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)

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.