Module 5 Transcripts.docx

Slide No. Slide Title What is heard (voice-over and sound effects) On-Screen Text/ Illustrations Developer Notes 1 Module Objectives In this module, we will continue our examination of the main provisions of the recently enacted Petroleum Industry Act (PIA) by studying the new fiscal regime, its applicability and comparing it to the old Petroleum Profits Tax Act (PPTA). Outline the fiscal options available. Describe the applicability of the new fiscal regime. Distinguish between the old PPTA fiscal terms and the new PIA fiscal terms. Visual description or sketch: Make sure the words on the screen sync with the audio. OST: All text in yellow should be on the screen and be animated to appear one after the other Audio: All text 2 Outline We will discuss the following in this module: Introduction Objectives and Administration of the new Fiscal Framework The New Tax Regimes with focus on Hydrocarbon tax (HT), Company Income Tax (CIT), and Royalties. Other Key Fiscal Provisions Lastly, we will discuss the Highlights of the Changes from the Petroleum Profit Tax Act (PPTA) to the Petroleum Industry Act (PIA) Course Outline Introduction Objectives of the new Fiscal Framework Administration of the Fiscal Framework The New Tax Regimes (HT, CIT, Royalties) Other Key Fiscal Provisions Highlights of the Changes from the PPTA to PIA Visual description or sketch: Make sure the words on the screen sync with the audio. OST: All text in yellow should be on the screen and be animated to appear one after the other Audio: All text 3 Introduction The PIA's enactment altered the administration of taxes and the payment of fees and levies in the Nigerian Petroleum Industry to encourage investment. The new PIA fiscal framework repeals the sector's prior fiscal regime, including the Petroleum Profits Tax Act (PPTA) and established institutions responsible for administering and collecting taxes and levies, rate changes, defined acceptable and non-allowable tax deductions, and so on. The fiscal and tax amendments in the PIA will apply when: existing Oil Prospecting Licences (OPLs) and Oil Mining Leases (OMLs) are converted to Petroleum Prospecting Licences (PPLs) and Petroleum Mining Licences (PMLs); and existing Oil Mining Leases (OMLs) are converted to Petroleum Prospecting Leases (PPLs) (PMLs) non-converted licenses are revoked or expired; and OMLs are renewed. As a result, holders of OPLs and OMLs who do not convert to PMLs will continue to be taxed under the previous PPT Act until their licenses expire. Chapter 4 of the Act details the fiscal reforms in the Petroleum Industry Act (PIA). Click next, and let's delve into the course. The PIA's enactment altered the administration of taxes and the payment of fees and levies in the petroleum Industry. Repealed enactments & regulations: Associated Gas Reinjection Act 1979 Hydrocarbon Oil Refineries Act 1965 Motor Spirits (Returns) Act 2004 Nigerian National Petroleum Corporation (Projects) Act 1993 Nigerian National Petroleum Corporation Act (NNPC) 1977 Petroleum Products Pricing Regulatory Agency (Establishment) 2003 Petroleum Profit Tax Act 2004 Deep Offshore and Inland Basin Production Sharing Contract Act 2019 Applies when: existing OPLs and OMLs are converted to PPLs and PMLs. existing OMLs are converted to PPLs/PMLs non-converted licenses are revoked or expired; and OMLs are renewed. Visual description or sketch: Make sure the words on the screen sync with the audio. OST: All text in yellow should be on the screen and be animated to appear one after the other All red text in highlighted yellow should be represented in images and text Audio: All text 4. Objectives The Petroleum Industry Fiscal Framework, described in Chapter 4 of the ACT, aims to accomplish the following: To provide a forward-thinking fiscal structure that promotes investment in Nigeria's petroleum sector, balancing rewards with risk and increasing the Federal Government's revenues. to offer a forward-looking fiscal framework based on fundamental principles of clarity, dynamism, and fiscal rules of general application; to establish a fiscal framework that increases the FG's revenue base while ensuring fair returns for investors; to simplify the administration of petroleum tax; and to promote equity and transparency in the petroleum industry fiscal regime. To create a forward-thinking fiscal structure that promotes investment in the Nigerian petroleum sector To offer a forward-looking fiscal framework founded on the fundamental values of clarity, dynamism, and fiscal regulations To construct a fiscal structure that increases the FG's revenue base while ensuring a fair return for investors. To simplify petroleum tax administration; To encourage fairness and openness in the fiscal system for the petroleum industry Visual description or sketch: Make sure the words on the screen sync with the audio. OST: All text in yellow should be on the screen and be animated to appear one after the other All red text in highlighted yellow should be represented in images and text Audio: All text 5. Administration The following organizations oversee administering and collecting taxes and other levies pursuant to the PIA: The Federal Inland Revenue Service (FIRS) The Commission The Authority FIRS: The Federal Inland Revenue Service (FIRS), is responsible for assessing and collecting the Hydrocarbon Tax, the Tertiary Education Tax, and the Companies Income Tax. We will delve into the Hydrocarbon Tax (HT) and Companies Income Tax (CIT) later in the course. The Commission: The Nigerian Upstream Petroleum Regulatory Commission (the Commission) is responsible for assessing and collecting royalties, signature bonuses, rents, production shares, profit sharing, or risk service provisions, as well as other related payments. The Authority: The Nigerian Midstream and Downstream Regulatory Authority (the Authority), is responsible for determining and collecting penalties on gas flaring resulting from midstream operations and its enforcement. Organizations oversee administering and collecting taxes and other levies pursuant to the PIA: The Federal Inland Revenue Service (FIRS) The Commission The Authority FIRS: The Federal Inland Revenue Service (FIRS), is responsible for assessing and collecting the Hydrocarbon Tax, the Tertiary Education Tax, and the Companies Income Tax. We will delve into the Hydrocarbon Tax (HT) and Companies Income Tax (CIT) later in the course. The Commission: The Nigerian Upstream Petroleum Regulatory Commission (the Commission) is responsible for assessing and collecting royalties, signature bonuses, rents, production shares profit sharing, or risk service provisions, as well as other related payments. The Authority: The Nigerian Midstream and Downstream Regulatory Authority (the Authority), is responsible for determining and collecting penalties on gas flaring resulting from midstream operations and its enforcement. Visual description or sketch: Make sure the words on the screen sync with the audio. OST: All text in yellow should be on the screen and be animated to appear one after the other All red text in highlighted yellow should be represented in images and text Audio: All text The New Fiscal Regime 6 Taxation regime The PIA established a dual income tax system that consists of the Hydrocarbon Tax (HT) and the Companies Income Tax (CIT) which shall apply to upstream petroleum operations. This new tax regime replaces the existing Petroleum Profits Tax (PPT), which previously exempted the Companies Income Tax (CIT). Click on each tax system to learn more. Hydrocarbon Tax (HT) Companies Income Tax (CIT) Create a good animation for the two types of taxes. 6.1 Hydrocarbon Tax (HT) 6.1.1 Hydrocarbon Tax (HT) The Hydrocarbon Tax (HT) is a new tax introduced by the Act that will be levied against companies engaged in upstream petroleum operations. The Hydrocarbon Tax applies to crude oil, field condensates, natural gas liquids derived from associated gas, and produced in the field upstream of the measurement points. It however excludes: Associated Natural gas, including Gaseous NGLs produced in the field and contained in the rich gas and non-associated natural gas, Condensates and NGLs from Non-associated gas in fields or gas processing plants, Condensates and NGLs from associated gas at gas processing plants, and frontier acreage and deep offshore. Costs that cannot be directly linked to production will not be eligible for a deduction because HT is a resource tax. Such expenses will, however, be deductible from corporate income taxes. This will significantly help to get the required investment. The Hydrocarbon Tax (HT) is a new tax introduced by the Act that will be levied against upstream oil and gas firms'. Applies to: Crude oil Condensates and Liquid Natural Gas Liquids (NGL) from associated gas field produced upstream of the measurement point Excludes: Associated Natural gas, including Gaseous NGLs produced in the field Condensates and NGLs from Non-associated gas in fields or gas processing plants, Condensates and NGLs from associated gas at gas processing plants Frontier acreage and deep offshore Costs that cannot be directly linked to production will be excluded from HT. However, such expenses will be deductible from corporate income taxes. Glossary The downstream of the flow station is referred to as the measurement point. Visual description or sketch: Make sure the words on the screen sync with the audio. OST: All text in yellow should be on the screen and be animated to appear one after the other All red text in highlighted yellow should be represented in images and text Audio: All text 6.1.2 HT Rates In calculating the HT, the amount eligible for deduction in a given accounting period is subject to a Cost Ratio limit of 65% of the measurement point's gross revenue. When mandatory deductions are not made during an accounting year, they may be reported to the FIRS within five months after the end of the accounting year, or as extended by the FIRS, and deducted in the subsequent accounting year. Hydrocarbon Tax (HT) is payable in installments and must be assessed, computed, and paid in USD. The Act classifies taxable tax on HT into two (2) categories, namely: Profit on crude oil for Petroleum Mining Leases (PML) in onshore and shallow water basins, which accounts for 30% of lessee profit; and Profit on crude oil for Petroleum Prospecting Licence (PPL) in onshore and shallow water basins, which accounts for 15% of the licensee's profit. The HT are not applicable to deep offshore projects to support exploration efforts in that region. When compared to similar countries, these rates seem reasonable and are lower than the prior Petroleum Profit Tax rates even with Company Income Tax (CIT) now applying. The amount eligible for deduction in a given accounting period is subject to a Cost Ratio limit of 65% of the measurement point's gross revenue. When deductions are not made, report to the FIRS within five months. Hydrocarbon Tax (HT) is payable in installments and must be paid in USD. Rates License Type Shallow waters and Onshore Deep offshore Converted PML 30% 0% Converted PPL 15% 0% To support exploration efforts in that region, the HT will not be applicable to deep offshore projects. Glossary Cost Price Ratio (CPR) OR Cost Ratio The Cost of Goods (COG) available divided by the retail value of the goods available. CPR = COG/ Average Inventory Value Visual description or sketch: Make sure the words on the screen sync with the audio. OST: All text in yellow should be on the screen and be animated to appear one after the other All red text in highlighted yellow should be represented in images and text Audio: All text 6.1.3 Ascertainment of crude oil revenue The PIA stipulates that a company's crude oil income in any accounting period is the value of all chargeable oil adjusted to measurement points based on the proceeds of all chargeable oil sold and chargeable oil disposed. The chargeable oil disposed of shall be valued based on the aggregate crude oil estimated for royalties for all fields. As a result, extraction, storage, and transportation expenses will no longer be deducted when calculating taxable income under the HT, as they are under the PPT regime. In addition, income related to petroleum operations would be exempt from taxation under HT. A company's crude oil income in any accounting period is the value of all chargeable oil adjusted to measurement points based on: - Proceeds of all chargeable oil sold by the company. - Value of all chargeable oil disposed by the company. Chargeable oil disposed of shall be valued based on the aggregate crude oil estimated for royalties for all fields. Visual description or sketch: Make sure the words on the screen sync with the audio. OST: All text in yellow should be on the screen and be animated to appear one after the other All red text in highlighted yellow should be represented in images and text Audio: All text 6.1.4 Allowable Deductions According to the PIA, to be tax-deductible, expenses must be totally, rationally, exclusively, and necessarily incurred. For hydrocarbon tax deduction purposes, a maximum Cost price ratio of 65% of gross revenue is set; any excess costs incurred may be carried forward. Allowable deductions include: Rents incurred under a petroleum mining lease or petroleum prospecting license Royalties Repair and maintenance expenses Drilling expenditure of the first exploration well and the first two appraisal wells in the same field Decommission and abandonment contributions to an approved fund by the Commission, provided the balance is subject to tax under PIA at the end of life of the field where the lessee receives the surplus. Statutory levies, stamp duties, and fees Costs of gas re-injection wells subject to ratification by the Commission Contribution to host communities development trusts and related sums Recoverable expense To be tax-deductible, expenses must be totally, rationally, exclusively, and necessarily incurred. For hydrocarbon tax deduction purposes, a maximum Cost price ratio of 65% of gross revenue is set; any excess costs incurred may be carried forward. Allowable deductions include: Rents incurred under a petroleum mining lease or petroleum prospecting license Royalties Repair and maintenance expenses Drilling expenditure of the first exploration well and the first two appraisal wells in the same field Decommission and abandonment contributions to an approved fund by the Commission, provided the balance is subject to tax under PIA at the end of life of the field where the lessee receives the surplus. Statutory levies, stamp duties, and fees Costs of gas re-injection wells subject to ratification by the Commission Contribution to host communities development trusts and related sums Recoverable expense Visual description or sketch: Make sure the words on the screen sync with the audio. OST: All text in yellow should be on the screen and be animated to appear one after the other All red text in highlighted yellow should be represented in images and text Audio: All text 6.1.5 Non-allowable Deductions The following costs are now added in the current list of non-allowable deductions when calculating the adjusted earnings of businesses engaged in upstream petroleum operations: Financial/bank charges, bad debts, interest on loans, arbitration and litigation costs Additional costs from tax gross-up clauses. Costs incurred outside of Nigeria, including head office, shared costs, research and development costs, and affiliate costs. Penalties and gas flare fees Costs for purchasing information on the existence and extent of petroleum deposits, except for geophysical, geological, and geochemical data and information. Production bonuses, signature bonuses for petroleum deposits, bonuses or renewal fees for petroleum mining lease Rent or repairs cost not incurred for operations. Income tax on profits tax or similar taxes Depreciation Payment to provident, savings, widows and orphans or other society All custom duties Financial/bank charges, bad debts, interest on loans, arbitration and litigation costs Additional costs from tax gross-up clauses. Costs incurred outside of Nigeria, including head office, shared costs, research and development costs, and affiliate costs. Penalties and gas flare fees Costs for purchasing information on the existence and extent of petroleum deposits, except for geophysical, geological, and geochemical data and information. Production bonuses, signature bonuses for petroleum deposits, bonuses or renewal fees for petroleum mining lease Rent or repairs cost not incurred for operations. Income tax on profits tax or similar taxes Depreciation Payment to provident, savings, widows and orphans or other society All custom duties Visual description or sketch: Make sure the words on the screen sync with the audio. OST: All text in yellow should be on the screen and be animated to appear one after the other All red text in highlighted yellow should be represented in images and text Audio: All text 6.1.6 Chargeable Profits and Capital Allowances Chargeable profits are computed as assessable profit, less capital allowances, production allowances, and annual allowances for the cost of acquiring petroleum rights. The changes to the chargeable profit and capital allowance computation, includes: Lifting of the restriction on capital allowance (CA) Deactivation of the petroleum investment allowance. Separation of acquisition costs of petroleum rights into the value of rights and the value of assets, such that the Company Income Tax capital allowance claimable on the value of rights is now 20% each year. For hydrocarbon tax purposes, the annual allowance on the fractional value of rights will be 20%, while the value of assets will be tax depreciated at 20% per year, subject to a 1% book retention. The other factors to consider when determining the chargeable tax are: If the chargeable tax computed in accordance with this Act is less than the chargeable tax for crude oil, the company will pay an additional tax equivalent to the difference. For exports, sales revenue is calculated by multiplying the quantity of barrels of crude oil measured at the measurement point by the fiscal oil price per barrel. Chargeable profits are computed as assessable profit, less capital allowances, production allowances, and annual allowances for the cost of acquiring petroleum rights. The changes to the chargeable profit and capital allowance computation, includes: Lifting of the restriction on capital allowance (CA) Deactivation of the petroleum investment allowance. Separation of acquisition costs of petroleum rights into the value of rights and the value of assets, such that the Company Income Tax capital allowance claimable on the value of rights is now 20% each year. For hydrocarbon tax purposes, the annual allowance on the fractional value of rights will be 20%, while the value of assets will be tax depreciated at 20% per year, subject to a 1% book retention. Visual description or sketch: Make sure the words on the screen sync with the audio. OST: All text in yellow should be on the screen and be animated to appear one after the other All red text in highlighted yellow should be represented in images and text Audio: All text 6.1.7 Production Allowance According to the Act, a company's crude oil production allowance per field for leases granted after the Act's implementation will be determined as follows: The production allowance for conversion contracts will be the lesser of $2.50 per barrel or 20% of the fiscal oil price. For onshore areas, the lower of $8 per barrel and 20% of fiscal oil price up to a cumulative maximum production of 50 million barrels from commencement of production, and the lower of $4 per barrel and 20% of fiscal oil price thereafter. For shallow waters, the lower of $8 per barrel and 20% of fiscal oil price up to a cumulative maximum production of 100 million barrels from commencement of production, and the lower of US$4 per barrel and 20% of fiscal oil price thereafter. Deep offshore and frontier, the lower of $8 per barrel and 20% of fiscal oil price up to a cumulative maximum production of 500 million barrels from commencement of production, and the lower of $4 per barrel and 20% of fiscal oil price thereafter. Other Considerations: The PIA does not include the petroleum investment allowance, investment tax credits (ITCs), and investment tax allowances (ITAs) that were available under the PPTA and/or deep offshore and inland basin production sharing contract act (DOIBPSCA). Any unused tax benefits would be forfeited upon the execution of a conversion contract. Government incentives were effectively redirected from capital investments to production by switching from investment allowances to production allowances. As a result, your financial advantages increase as you generate production. Production allowances are only useful for enterprises that are subject to the upstream HT and only apply to crude oil, field condensates, and Natural Gas Liquids (NGLs) generated from Associated Gas (AG) where in the deep offshore the production allowances only apply to Hydrocarbon Tax not Company Income Tax Field area / Terrain Applicable rate Onshore acreages lower of US$8 per barrel and 20% of fiscal oil price up to 50 million barrels from commencement of production lower of $4 per barrel and 20% of fiscal oil price thereafter. Shallow water acreages lower of $8 per barrel and 20% of fiscal oil price up to 100 million barrels from commencement of production lower of $4 per barrel and 20% of fiscal oil price thereafter. Deep offshore and frontier acreages lower of US$8 per barrel and 20% of fiscal oil price up to 500 million barrels from commencement of production lower of US$4 per barrel and 20% of fiscal oil price thereafter. Visual description or sketch: Make sure the words on the screen sync with the audio. OST: All text in yellow should be on the screen and be animated to appear one after the other All red text in highlighted yellow should be represented in images and text Audio: All text 6.1.8 Persons Chargeable Companies engaged in Upstream petroleum operations are generally subject to Hydrocarbon Tax charges and payments. Additionally, these individuals and businesses are also subject to hydrocarbon tax: Any individual or entity, excluding corporations and partnerships between corporations, that engages in and profits from upstream petroleum operations is subject to taxes and penalties. Organizations engaged in upstream petroleum operations as a Partnership, Joint Venture, or under any other arrangement. These companies will be charged proportionally to their respective equity stakes. Companies engaged in Upstream petroleum operations are subject to Hydrocarbon Tax charges and payments, Individuals and businesses are also subject to hydrocarbon tax Organizations engaged in upstream petroleum operations as a Partnership, Joint Venture, or under any other arrangement will be charged proportionally to their equity stakes. Visual description or sketch: Make sure the words on the screen sync with the audio. OST: All text in yellow should be on the screen and be animated to appear one after the other All red text in highlighted yellow should be represented in images and text Audio: All text 6.1.8 Applicable accounts and particulars The following details and documents are required for calculating hydrocarbon tax: statement of accounts computed actual adjusted profit/loss and actual assessable profits. schedule displaying the total production allowance from upstream petroleum operations relating to crude oil. schedule displaying the residues at the end of that period, all qualifying petroleum expenditure, assets disposed of, and the allowances due. computed actual chargeable profits for the two chargeable profit classes. statement of amounts repaid, refunded, waived, or released. Computed chargeable tax and methodology; where associated gas is sold or delivered through the measurement chargeable tax computation and methodology; and associated gas is sold or delivered through the measurement point. Duly completed self-assessment form Evidence of payment of the final installment statement of accounts computed actual adjusted profit/loss and actual assessable profits. schedule displaying the total production allowance from upstream petroleum operations relating to crude oil. schedule displaying the residues at the end of that period, all qualifying petroleum expenditure, assets disposed of, and the allowances due. computed actual chargeable profits for the two chargeable profit classes. statement of amounts repaid, refunded, waived, or released. Computed chargeable tax and methodology; where associated gas is sold or delivered through the measurement chargeable tax computation and methodology; and associated gas is sold or delivered through the measurement point. Duly completed self-assessment form Evidence of payment of the final installment Visual description or sketch: Make sure the words on the screen sync with the audio. OST: All text in yellow should be on the screen and be animated to appear one after the other All red text in highlighted yellow should be represented in images and text Audio: All text 6.2 Companies Income Tax (CIT) 6.2.1 Company Income Tax (CIT) The Companies Income Tax Act applies to companies engaged in upstream, midstream, and downstream petroleum operations. The revenue is the proceeds from the sale of chargeable oil or gas, after adjusting for measurement points and amount disposed. Natural gas transferred or disposed of from the upstream to the midstream or downstream is subject to CIT. It also includes natural gas-derived liquids and liquid petroleum gases. Income tax returns will be filed on a calendar-year basis for upstream petroleum operations. Other considerations: When a company with multiple streams separates operations, it is exempt from stamp duties and capital gains taxes. Capital investment consolidation between upstream and midstream operations is possible at market rates. However, when calculating the income from midstream petroleum operations, the consolidated capital investment cannot be deducted for capital allowances. The transfer or disposal of natural gas is taxable. Acquisition costs of petroleum rights qualify for a 20% annual allowance with a 1% retention value in the final year until the asset is sold. The Companies Income Tax Act applies to companies engaged in upstream, midstream, and downstream petroleum operations. The revenue is the proceeds from the sale of chargeable oil or gas, after adjusting for measurement points and amount disposed Natural gas transferred or disposed of from the upstream to the midstream or downstream is subject to CIT. Other considerations: Companies with multiple streams are exempt from stamp duties and capital gains taxes. Capital investment consolidation between upstream and midstream operations is possible at market rates. The transfer or disposal of natural gas is taxable. Acquisition costs of petroleum rights qualify for a 20% annual allowance with a 1% retention value in the final year until the asset is sold. Visual description or sketch: Make sure the words on the screen sync with the audio. OST: All text in yellow should be on the screen and be animated to appear one after the other All red text in highlighted yellow should be represented in images and text Audio: All text 6.2.2 Consolidation of Taxes The Company Income Tax will be applied as an entity-based tax, enabling the consolidation of results across terrains. This indicates that no restrictions exist on individual fields. However, businesses that acquire loss-making companies to qualify for the tax incentive cannot claim the acquired company's losses. It will be an entity-based tax, allowing for consolidation of results across terrains, Businesses that acquire loss-making companies cannot claim the acquired company's losses. Visual description or sketch: Make sure the words on the screen sync with the audio. OST: All text in yellow should be on the screen and be animated to appear one after the other All red text in highlighted yellow should be represented in images and text Audio: All text 6.2.3 Allowable and Disallowable deductions The Act introduces the following permissible and non-permissible deductions to the provisions in CITA in determining CIT taxable profit: For permissible deductions Delivered or disposed rents and royalties for the sale of crude oil, condensate, and natural gas. Contribution to an approved abandonment and decommissioning fund, a petroleum host community development trust, or environmental remediation fund. Additional deductions specified by the Minister of Finance For Non-permissible deductions Cost of data for petroleum deposits, excluding geological, geophysical, and geochemical data acquisition. Gas flare fees and Penalties Fees, production bonuses or signature bonuses Tax inputted on a net tax basis into a contract or agreement. Tax on hydrocarbons Petroleum profits of upstream companies will be assessed to CIT on an actual year basis (as applicable under HT), whereas those of midstream and downstream companies will be assessed on a preceding year basis. This may have cashflow impact on the government. For permissible deductions Delivered or disposed rents and royalties for the sale of crude oil, condensate, and natural gas. Contribution to an approved abandonment and decommissioning fund, a petroleum host community development trust, or environmental remediation fund. Additional deductions specified by the Minister of Finance For Non-permissible deductions Cost of data for petroleum deposits, excluding geological, geophysical, and geochemical data acquisition. Gas flare fees and penalties Fees, production bonuses or signature bonuses Tax inputted on a net tax basis into a contract or agreement. Tax on hydrocarbons Visual description or sketch: Make sure the words on the screen sync with the audio. OST: All text in yellow should be on the screen and be animated to appear one after the other All red text in highlighted yellow should be represented in images and text Audio: All text 6.3 Royalties 6.3.1 Royalties Royalties are payments made to the Federal Government of Nigeria (FGN) by oil and gas producing companies based on volumes of oil and gas extracted from fields and measured at measurement stations. Before the Deep Offshore Inland Basins and Production Sharing Contract Act (DOIBSPSCA) was revised in November 2019, Nigeria only had production-based royalties. Following the revision, a price-based royalty became applicable when the price of crude oil and condensates generated from deep offshore acreage surpasses $20 per barrel. Today, PIA has implemented a price-based royalty on crude oil and condensates generated from all contract areas when the price per barrel surpasses $50 Real Term 2021; the price-based royalty will be deposited into the Nigerian Sovereign Wealth Fund. Other key royalty related provisions of the PIA are as follows: Production-based royalty Gas Royalty Price-based royalty Production-based royalty rates To ascertain the royalty payable, Condensates are classified as crude oil, while natural gas liquids (NGLs) are classified as natural gas. If fields with crude oil and condensate produce more than 10,000 barrels of oil per day (bopd) per month, the portion of production over 10,000 bopd per month will be subject to royalty rates of 15% for onshore fields and 12.5% for shallow water fields. Royalties for onshore fields, shallow water fields, and marginal fields with crude oil and condensates production of fewer than 10,000 barrels per day (bpd) per month shall be calculated as follows: First 5,000 bpd - 5.0% Production over 5,000 bpd - 7.5% For deep offshore fields producing less than 50,000 barrels per day (bpd) per month, the royalty rate is reduced to 5%. Production above 50,000 barrels per day for deep offshore fields will be at the initial specified rate of 7.5%. The royalty rate for frontier basin areas will be 7.5%. Gas Royalty The production-based royalty rate for natural gas and natural gas liquids will be 5% of the chargeable volume. The royalty rate for domestically produced and used natural gas is set at 2.5% of the chargeable volume. Under the Petroleum Act (PA), royalty rate was 7% for onshore areas and 5% for offshore areas; there was no distinction between export and domestic utilisation. Price based royalties - crude oil and condensates The Act also establishes the following price-based royalty for crude oil and condensates: Less than $50 per barrel - 0% At US$100 per barrel - 5% Above US$150 per barrel -10% The royalty rate by price will be determined using linear interpolation between the price ranges of US$50 to US$100 and US$100 to US$150. The price benchmarks will be adjusted annually for inflation by 2% by adding 2% to the price benchmark. Pricing-based royalties do not apply to gas production and frontier acreage. Royalties are payments made to the Federal Government of Nigeria (FGN) by oil and gas producing companies based on volumes of oil and gas extracted from fields and measured at measurement stations. Nigeria only had production-based royalties before DOIBSPSCA was revised. Price-based royalty became applicable when crude oil and condensates price surpassed $20 per barrel. Following the PIA enactment, price-based royalty on crude oil and condensates applies when the price per barrel surpasses $50 RT 2021. Nigerian Sovereign Wealth Fund is the sole beneficiary of royalties based on price. Other royalty related provisions: Click: Production-based royalty Gas Royalty Price-based royalty Production based royalties - crude oil and condensates Field area/Terrain Production volumes in barrels of oil per day PIA PA/DOIBPSCA Onshore areas >10,000 15% 20% Shallow water (Up to 100m water depth) 12.5% 18.5% Shallow water (Up to 200m water depth) 16.5% Onshore ﬁelds and shallow waters, including marginal ﬁelds 1 – 5,000 5% 2.5% 5,001 – 10,000 7.5% 7.5% Onshore ﬁelds and shallow waters (marginal ﬁelds only*) 10,001 – 15,000 N/A 12.5% 15,001 - 25,000 18.5% Deep oﬀshore (greater than 200m water depth) 1 – 50,000 5% 10% >50,000 7.5% Frontier basins >1 7.5% 7.5% Gas Royalty Chargeable volumes of natural gas 5% Natural gas produced and utilized in-country 2.5% Price based royalties - crude oil and condensates Field area/Terrain PIA PA/DOIBPSCA Below $20 0% 20% Above $20 - $40 2.5% Above $40 - $50 Above $50 - $60 Linear interpolation Above $60 – less than $100 4% At $100 5% Above $100 - $150 Linear interpolation 8% Above $150 10% 10% Visual description or sketch: Make sure the words on the screen sync with the audio. OST: All text in yellow should be on the screen and be animated to appear one after the other All red text in highlighted yellow should be represented in images and text Audio: All text Animation each item on the table to come in one at a time 7 Other Key Fiscal Provisions 7.1 Due date The deadline for submission of audited account is five months following the end of the term or the effective date of the PIA, whichever is later. The taxable entity must present a copy of its audited financial statements along with the particulars of an actual and complete declaration duly signed by an authorized person. A new company yet to commence bulk sales or disposal of chargeables must file its audited accounts and returns within 18 months of its formation date. While for an existing company, 5 months after the end of any period ending on December 31. The deadline for submission of audited accounts and returns is five months following the end of the term or the effective date of the PIA, whichever is later. A new company must file its accounts and returns within 18 months of its formation date, while an existing company must do so 5 months after the end of any period ending on December 31. Visual description or sketch: Make sure the words on the screen sync with the audio. OST: All text in yellow should be on the screen and be animated to appear one after the other All red text in highlighted yellow should be represented in images and text Audio: All text 7.2 Rendering of tax returns The following Applies to Estimated Returns: Returns of the estimated hydrocarbon tax is due two months after the commencement of an accounting period. The currency for calculating and remitting hydrocarbon tax is US Dollars. FIRS has the power to call for books and returns within 21 days. Hydrocarbon Tax is paid monthly and in a single float. The first payment is due in the third month of the accounting cycle, while the remaining payments on the last day of the month. Before filing the self-assessment, a final tax installment is due. Changes in crude oil price, cost, or volume necessitate monthly estimated returns. Upstream enterprises may have to submit revised estimated returns every month because cost, price, and volume of crude oil may change from estimates regardless of accuracy and reasonability. Defaulting companies are liable to Interest at the prevailing LIBOR rate plus 10% points of the difference between the revised and estimated tax. Where a company fails to submit estimated returns, FIRS may use its best judgment to estimate and adjust estimated HT returns and tax the defaulting entity accordingly. For Actual Returns: Upstream petroleum firms must submit crude oil-only actual HT returns in the stipulated format within five months of the relevant accounting period. HT returns include the final installment payment. Penalties are same as described under ‘estimated returns’. FIRS has the power to call for books and returns within 21 days. Hydrocarbon Tax (HT) is paid monthly and in a single float, with the first payment due in the third month and the remaining payments on the last day of the month. Upstream enterprises must submit monthly estimated returns due to changes in crude oil price, cost, and volume. Defaulting companies are liable to interest at the prevailing LIBOR rate. FIRS may use its best judgment to estimate and adjust estimated HT returns and tax the defaulting entity accordingly. Visual description or sketch: Make sure the words on the screen sync with the audio. OST: All text in yellow should be on the screen and be animated to appear one after the other All red text in highlighted yellow should be represented in images and text Audio: All text 7.3 Transfer/sale of business – related parties and third parties The following guidelines apply to the transfer/sale of business to related parties and third parties. If related upstream companies transfer or sell upstream petroleum business or trade, including management or assets, the assets transferred are presumed to be sold for the remaining qualifying expenditure. The acquiring company is likewise presumed to have received all allowances from the selling company. To avoid revocation and further assessment, the company selling or transferring such trade or business must have paid its taxes in full. If the acquiring corporation sells significant assets within three years of the acquisition, all concessions will be revoked. However, the allowances specified in the PIA's fifth schedule will apply to unrelated party upstream petroleum trade/business rights and assets, subject to the accompanying limitations. The assets transferred are presumed to be sold for the remaining qualifying expenditure. Company must pay taxes in full to avoid revocation and assessment. The acquiring corporation must sell significant assets within three years to revoke concessions. The PIA's fifth schedule applies to unrelated party upstream petroleum trade/business rights and assets. Visual description or sketch: Make sure the words on the screen sync with the audio. OST: All text in yellow should be on the screen and be animated to appear one after the other All red text in highlighted yellow should be represented in images and text Audio: All text 7.4 Unbundling A company that plans to engage in more than one stream or sector of the oil and gas industry must establish a distinct entity for each stream of petroleum operations. This means that corporations who previously operated combined assets will have to split them, and form separate and unique companies to operate in each industry. A company that plans to engage in more than one stream or sector of the oil and gas industry must establish a distinct entity for each stream of petroleum operations. This means that corporations who previously operated combined assets will have to split them, and form separate and unique companies to operate in each industry. Visual description or sketch: Make sure the words on the screen sync with the audio. OST: All text in yellow should be on the screen and be animated to appear one after the other All red text in highlighted yellow should be represented in images and text Audio: All text 7.5 Penalties and offences The Act imposes harsher sanctions to encourage voluntary compliance, deter non-compliance, and reinforce integrity. The following sanctions apply to the corresponding violations: Non-compliance – NGN10,000,000 plus an extra cost of NGN2,000,000 or other statutory penalties if the default persists. Where there is no stated penalty for an offense, the fine will be NGN10,000,000 plus an additional NGN2,000,000 if the default continues, or six months of imprisonment. Incorrect filing - NGN15,000,000 or 1% of the tax understated in addition to the actual principal sum. False or misleading information - NGN5,000,000 or 1% of the tax amount that was understated. False statements and returns – NGN15,000,000 or 1% of the assessment, or six months' imprisonment, or both fine and jail term, Improper conduct by tax officers - 200% of the amount, a maximum of three years in prison, or both fine and imprisonment Taxes due in Naira and foreign currencies from an upstream petroleum operations company are subject to interest at the prevailing Nigerian Interbank Offered Rate (NIBOR) and London Interbank Offered Rate (LIBOR) plus 10% on outstanding remittances from the date the tax becomes payable until it is paid. Non-compliance – NGN10,000,000 plus an extra cost of NGN2,000,000 or other statutory penalties if the default persists. Where there is no stated penalty for an offense, the fine will be NGN10,000,000 plus an additional NGN2,000,000 if the default continues, or six months of imprisonment. Incorrect filing - NGN15,000,000 or 1% of the tax understated in addition to the actual principal sum. False or misleading information - NGN5,000,000 or 1% of the tax amount that was understated. False statements and returns – NGN15,000,000 or 1% of the assessment, or six months' imprisonment, or both fine and jail term, Improper conduct by tax officers - 200% of the amount, a maximum of three years in prison, or both fine and imprisonment Visual description or sketch: Make sure the words on the screen sync with the audio. OST: All text in yellow should be on the screen and be animated to appear one after the other All red text in highlighted yellow should be represented in images and text Audio: All text 7.6 Avoidance by Transfer When it has been established that a transfer or sale of a substantial portion of a petroleum company's assets is intended to evade payment of taxes (CIT or HT) assessed or chargeable on the company in the accounting period preceding the transfer/sale, the petroleum company may be sued for the recovery of tax charged by the tax authority. A transfer or sale of a substantial portion of a petroleum company's assets is intended to evade payment of taxes (CIT or HT) assessed or chargeable on the company in the accounting period preceding the transfer/sale, the petroleum company may be sued for the recovery of tax charged by the tax authority. Visual description or sketch: Make sure the words on the screen sync with the audio. OST: All text in yellow should be on the screen and be animated to appear one after the other All red text in highlighted yellow should be represented in images and text Audio: All text 8. Highlights of the changes from PPTA to PIA 8.1 PIA vs PPTA The following table shows a comparison between the Petroleum Profit Tax Act (PPTA) and the Petroleum Industry Act (PIA). Background sound PPTA PIA Single tax – only Petroleum Profit Tax (PPT) Dual tax – Hydrocarbon Tax (HCT) and Companies Income Tax (CIT) Scope of the Law – covers only Upstream Sector of the Oil and Gas Industry Scope of the Law – covers Upstream, Midstream and Downstream Sectors of the Oil and Gas Industry Returns – only PPT returns applies under the PPTA Returns – two returns NHT and CIT returns applies under the Act. Rate of Tax – under PPT the rates of tax include the following 50% (PSCs), 65.75% for the first five years and 85% (Sole Risks & JVs) respectively. Rate of Tax – HCT (15% (PPL) to 30% (PML) depending on the terrain) and CIT (30%) (Offshore rate omitted) Allowable Deduction – was not guided by the reasonability test under the act Allowable Deduction - the PIA deductibles is guided by reasonability test. Deductions Not Allowable Deductions Not Allowable – items like interest on loan, bank charges, HCT etc., are not allowable deductions. Transfer Pricing – not specifically mentioned. Only recognizes artificial transactions. Transfer Pricing – TP Regulations 2018 shall apply to the TP under the PIA. Revised Estimate on Budget – is taxable under the Act. Revised Estimate on Budget – now taxable at Libor at 10% under the Act. Appeal – provides for appeals to be addressed to the Appeal Commissioners. Section 41. Appeal – the Act specifically provides that appeals from the Act shall be referred to the Tax Appeal Tribunal (TAT). Penalties – is N10,000 fine and N2,000 for every subsequent day the offence persist. Penalties – for late filing is N10 million for the first day and N2 million every other day. Multiple Regulation (DPR, PPPRA, NEITI etc) Single Regulatory Agency (Commission or Authority) Does not admit Cost Price Ratio Cost Price Ratio Limit of 65% should impact the total allowable deductions in determining the chargeable profit in any assessment year. Unclaimed costs to be carried forward. Royalties - onshore field attracts a flat royalty rate of 20%, while royalty rates applicable for offshore production vary from 0% to 18.5% depending on water depth. Royalties - on oil production across terrains ranging from 7.5% to 15%. Gas Reinjection – cost is treated under PPT, while the revenue is taxed under the CITA. Gas income - cost and revenue is treated under the PIA and to be fully taxed under CITA. Petroleum Investment Allowance – makes allowable expenses incurred in any qualifying capital expenditure wholly, exclusively and necessarily for the purpose of petroleum operations. Production Allowance – the Act creates this allowance for leases for crude oil production and pegs it at certain percentage per barrel. Note to Developer Break the table and create pagination to that effect. 9 Summary The PIA offers three fiscal options to investors: Maintenance of current terms based on PPTA till license expires Conversion to new PIA terms New terms for new acreages or relinquished acreages Cost based and incentives based on percentage of capital investments does not apply under new terms A cost capping mechanism referred as CPR has been set at a 65% maximum The Federal Inland Revenue Service (FIRS) collects the hydrocarbon tax, corporate income tax, and education tax from the oil and gas sector. The "Commission" (The Nigerian Upstream Petroleum Regulatory Commission) decides how much of the upstream petroleum sector's royalties, signing bonuses, rent, and related payments for production shares are due. The "Authority" (The Nigerian Midstream & Downstream Petroleum Regulatory Authority) will decide how much to collect as penalty for gas flares resulting from midstream operations. The PIA offers three fiscal options to investors: Maintenance of current terms based on PPTA till license expires Conversion to new PIA terms New terms for new acreages or relinquished acreages Cost based and incentives based on percentage of capital investments does not apply under new terms A cost capping mechanism referred as CPR has been set at a 65% maximum The Federal Inland Revenue Service (FIRS) collects the hydrocarbon tax, corporate income tax, and education tax from the oil and gas sector. The "Commission" (The Nigerian Upstream Petroleum Regulatory Commission) decides how much of the upstream petroleum sector's royalties, signing bonuses, rent, and related payments for production shares are due. The "Authority" (The Nigerian Midstream & Downstream Petroleum Regulatory Authority) will decide how much to collect as penalty for gas flares resulting from midstream operations. Visual description or sketch: Make sure the words on the screen sync with the audio. OST: All text in yellow should be on the screen and be animated to appear one after the other All red text in highlighted yellow should be represented in images and text Audio: All text 10 End of Module Well done! You have come to the end of the module. Well done! Proceed to the assessment. Click "Begin" to start the Progress Test. 11 Closing slide Well done! You have come to the end of the module. We trust this has been an exciting learning experience for you thus far. Let's proceed to the next Module! Well done! See you in Module 6!

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