- 20 Marks
AT – May2024 – PL – SB – Q2 – Petroleum Profits Tax
Compute hydrocarbon tax for 2023 and advise on tax implications of investing in deep offshore areas for a petroleum company.
Question
New Rain Petroleum Company Limited has been operating in the onshore and shallow water areas of the Niger Delta region for over fifteen years. The company was granted a petroleum mining lease licence in January 2021. In its bid to improve profitability, the company‟s management intends to apply for licence to operate in the deep sea area as from 2025. The decision of the management is expected to be laid before the members of the company at the 2023 annual general meeting, which comes up in the second half of 2024.
The following was extracted from the book of accounts of the company for the year ended December 31, 2023:
| Income: | N‟ million | N‟ million |
|---|---|---|
| Fiscal value of crude oil sold (note 1) | 191,100 | |
| Value of condensate from associated gas sold (note 1) | 84,474 | |
| Value of natural gas liquid from associated gas sold (note 1) | 55,328 | |
| Other incidental income | 151 | |
| Realised exchange gain | 38 | |
| Gross total income | 331,091 | |
| Expenses/deductions: | ||
| Royalty incurred and paid | 86,200 | |
| First exploration wells cost | 6,800 | |
| First two appraisal wells costs | 18,700 | |
| Joint cost- terminalling | 12,000 | |
| Gas reinjection wells cost | 3,420 | |
| Salaries and wages | 9,300 | |
| Power cost | 1,650 | |
| NDDC charge | 125 | |
| Concessional rentals | 60,430 | |
| Depreciation of assets | 13,860 | |
| Allowance for doubtful debts (note 3) | 2,400 | |
| Host community trust fund contribution | 4,800 | |
| Stamp duty | 16 | |
| Staff welfare | 350 | |
| Travelling | 180 | |
| Donations and subscription (note 4) | 6 | |
| Decommissioning and abandonment | 1,300 | |
| Environment remediation fund contribution | 1,250 | |
| General expenses (note 5) | 500 | |
| Finance costs | 1,750 | 225,037 |
| Net profit | 106,054 |
The following additional information was also provided:
(i) Data on crude oil; condensate from associated gas sold; and natural gas liquid from associated gas sold;
| Category | Quantity (million barrels) | Actual price USD | Fiscal price USD |
|---|---|---|---|
| Crude oil | 5.25 | 70 | 72 |
| Condensate from associated gas | 3.61 | 45 | 44 |
| Natural gas liquid from associated gas | 2.80 | 38 | 40 |
(ii) Omitted from the records was a balancing charge of N1, 500,000 made from disposal of an old oil equipment platform;
(iii) Allowance for doubtful debts:
| N‟ million | |
|---|---|
| Specific provisions | 900 |
| General provisions | 1,500 |
| 2,400 |
(iv) Donations and subscription:
| N‟ million | |
|---|---|
| Recognised orphanage homes | 3.0 |
| Host community‟s cultural group | 2.0 |
| Subscription to oil and gas association | 1.0 |
| 6.0 |
(v) General expenses:
| N‟ million | |
|---|---|
| Penalty for gas flare | 250 |
| Printing of stationery items | 140 |
| State government levy | 110 |
| 500 |
(vi) Agreed capital allowances:
| N‟ million | |
|---|---|
| Brought forward | 167 |
| For the year | 2,105 |
| 2,272 |
(vii) Production allowance:
| N‟ million | |
|---|---|
| Onshore operations | 900 |
| Shallow water operation | 1,700 |
| 2,600 |
(viii) The exchange rate averaged N520 to 1 USD during the year; and
(ix) Assume the tax liabilities are to be paid in domestic (Naira) currency.
Required:
As the company’s Tax Manager, you are to advise the management, in accordance with the provisions of Petroleum Industry Act 2021, on:
a. Hydrocarbon tax payable in the relevant assessment year (18 Marks)
b. The tax implications, if the company decides to involve or invest in deep offshore areas
(2 Marks)
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