For some time now, there has been some controversy on whether the contractors under a Production Sharing Contract (PSC) in Nigeria should be entitled to Tertiary Education Tax (TET) receipt. This controversy is naturally following from a view held by some, that such contractors do not pay TET.
This article is in 3 sections. The first section looks at the background to the controversy. The second section reviews some provisions of the tax laws that are relevant in the determination of whether such contractors legitimately pay TAT. The final part is the concluding remarks.
The Petroleum Act of 1969 places the entire ownership and control of all oil and gas in place within any land in Nigeria, under its territorial waters and continental shelf, in the state of Nigeria. The Nigerian National Petroleum Corporation (NNPC) manages the petroleum assets on behalf of the federation.
Prior to the advent of PSCs in 1993, Joint Venture (JV) arrangements were the model used for most petroleum exploration and production operations in Nigeria, and they continue to be used today. Each party to the JV is responsible for preparing and filing its PPT returns with the Federal Inland Revenue Service (FIRS) based on the proceeds from its share of the petroleum produced as well as its share of the cost of production (both capital and recurrent costs). The PPT rate for companies engaged in JV operations is 85 per cent.
The PSC arrangements that are the subject of the present controversy, were introduced from 1993. It is generally recognised that the terms of the PSCs were deliberately structured to provide a more favourable fiscal regime than applied under the JV arrangements. This was in recognition of the fact that, in 1993, the Deep Offshore was regarded as a “frontier area”, in which exploration and production would require far greater capital expenditure and would involve a far greater degree of risk than in other, less technically challenging Nigerian oil fields. The more favourable fiscal regime applicable to the PSCs include a lower rate of PPT (50% instead of the generally applicable rate of 85%), Investment Tax Credit or Allowance at 50% (instead of the extant lower rates of between 5% and 20%), and lower royalty rates than apply in the taxation of other non-PSC operations.
The commencement of production from the deep offshore regions governed by the PSCs heralded several disputes between NNPC, which represented the country in the PSCs and the contractors, on the interpretation of the provisions of the PSC.
The challenges ranged from the entitlement of the contractors to investment tax credit, to whether the contractors are even tax payers and entitled to petroleum profits tax receipts.
This was unfortunately not helped by the FIRS, which took the position that it should support the views of the NNPC (as a sister agency of the Federal Government) even in the face of overwhelming evidence in Nigerian tax laws to the contrary.
Most of the issues were eventually resolved in favour of the contractors. But the question of the entitlement of the contractors to TET receipts has unfortunately, not gone away.
To be fair, this is not a position being pushed by the NNPC. Rather, it was one arrived at by the FIRS all by itself, from the early days of the controversy when it held the view that the PSC contractors were not engaged in petroleum operations and were therefore not entitled to PPT receipt and TET receipt in their names.
While it now accepts that the PSC contractors are indeed engaged in petroleum operations and are entitled to PPT receipts in their names (thanks to the very unambiguous provision in the Deep Offshore and Inland Basin Production Sharing Contracts Act to that effect), it has continued to maintain that the PSC contractors are not entitled to TET receipts. The reasons given by the FIRS for this position are:
1. If PSC contractors were entitled to TET receipts, the Deep Offshore And Inland Basin Production Sharing Contracts Act would have specifically provided for it, just as it did for PPT receipts; and
2. The TET paid by the contractors is reimbursed by NNPC and is therefore not their cost, but that of NNPC.
To address the above, it is pertinent to set out the provisions of some laws that are relevant to the discussion.
The two keys laws of relevance are the Deep Offshore and Inland Basin Production Sharing Contracts Act and the Tertiary Education Trust Fund (Establishment, etc.) Act.
Deep Offshore and Inland Basin PSC Act
The Deep Offshore and Inland Basin Production Sharing Contracts Act (DOIBPSCA) provided some modification to the taxation of both Contractors and the Corporation (or Holder) under the Petroleum Profits Tax (PPT) Act – the primary legislation for the taxation of companies engaged in petroleum operations.
Section 3 of the DOIBPSCA titled “Determination of Petroleum Profits Tax” provides as follows:
1. The Petroleum Profits Tax payable under a Production Sharing Contract shall be determined in accordance with the Petroleum Profits Tax Act as amended: Provided that the Petroleum Profits Tax applicable to the contract area as defined in the Production Sharing Contracts shall be 50 per cent flat rate of chargeable profits for the duration of the Production Sharing Contracts.
2. Nothing contained in this Act shall be construed as having exempted the Contractors from the payment of any other taxes, duties or levies imposed by any Federal, State or Local Government, or Area Council Authority.
Section 12 of the Act further provides for the chargeable tax on petroleum operations in the contract area under the PSC to be shared between Corporation and the Contractor in the same profit sharing ratio as the split of profit oil as defined in the PSC between them.
Tertiary Education Trust Fund Act
Section 1(2) of the Tertiary Education Trust Fund (Establishment, etc.) Act (TET Act) imposes the tax (tertiary education tax) on the assessable profit of a company registered in Nigeria. Section 1(4) of the TET Act further provides that all companies chargeable to tax under the Petroleum Profits Tax Act shall be liable to pay the full extent of the tax imposed under this Act.
Section 2(1)(a) of the TET Act further requires the FIRS to, ‘… when assessing a company, for… petroleum profit tax for an accounting period of the company, also proceed to assess the company for the tax due under this Act’.
The Contractors in the PSCs are companies registered in Nigeria. Further, they are companies engaged in petroleum operations and therefore liable to PPT. The Contractors, by virtue of sections 1(2) and 1(4) of the TET Act, are therefore fully subject to the payment of TET. Neither are they provided any exemption by the DOIBPSCA, as any such perceived exemption is thrown out by virtue of section 3(2) of the said Act.
As the body responsible for ensuring that companies comply with the provisions of tax laws in Nigeria, the position of the FIRS with respect to entitlement of PSC Contractors to TET receipt is confusing. If it is of the view that the Contractors are not paying TET, why has it not prosecuted them, as they have no basis under any law not to do so? If on the other hand, it agrees they are paying TET, why has it refused to issue receipts to them?
Please note that there is no provision in the PPTA nor in the TET Act that imposes tax on contract area; the taxes are imposed on companies. This fact is buttressed by section 12 of the DOIBPSCA which provides for the chargeable tax in the Contract Area under a PSC to be allocated to the Corporation and Contractor (all companies) in the same ratio as split of Profit Oil. This provision is further replicated in Section 22 (4) of the PPTA. And as already highlighted above, TET Act imposes the tax on companies registered in Nigeria and on companies chargeable to tax under the PPT Act (sections 1(2) and 1(4) respectively).
Now let us examine the reasons given by the FIRS for not issuing TET receipts to PSC Contractors. The first reason is that the DOIBPSCA did not specifically provide for TET receipts to be split between NNPC and the Contractors, just as it did for PPT receipts. It is perhaps worth emphasizing that the fiscal terms of the PSCs which the DOIBPSCA sought to codify relate mainly to PPT. It did not address all other taxes, duties, levies etc. that the contractors would be liable to, by virtue of their operations in Nigeria. This is indeed the reason why the DOIBPSCA, in section 3(2) clearly provided that “Nothing contained in this Act shall be construed as having exempted the Contractors from the payment of any other taxes, duties or levies imposed by any Federal, State or Local Government, or Area Council Authority”. The DOIBPSCA cannot therefore, be the reason for not issuing TET receipts to PSC contractors, if the FIRS accepts that they are liable to the tax and have indeed paid the tax. If anything, the DOIBPSCA provision on how the PPT receipt should be issued ought to be seen as a guide to how the TET receipt should be issued.
The second argument that the TET paid by the contractors have been reimbursed and is therefore not their cost, is also not tenable. The so-called reimbursement of costs (including TET) provided in the PSCs is simply an acknowledgement that since the contractor has paid all the costs, they (i.e. the costs) have to be taken out (“reimbursed”) before determining the amount of profits to be shared by the parties in the ratio defined in the PSC. Just like in any other business, the costs incurred in running the business are first recovered, to determine the profit on which taxes are to be paid. It is this same profit that is shared with NNPC after all appropriate taxes (including TET) have been paid. There is no other “reimbursement of cost” made by NNPC to the Contractor, contrary to the view held by some officials of the FIRS. A simple modelling will show that had the TET not been paid, the profit share of the contractors would have been higher by the amount of their share of the TET. In effect, they have borne their profit percentage of the TET paid. The receipt should be issued accordingly.
It is instructive to note that unlike PPT and royalty that are mandated to be paid by the Corporation through tax and royalty oil liftings, the Contractors pay the TET directly to the FIRS. Therefore, if any one party is to be issued a receipt for the payment of TET, it should be the Contractors. This is however not what is being proposed in this article, as the payment is made on behalf of all the parties to the PSC.
The current practice of the FIRS in issuing the TET receipts in the name of the contract area is of no good. The “contract area” is not a taxable person. Rather, the parties to the PSC covering that contract area are the taxable persons. And if it (FIRS) needs a law to back up this position, it need look no further than the TET Act itself. Section 2(1)(a) of the TET Act requires the FIRS to, ‘… when assessing a company, for… petroleum profit tax for an accounting period of the company, also proceed to assess the company for the tax due under this Act’. This section is clear that it is companies (not contract areas) that are assessed to TET. It also provides for the assessment for TET to follow that of PPT. If the FIRS accepts that PPT should be assessed on companies and not on contract areas, it should have no difficulty doing the same for TET.
The FIRS, as a key agency of government, needs to align its activities to support the current drive to improve the ease of doing business in Nigeria. So much time and effort has been expended on the simple matter of issuing TET receipts to the legitimate taxpayers. And when you recognize that issuing receipts to the PSC Contractors does not reduce by even a kobo, the amount of the TET (or PPT for that matter) that is paid, you begin to wonder whose cause the FIRS is protecting.
If we are saying to the world that we are open for business, the best advertisement will be how we treat those who are already doing business here. We should not let little things like issuing TET receipts in the names of legitimate taxpayers get in the way.
Onyenkpa is the Chief Operating Officer at KPMG Nigeria