512.5 |
Final Results:
- Assessable Profit: ₦585,000
- Chargeable Profit: ₦158,250
- Assessable Tax: Not Applicable
- Chargeable Tax: ₦134,512.5
- Topic: Petroleum Profits Tax (PPT)
- Series: NOV 2016
- Uploader: Dotse