Implications of the Finance Act 2019 on Petroleum Profit Tax in the Oil and Gas Industry
Oil serves as a major source of foreign exchange and income for countries with crude oil as one of their major natural resources. The economies of oil play important roles in the shaping of economic, political and foreign policies of nations. The Organization of Petroleum Exporting Countries (OPEC) constitutes a powerful bloc in oil and energy sector of world economy.
Petroleum taxation is a direct tax, levied annually on net profit of a petroleum tax payer, who is carrying on the business of petroleum exploration and production and Petroleum Profits Tax (PPT) applies to the upstream operations in the industry. It particularly relates to rents, royalties, margins and profit-sharing elements associated with oil mining, prospecting and exploration leases. It is the most important tax in Nigeria in terms of its share of total revenue contributing 90 and 70 percent of foreign exchange earnings and government revenue, respectively.
It became an issue of controversy when the Finance Act of 2019 and passed into law by the President of the Federal Republic of Nigeria completely deleted Section 60 of the Petroleum Profit Tax Act which prohibited taxation of dividends paid out of any profits of petroleum operation in the upstream sector. In light of the general perception on double taxation and withholding taxes (hereinafter refers to as WHT), the question of whether the subjection of dividends on to WHT is a form of double taxation will be answered in this paper.
The effect of the Finance Act 2019 on the petroleum profit tax (now subject to withholding tax
The Petroleum Profit Tax is regulated by the Petroleum Profit Tax Act where Section 8 states that “every industry engaged in petroleum operations is under an obligation to render return, together with properly annual audited accounts and computations, within a specified time after the end of its accounting period”. Thus, Petroleum profit tax involves the charging of tax on the incomes accruing from petroleum operations. The Finance Act 2019 set to raise the revenue raised from the oil and gas industry; dividends paid out of petroleum profits are subject to a 10% withholding tax.
Notably; the provision of Section 24 of the Finance Act 2019 provides as follows:
“Section 60 of the Petroleum Profit Tax Act is deleted.”
For ease of proper reference of the above cited section, Section 60 of the Petroleum Profit Tax Act, 2014 provides:
“No tax shall be charged under the provisions of the Personal Income Tax Act or any other Act in respect of any income or dividends paid out of any profits which are taken into account, under the provisions of this Act, in the calculation of the amount of any chargeable profits upon which tax is charged, assessed and paid under the provisions of this Act.”
The provision of Section 60 of the Petroleum Profit Tax Act (PPTA) exempts dividends paid out of petroleum profits from further tax in recognition of the relatively higher corporate income tax rate on petroleum operations, of which is also supported by section 43 of Company Income Tax Act.
On the other hand, a withholding tax (WHT) is an advance and indirect source of taxation deducted at the source from the invoices of the tax payers. The crux of the enactment is to fully capture all tax evaders through their personal invoice on all commercial transaction. A community perusal of the above begs for the question of whether the payment of any advance tax under the WHT that was settled under the PPTA would amount to double taxation.
Withholding Tax on Paid Dividends: A Double Taxation Strategy?
The concept of Withholding tax is treated as a payment on account of the recipient’s final tax liability, when the withholding is made in advance. It may be refunded if it is determined that when a tax return is filed, the recipient’s tax liability to the government which received the withholding tax is less than the tax withheld or additional tax may be due if it is determined that the recipient’s tax liability is more than the withholding tax.
The act of taxing individual shareholders on the paid-out dividends, and also taxing the corporate entity can validly be taken as double taxation. Double taxation occurs when income tax is paid twice on the same source of income. It can occur when income is taxed at both the corporate and individual levels. Double taxation operates in the slight sense that corporations are considered as separate legal entities from their shareholder. Corporate bodies pay 30% tax on their annual profits and when paying out dividends to shareholders, the dividends also incur income-tax liabilities for the shareholders who receive them. In the oil and gas industry (downstream operations), the repealing of Section 60 of the Petroleum Profit Tax Act by the Finance Act 2019, has really created a loophole in the taxation sphere of the industry. Thus, it is the same forum that pays the double taxation in two different ways.
Deletion of Section 60 of the Petroleum Profit Tax Act: My position
Although, the contributions of the petroleum industry to the growth and development of the Nigerian economy can be enumerated in terms of the industry’s impacts on the economic variables responsible for economic growth in Nigeria. The contributions of petroleum industry can also be analyzed in terms of its share of revenue generation in the Nigerian economy. The petroleum industry has contributed immensely in both foreign exchange reserves and government revenues.
The enactment of the Finance Act 2019 was geared towards a good tune of the Nigeria economy, invariably touching every sector and majorly to end tax multiplicity, with a huge thrust to increase revenue to the federal government. The legal defense and justification of the double taxation will be that; the corporate and individual shareholders are different entity based on their mode of function; however, this should not have been at the expense of companies paid dividends. The aim of the deletion of section 60 of Petroleum Profit Tax Act; the question, is who bears the ultimate burden of the tax under the law?
Thus, in as much as the Finance Act 2019 consolidates the tax system in Nigeria, it is sad that there exists, a technical form of double taxation that exist under the Act. I posit that there should be a very transparent system in the mode of operation in the administration of tax under the Withholding tax, to eliminate the doubt of technical form of double taxation. Thus, the mode of withholding tax is rough to be implemented on petroleum profit tax. Truly, the Finance Act 2019 is the best of its kind, as it tries to evaluate and shift the revenue generation in Nigeria to more of tax rather than from crude oil. However, the deletions of the section 60 of the Petroleum Profit Tax Act remain a scratch on the law. Succinctly, it would be left for each company to devise means of reducing their exposure to double taxation; this could be achieved through tax and legal advice on the proper structure of their tax leverage.
Badmus Sherifdeen Oluwagbenga is a 500 Level Student, Faculty of Law, Lagos State University. He can be reached at Badmussherifdeen@gmail.com