- 20 Marks
Question
| Dandy Producing Company Limited operates in both onshore and offshore in the riverine areas in Nigeria. It has been in the oil prospecting business for many years. |
The company applied for and was granted a petroleum prospecting licence (PPL) on January 1, 2023 after studying the provisions of the Petroleum Industry Act, 2021.
The company’s financial records for the year ended December 31, 2023 are as follows:
| Revenue earned: | N’million | N’million |
|---|---|---|
| Value of crude oil sold | 486,000 | |
| Value of condensate from associated gas sold | 128,000 | |
| Value of natural gas liquid from associated gas sold | 112,500 | |
| Income from refinery operations | 25,100 | |
| Gross revenue | 751,600 |
| Expenses deducted: | ||
|---|---|---|
| Production cost | 330,400 | |
| Cost of gas reinjection wells | 1,600 | |
| Drilling cost incurred | 6,650 | |
| Depreciation of plant, machinery and fixtures | 2,010 | |
| Decommissioning and abandonment cost | 2,500 | |
| Repairs and maintenance | 4,200 | |
| Royalty cost incurred and paid | 171,500 | |
| Niger Delta Development Commission charge | 340 | |
| Finance cost and bank charges | 615 | |
| Terminaling cost | 2,345 | |
| Donations to approved charity homes | 195 | |
| Concession rentals | 74,110 | |
| Host community fund | 23,200 | |
| Local government municipal levy | 250 | |
| Environmental remediation fund | 2,800 | |
| Cost incurred in seeking information for oil deposits | 540 | 623,255 |
| Net profit | 128,345 |
Additional information made available:
(i) Losses brought forward from previous year was N380 million.
(ii) Repairs and maintenance:
| N’million | |
|---|---|
| Repairs of plant and machinery | 970 |
| Repairs or alteration of production utensils | 3,230 |
| 4,200 |
(iii) Drilling cost incurred comprised:
| N’million | |
|---|---|
| Tangible drilling cost for first exploration well | 3,990 |
| Drilling of the first two appraisal wells | 2,660 |
| 6,650 |
(iv) Production allowance after commencement of the Petroleum Industry Act, 2021 amounted to N6,401 million.
(v) Capital allowances computed and agreed:
| N’million | |
|---|---|
| – For the current year | 2,750 |
| – Unrecouped brought forward | 1,350 |
| 4,100 |
(vi) Exchange rate agreed with the CBN was N752 to a USD ($).
Required: As a newly qualified accountant just appointed by the company as its Tax Consultant, compute hydrocarbon tax in line with the provisions of Petroleum Industry Act, 2021.
Answer
Dandy Producing Company Limited
Computation of hydrocarbon tax
For 2023 assessment year
| N’million | N’million | |
|---|---|---|
| Revenue | ||
| Value of crude oil sold | 486,000 | |
| Value of condensate from associated gas sold | 128,000 | |
| Value of natural gas liquid from associated gas | 112,500 | |
| Gross revenue | 726,500 | |
| Balancing charge | Nil | |
| Total income | 726,500 | |
| Allowed deductions (Section 263) | ||
| Production cost | 330,400 | |
| Cost of gas reinjection wells | 1,600 | |
| Drilling cost | 6,650 | |
| Decommissioning and abandonment | 2.500 | |
| Repairs and maintenance | 4,200 | |
| Royalties cost incurred and paid | 171,500 | |
| NDDC charge | 340 | |
| Terminaling cost | 2,345 | |
| Concession rentals | 74,110 | |
| Host community fund | 23,200 | |
| Local government municipal levy | 250 | |
| Environmental remediation fund | 2,800 | |
| Total allowable deductions (S.263) | 619,895 | (619,895) |
| Total costs subject to CPR limit (W1) | 623,995 | |
| Excess allowable cost carried forward | NIL | |
| Adjusted profit | 106,605 | |
| Less: Loss relief | (380) | |
| Assessable profit | 106,225 | |
| Less: Section 266 and 6th schedule deductions | ||
| Capital allowance for the year | 2,750 | |
| Unrecouped b/f | 1,350 | (4,100) |
| 102,125 | ||
| Less: production allowance | (6,401) | |
| chargeable profit | 95,724 | |
| Hydrocarbon tax@15% od N95,724 | 14,358.6 |
Workings
- Cost –price –ratio (CPR) limit
| N’ million | N’million | |
|---|---|---|
| a. Gross revenue | 726,500 | |
| I Maximun allowable @65% on gross revenue of N726,500 | 472,225 | |
| Total operating cost | 619,895 | |
| Capital allowances | 4,100 | |
| b. Total eligible costs | 623,995 | |
| Less: Exempted cost incurred [(section 263 (1)] | ||
| Royalties paid | 171,500 | |
| NDDC Charge | 340 | |
| Concession rentals | 74,110 | |
| Host community fund | 23,200 | |
| Environmental remediation fund | 2,800 | |
| ci. Total exempted cost | (271,950) | |
| ii =B-C1=Net total costs to be subject to CPR | 352,045 | |
| C2 Maximum allowable cost is the lower of (i) and (ii) Which is N352,045 million | ||
| D. Total allowable cost ( in line with the Practice of FIRS) =C1+C2 ( that is , Exempted cost +CPR restricted cost) =N271,950 million + N352, 045 million =N623,995 million |
Note: We sincerely believe that capital allowances should not have been added to total operating cost in determining the total eligible costs in the computation of CPR limit. But in this situation, we adhered strictly to the format of FIRS, being the Federal tax administration.
Henceforth, candidates are advised to adhered to this format (FIRS circular), pending any subsequent review of the same.
- Uploader: Samuel Duah