- 20 Marks
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)
Answer
a.
New Rain Petroleum Company Limited Computation of hydrocarbon tax For the year ended December 31, 2023
N‟ million | N‟ million | |
---|---|---|
Income/Revenue: | ||
Value of crude oil sold (5.25m barrels x $72 x N520) | 196,560 | |
Value of condensate from associated gas sold (3.61m barrels x $45 x N520) | 84,474 | |
Value of natural gas liquid from associated gas sold (2.8m barrels x $40 x N520) | 58,240 | |
Gross revenue | 339,274 | |
Balancing charge | 1.5 | |
Total gross income | 339,275.5 | |
Allowable deductions (Section 263): | ||
Royalty incurred and paid | 86,200 | |
First exploration wells cost | 6,800 | |
First two appraisal wells cost | 18,700 | |
Joint cost-terminalling | 12,000 | |
Gas reinjection wells cost | 3,420 | |
NDDC charge | 125 | |
Concessional rents | 60,430 | |
Host community trust fund contribution | 4,800 | |
Stamp duty | 16 | |
Decommissioning and abandonment | 1,300 | |
Environment remediation fund contribution | 1,250 | |
General expenses- State government levy | 110 | |
Total allowable costs | 195,151 | |
Total costs subject to CPR limit (W1) | (44,618) | (44,618) |
Excess allowable cost carried forward | 150,533 | |
Adjusted profit | 294,657.5 | |
Less: Loss relief | Nil | |
Assessable profit | 294,657.5 | |
Less: Section 66 and 6th Schedule deduction | ||
Capital allowances: | ||
Brought forward | 167 | |
For the year | 2,105 | 2,272 |
292,385.5 | ||
Less: Production allowances: | ||
Onshore operations | 900 | |
Shallow water operations | 1,700 | 2,600 |
Chargeable profit | 289,785.5 | |
Hydrocarbon tax @ 30% of N289,785.5 | 86,935.65 |
Workings 1: Cost-profit-ratio (CPR)
N‟ million | N‟ million | |
---|---|---|
Gross revenue | 339,274 | |
(i) Maximum allowable @ 65% of gross revenue | 220,528.10 | |
Total operating cost | 195,151 | |
Capital allowances | 2,272 | |
Total eligible costs | 197,423 | |
Less: Exempted cost incurred (Section 263): | ||
Royalty paid | 86,200 | |
NDDC charge | 125 | |
Concessional rentals | 60,430 | |
Host community fund | 4,800 | |
Environment remediation fund | 1,250 | 152,805 |
(ii) Net total costs to be subject to CPR | 44,618 |
Maximum allowable cost is the lower of (i) and (ii), which is N44,618 million.
b.
The tax implications on the profit/activities of the company, if it invests in deep offshore areas are:
(i) Hydrocarbon tax will not apply to companies with investments in the deep offshore areas; and
(ii) The company will need to incorporate a separate company to take care of the deep offshore activities. This means that onshore/shallow water operations cannot be merged with deep offshore activities.
- Topic: Petroleum Profits Tax (PPT), Taxation of Specialized Businesses
- Series: MAY 2024
- Uploader: Samuel Duah