NNPCL Finance and Accounts_Tax.pdf

NNPC Limited Finance and Accounts Process and Procedures 18.0 Tax and Other Statutory Remittances 18.1 Objectives This section sets out the NNPC Limited’s strategy for conducting its tax affairs and managing the tax risks it is exposed to due to its business operations in order to ensure compliance...

NNPC Limited Finance and Accounts Process and Procedures 18.0 Tax and Other Statutory Remittances 18.1 Objectives This section sets out the NNPC Limited’s strategy for conducting its tax affairs and managing the tax risks it is exposed to due to its business operations in order to ensure compliance with applicable tax laws and regulations. The processes under Tax and Other Statutory Remittances are designed to ensure:  Compliance with all relevant laws, rules, regulations relating to taxes and statutory payments;  The tax risk management strategy is at all times consistent with NNPC Limited and its subsidiaries overall strategy;  Existence of constructive, professional, and transparent relationships with tax authorities;  Standardized procedures for tax review and corporate tax planning;  Adequate provision for the Company’s tax liabilities; and  Timely, complete, and accurate filings of returns. 18.2 Scope/Applicability The following sub-processes are covered in the policy and are applicable to NNPC Limited and its subsidiaries:  Tax management and oversight  Corporate tax planning  Tax computations and remittances:  Petroleum Profits Tax (PPT)  Hydrocarbon Tax (HCT)  Companies Income Tax (CIT)  Capital Gains Tax (CGT) 163 NNPC Limited Finance and Accounts Process and Procedures  Tertiary Education Tax  Royalty  Withholding Tax (WHT)  Value Added Tax (VAT)  Pay As You Earn (PAYE)  Other taxes, statutory remittance, and levies  Tax Audits  Transfer Pricing 18.3 Policy Statements 18.3.1 Tax Management Oversight  The NNPC Limited Tax Department under the overall supervision of the Chief Financial Officer (CFO) shall have functional responsibility on all taxation related matters for NNPC Limited and its subsidiaries.  The roles and functions of the NNPC Limited’s Tax Department shall include the following:  Formulate a tax strategy for NNPC Limited and its subsidiaries;  Establish appropriate systems or processes for tax risk management for NNPC Limited and its subsidiaries;  Provide internal tax advisory services and support on business operation matters to all business units within NNPC Limited and its subsidiaries;  Legally manage NNPC Limited and its subsidiaries’ tax exposure through informed application of tax laws and regulations;  Serve as a central point of contact and support for all Federal, State, Local and Cross Border taxation matters;  Monitor tax compliance across NNPC Limited and its subsidiaries; 164 NNPC Limited Finance and Accounts Process and Procedures  Liaise with tax authorities on behalf of business units and providing tax audit support for NNPC Limited and its subsidiaries; and  Provide guidance on the tax implications of key business strategic efforts e.g., restructurings, acquisition or disposal of business units, changes in capital structure, etc.  Promptly monitor changes in tax regulations and advising business units on the implication of such changes on their business operations.  The Head, F&A(N-3/4) of each business unit shall be primarily responsible for monitoring and ensuring tax compliance of their business units. This responsibility includes:  Review of tax calculations, estimates and accruals;  Manage tax compliance, reporting, and filing for the business unit;  Review current and deferred tax provision;  Ensure statutory deductions on invoices are properly computed;  Ensure timeliness remittance of taxes and other statutory contributions/deductions  Ensure accurate records of tax liability or assets both on the ledger and in documentation; and  Manage and coordinate tax audits within the specified materiality threshold.  Work with NNPC Limited Tax Department for tax audits beyond the materiality threshold and ensure prompt resolution.  Tax deductions shall be based on statutorily defined rates and must comply with relevant guidelines and procedures. All tax deductions 165 NNPC Limited Finance and Accounts Process and Procedures shall be remitted to the relevant authorities in line with statutory deadlines.  Tax requirements/deductions from various financial transactions shall be pre-defined and pre-set in the NNPC Limited’s financial system as relevant system controls.  Scanned copies of all tax receipts and certificates must be filed in the tax units of the Finance and Accounts Departments accordingly.  The timeliness and accuracy of remittances (taxes and other statutory deductions) to relevant authorities shall be set as a key performance indicator for the Head, F&A(N-3/4) of the businesses. 18.3.2 Corporate Tax Planning  NNPC Limited and its subsidiaries shall prepare an annual corporate tax plan to ensure arrangement of all financial activities within the Company in such a way that maximizes all tax benefits (exemptions, deductions, rebates, and reliefs) and manage the Company’s tax exposure.  NNPC Limited Tax Department shall be responsible for developing the annual corporate tax plan. Tax planning shall commence in line with annual budgeting activities. The tax plan shall form an input in the annual expenditure budget.  The tax plan shall incorporate all applicable taxes originating from the activities of all business units and shall factor in the tax implication for all intercompany transactions and any update from Finance Acts and other regulations that may have been passed within the twelve (12) month period.  The tax plan shall also identify the key high tax risk areas across all the business operations of the Company and provide a strategy for mitigating such risks. 166 NNPC Limited Finance and Accounts Process and Procedures  The corporate tax plan shall also make consideration for the following:  Tax implication on business restructuring strategies  Tax implication of inter-company transactions (Transfer pricing)  Tax clauses on significant contract agreements  Taxation on interests from financing arrangements  Taxation on estimated production (for upstream operations)  Timing of tax cash outflows  Available loss reliefs  Payroll tax planning  Disposal of capital assets  Allowances  The Head, NNPC Limited’s Tax Department (N-3) shall coordinate the preparation of the annual tax plan. The annual corporate tax planning shall be conducted in line with the following timelines:  Preparation and issuance of tax planning guidelines - 1st week in October;  Submission and collation of input documents/report from business units- 3rd week in October;  Preparation and issuance of tax plan – 1st week in December.  The plan would be reviewed for quarterly to ensure that material changes within the tax environment are appropriately reflected.  The annual tax plan shall be forwarded to the CFO for review and approval. 18.3.3 Petroleum Profits Tax (PPT) / Hydrocarbon Tax (HCT) 167 NNPC Limited Finance and Accounts Process and Procedures  PPT is levied on the income of companies engaged in upstream petroleum operations.  HCT is applicable to companies engaged in upstream petroleum operations in the onshore and shallow water. HCT is not applicable to frontier acreages (until reclassification as onshore acreages) and deep offshore crude oil as well as field condensates and liquid natural gas liquids derived from associated gas and produced in the field upstream of the measurement points. 18.3.3.1  Rates Under the Petroleum Profits Tax Act 85% for petroleum operations carried out under a joint venture arrangement or any non-Production Sharing Contract (PSC) over 5 years.  65.75% for non-PSC operation in its first 5 years during which the company has not fully amortized all pre-production capitalized expenditure.  50% for petroleum operations under Production Sharing Contracts (PSC). 18.3.3.2 Rates Under the Petroleum Industry Act HCT is charged at:  30% of the chargeable profits from crude oil for petroleum mining leases for onshore and shallow water areas; and  15% of chargeable profits from crude oil for onshore and shallow water and for petroleum prospecting licenses  HCT is not applicable to PSCs 18.3.3.3 Returns  Payable on actual year basis 168 NNPC Limited Finance and Accounts Process and Procedures  The estimated tax returns must be filed within two months of the fiscal year (which runs from January 1st to December 31st). Business units shall prepare the estimated returns based on the approved budget for the year.  Actual tax returns must be filed within five months after the end of the accounting period, that is, not later than 31 May. 18.3.3.4 PPT / HCT Payment PPT/ HCT shall be paid in twelve (12) equal monthly instalments based on the estimated assessable profit for the year. There shall be a final 13th instalment if there is an underpayment. The first instalment for the year is due by the end of March. 18.3.3.5 Final Returns The actual tax returns to be filed in line with the prevailing tax laws. 18.3.4 Royalty Under the PPTA holders of an Oil Prospecting License (OPL) or an Oil Mining Lease (OML) are required to pay royalties to the Federal Government as soon as production begins. This is usually in form of monthly cash payments at the prescribed rate or in kind by royalty oil. 18.3.4.1 Rates in Respect of JV Operations Area Rate (%) Onshore production 20 Offshore production up to 100 meters water depth 18.5 Offshore production beyond 100 meters water depth 16.66 The Deep Offshore and Inland Basin Production Sharing Contracts Act specifies the royalty rates that apply to production from PSC fields beyond 200 meters, which are as shown in the table below: Area Up to 200 meters’ water depth In areas from 201 to 500 meters water depth Rate (%) 16.67 12 169 NNPC Limited Finance and Accounts Process and Procedures In areas from 501 to 800 meters water depth 8 In areas from 801 to 1,000 meters water depth 4 In areas in excess of 1,000 meters water depth 0 In land basins 10 18.3.4.2 Rates Under the PIA  The royalty rate of chargeable volume of the crude oil and condensates produced from the field area are as follows: Area Rate onshore areas and shallow water fields, including marginal fields with monthly production less than 10,000 bpd 5% for the first 5,000 bpd and 7.5% for the balance onshore areas above 10,000bpd 15% shallow water up to 200 meters water depth 12.50% deep offshore (greater than 200m water depth) with monthly production less than or equal to 50,000 bpd 5% deep offshore (areas greater than 200 meters water depth) with monthly productions above 50,000 bpd 7.5% for excess over 50,000bpd frontier basin 7.5%  For single fields covering two or more petroleum mining leases, the royalty shall be determined based on the total production from the fields.  For a field located partially in onshore and in shallow water or partially in shallow water and deep offshore areas, the weighted average royalty shall be calculated as per regulations  Royalty for natural gas and natural gas liquids production is at a rate of 5% of the chargeable volume. However, a concession of 2.5% is granted natural gas produced and utilized in-country. 170 NNPC Limited Finance and Accounts Process and Procedures 18.3.4.3 Royalty Based on Price Companies would be liable to additional royalty when crude oil, and condensate, prices exceed specified benchmark. Royalty based on price are payable to the Nigerian Sovereign Investment Authority. The basis is as follows:  For fields in onshore, shallow water and deep offshore areas, the royalty rates will apply as follows:  Below US$50 per barrel – 0%  At US$100 per barrel – 5%  Above US$150 per barrel – 10%  Prices between ranges will be determined by “linear interpolation”.  Price royalty do not apply to production from Frontier acreages 18.3.4.4 Gas Royalty For exported natural gas and natural gas liquids, royalty shall be at a rate of 5% of the chargeable volume. Royalty rate for natural gas produced and utilized in-country shall be 2.5%. Gas Royalty PPT PIA Gas Royalty - Onshore 7.0% 5.0%* Gas Royalty - Offshore 5.0% 5.0% Gas Royalty - Domestic Not applicable 2.5% Gas Royalty - Export Not applicable 5.0% 18.3.5 Companies Income Tax (CIT)  CIT is levied on profits accruing in, derived from, brought into, or received in Nigeria. The principal law is the Companies Income Tax Act (CITA). Companies registered in Nigeria, non-resident companies carrying out business in Nigeria or that have significant economic presence in Nigeria are liable to CITA. 171 NNPC Limited Finance and Accounts Process and Procedures  The applicable CIT rate for large companies (that is, companies with annual gross turnover exceeding ₦100,000,000) is 30%. Medium sized companies (with annual gross turnover higher than ₦25,000,000 but less than ₦100,000,000) have applicable CIT rate of 20% while small companies (with annual gross turnover of less than ₦25,000,000) are exempted. (Under the PIA, companies involved in upstream petroleum operations would also be required to pay CIT in addition to HCT).  CIT shall be filled with the Federal Inland Revenue Service (FIRS) within 6 months of the company’s accounting year end. Tax is payable on preceding year basis.  The due date for payment of CIT shall be on or before the due date of filling the tax returns. Where a company pays its tax 90 days before the due date of payment as provided in CITA, such company shall be entitled to a bonus of:  2% if such company is a medium sized company  1% for any other company on the amount paid, which can be utilized as tax credit against future tax payable. 18.3.6 Education Tax  Tertiary Education Tax (TET) is payable by all Nigerian companies (other than small companies) and levied on assessable profit, that is, tax adjusted profit before capital allowance. The applicable rate is 2.5%.  18.3.7 TET is assessed, filed, and paid together with CIT. Capital Gains Tax  CGT shall be applied on capital gains accruing to NNPC Limited from chargeable disposal of assets during the year. The applicable rate for 172 NNPC Limited Finance and Accounts Process and Procedures CGT is 10%. CGT returns are due for filing not later than 30 June and 31 December of the year.  Chargeable assets for CGT include:  Options, debt, and incorporeal property generally  Any currency other than Nigerian currency  Any form of property created by the entity disposing of it, or otherwise coming to be owned without being acquired.  Goodwill  Copyrights  Buildings  Chattels, etc. 18.3.8 Pay-As-You-Earn (PAYE)  Payroll computation and system entries shall commence on the 10th of every month in order to facilitate timely payroll disbursements.  Payroll deductions shall be based on statutorily defined rates and must comply with relevant guidelines and procedures.  PAYE tax must be remitted on or before the 10th day of the month following the month of deduction. Business units shall file an annual PAYE return before 31 January every year in respect of emolument paid to employees in the preceding year and file an estimated annual return for the current year not later than 31 March. 18.3.9 Withholding Tax (WHT)  WHT is an advance payment of income tax deductible at source on specified transactions. It can be applied as tax credit against income tax liability.  Applicable rates as determined by the applicable laws and ranges between 2.5% - 10% depending on the nature of the transaction, the 173 NNPC Limited Finance and Accounts Process and Procedures corporate registration of the vendor (i.e., incorporated, and unincorporated companies/ limited liability company or Enterprise/ Partnership/Individuals) and the country of origin for foreign vendors. Due date for remitting WHT  WHT deducted from companies shall be remitted to FIRS on or before 21 days of the month following the month in which deductions were made.  WHT deducted from individuals and unincorporated entities shall be remitted to State Internal Revenue Service (SIRS) on or before 30 days of the month following the month in which deductions were made.  WHT to be remitted to FIRS shall be submitted in electronic form and must contain specific information such as the Tax Identification Number (TIN) of various suppliers from which the tax has been deducted. 18.3.10 Value Added Tax (VAT)  VAT is chargeable on the supply of taxable goods and services except items specifically stated as exempted or zero-rated. The applicable rate is 7.5%.  VAT shall be due for filing to FIRS on the 21st day of the month following the month of the transaction.  Goods and services exempted from VAT but subject to review by the tax authorities include:  Oil exports  Plant, machinery, and equipment purchased for utilization of gas in downstream petroleum operations  Medical and pharmaceutical products 174 NNPC Limited Finance and Accounts Process and Procedures  Basic food items  Books and educational materials Please refer to the VAT modification order for complete exemption list  Exempted services include:  All export services  Medical services  Services rendered by community banks and mortgage institutions 18.3.11  Stamp Duty Stamp duty is tax on documents evidencing transactions between entities.  Stamp duty is chargeable either at fixed rates or ad valorem (i.e., in proportion to the value of the consideration) depending on the class of instrument.  All instruments relating to an act to be performed in Nigeria must be stamped, except such instrument is specifically exempted.  Instruments which are required to be stamped under the Stamp Duties Act must be stamped within 40 days of first execution. 18.3.12 Other Statutory Remittances 18.3.12.1 Staff Pension Contributions  NNPC Limited shall remit monthly pension contributions to the Pension Fund Administrators, not less than 18% of monthly staff emoluments (with a minimum contribution of 10% by the employer and up to 8% by the employee). The employer and/or the employee may make additional voluntary contribution.  Staff pension shall be remitted within seven working days from the date of payment of salaries. 175 NNPC Limited Finance and Accounts Process and Procedures 18.3.12.2 NDDC Levy  The Niger Delta Development Commission (Establishment, etc.) Act imposes a levy of 3% of the total annual budget (to be paid to the Fund established by the Act) of any onshore and offshore oil producing company operating in the Niger-Delta area, including gas processing companies. 18.3.12.3 National Social Insurance Trust Fund (NSITF)  The NSITF levy is charged at 1% of total monthly payroll or amount assessed by the NSITF. Where the claim cost in respect of an employer exceeds 105% of the ordinary assessment of that employer, the NSITF Board may within 4 years levy a super assessment on the employer not exceeding 133% of the ordinary assessment for the year.  Business units shall file statements of actual earning of their employees for the preceding year and budgeted earnings for the current year not later than the last day of February of every year. Monthly contributions to the NSITF shall be made not later than the last day of the month. 18.3.12.4 Industrial Training Fund (ITF)  The ITF levy shall be charged at the rate of 1% of annual payroll cost and shall be due for payment not later than 1st April of the subsequent year. The main objective of the Fund is to generate a pool of indigenous trained manpower to meet the needs of the Nigeria economy.  An employer is entitled to a refund of 50% of contributions made if adequate (documented) training courses are provided as prescribed by the ITF. 18.3.12.5 Cabotage Surcharge 176 NNPC Limited Finance and Accounts Process and Procedures The Coastal and Inland Shipping (Cabotage) Act levies a surcharge of 2% of the contract sums earned by vessels engaged in costal trade in Nigeria. 18.3.12.6 Nigerian Oil and Gas Industry Content Development The Nigerian Oil and Gas Industry Content Development Act imposes a levy of 1% on every contract awarded to any operator, contractor, subcontractor, alliance partner or any other entity involved in any project, operation, activity, or transaction in the upstream sector of the Nigerian oil and gas industry. 18.3.12.7 Host Communities Development Trust Contribution The PIA requires each settlor (holder of petroleum mining lease/license) to contribute 3% of its actual operating expenditure in the upstream petroleum operations in the preceding calendar year to a fund established by the Trust. 18.3.12.8 Nigerian Police Trust Fund Levy The Nigeria Police Trust Fund (Establishment) Act, 2019 (NPTF Act) imposes a levy of 0.005% on the net profit of companies operating business in Nigeria, to finance the Nigeria Police Force. 18.3.12.9 National Agency for Science and Engineering Infrastructure Act The NASENI was established by the NASENI Act, Cap N3 LFN 2004 in 1992. The NASENI Act imposes a levy of 0.25% on the PBT of companies with turnover of ₦100 million and above, covering the banking, mobile telecommunication, ICT, aviation, maritime and oil and gas sector. 18.3.12.10National Housing Development Fund  The contribution is applicable to Nigerian employees earning a minimum of ₦3,000 per annum.  Based on the provisions of the NHF Act, the employer is required to deduct from the salary of its employees and remit it to the Federal Mortgage Bank of Nigeria within one month of the deduction.  The NHF contribution rate is 2.5% of basic salary. 177 NNPC Limited Finance and Accounts Process and Procedures 18.3.13 Tax Computation and Remittances 18.3.13.1  Monthly Returns and Remittance The Finance and Accounts Department (N-3/4) of each business unit shall maintain a schedule of monthly, quarterly, and annual taxes and statutory remittances relating to the operations of the business unit. The schedule shall serve as guide for the preparation of periodic tax returns and remittances  On a monthly basis, the accountant (N-6) shall prepare a schedule of all applicable taxes for the month based on the tax schedule.  WHT and VAT deductions shall be booked at the point of processing of vendor invoices.  At month end, the Accountant (N-6) shall spool a schedule of all input and output VAT booked for the month and prepare the monthly returns with copies of the supporting invoices. VAT shall be filled with FIRS no later than twenty-one (21) days from the end of the month of deduction.  Where the net-off of input and output VAT results in a tax liability, the tax shall be remitted to FIRS through the approved channel and evidence of payments and receipts shall be filled appropriately.  Payroll related taxes and remittances such as PAYE, pension and NSITF shall be derived from the approved payroll schedule for the month from the HR department and used to generate the pension and PAYE remittance schedules for the month.  Other monthly taxes and levies such as PPT / HCT, NDDC levy, NCD levy, concession rentals and gas flaring penalties shall be prepared by the Accountant(N-6) with input from other departments where necessary.  The final remittance schedules shall be forwarded to the Head F&A for review and approval and payment processing. 178 NNPC Limited Finance and Accounts Process and Procedures  All tax ledgers and sub-accounts shall be updated and reconciled with the source documents on a monthly basis after the close of the GL. 18.3.13.2 Annual Returns and Remittance PPT /HCT Assessment  Business units involved in upstream operations shall file their tax returns accompanied with the audited accounts with FIRS by May of the subsequent year.  The NNPC Limited Tax Department shall review all tax returns before they are filed with the tax authority.  Records and supporting documentation for tax payments shall be maintained by both the business unit and the NNPC Limited Tax Department.  The actual PPT/ HCT liability shall be computed based on the audited account and compared with the estimated PPT/HCT. Where the actual PPT/HCT is higher than the estimated PPT/HCT, an additional assessment shall be raised for the difference.  The assessment is due and payable within 21 days from the date of the service of the assessment notice for such accounting period.  Where the actual PPT /HCT is lower than the estimated PPT/HCT, the overpayment (tax credit) is carried forward to offset the PPT/HCT liability of the subsequent tax years. Companies Income Tax and Tertiary Education Tax  Each business unit shall perform an annual tax assessment to make provision for the tax liability for the year. The Head, F&A of business units shall forward all tax assessments to NNPC Limited Tax Department for review and endorsement. 179 NNPC Limited Finance and Accounts Process and Procedures  The NNPC Limited Tax Department shall review all tax returns before they are filed with the tax authority.  Records and supporting documentation for tax payments shall be maintained by both the business unit and the NNPC Limited Tax Department. 18.3.14 Tax Audits  The NNPC Limited Tax Department shall monitor the activities of all business units in relation to tax compliance and would get involved in resolving same if the total liability is above a materiality threshold that would be defined based on the size of the entities.  Heads of F&A Departments in NNPC Limited and its respective subsidiaries shall inform the NNPC Limited Tax Department upon notification of a tax audit by the tax authorities and upon receipt of the audit report.  Each business unit shall maintain adequate records of all tax returns filled during the year.  The Head, F&A of each business unit shall be responsible for coordinating the tax audit. The NNPC Limited Tax Department would decide when to get involved in the audit field stage. 18.3.15 Transfer Pricing 18.3.15.1 Connected Persons  The Income Tax (Transfer pricing) Regulations, 2018 apply to dealings or transactions between connected persons. The regulation imposes significant penalties of up to ₦10million for failure to comply with the Transfer Pricing regulation.  Regulation 4 of the Nigerian TP Regulations requires that the taxable profits resulting from transactions between ‘connected 180 NNPC Limited Finance and Accounts Process and Procedures persons’ are ascertained in a manner that is consistent with the arm’s length principle.  Persons are deemed connected where:  One person has the ability to control or influence the other person in making financial, commercial, or operational decisions, or  there is a third person who has ability to control or influence both persons in making financial, commercial, or operational decisions  Connected persons can also be defined as associated enterprises.  Two enterprises are considered to be associated where one party participates directly or indirectly in the management, control or in the capital of the other; or the same person or persons participate directly or indirectly in the management, control or in the capital of both enterprises. 18.3.15.2 Transaction Covered  The TP Regulations apply to the following transactions –  Sale and purchase of good and services;  Sale, purchase or lease of tangible assets;  Transfer, purchase, license or use of intangible assets;  Provision of services;  Financial transactions;  Manufacturing arrangements; and  Any transaction which may affect profit or loss, or any other matter incidental to, connected with, or pertaining to the transactions referred to in (1) to (6) above. 18.3.15.3 Transfer Pricing Methods 181 NNPC Limited Finance and Accounts Process and Procedures  In determining whether the result of a transaction or series of transactions are consistent with the arm’s length principle, one of the following transfer pricing methods shall be applied –  the Comparable Uncontrolled Price (‘CUP’) method;  the Resale Price method;  the Cost-Plus method;  the Transactional Net Margin method;  the Transactional Profit Split method;  any other method which may be prescribed by Regulations made by the Service from time to time. 18.3.15.4 Compliance requirement – Transfer Pricing Declarations, Disclosures and Documentation Declarations  Each business unit shall declare its relationship with all connected persons within or outside the NNPC Limited and its subsidiaries in the prescribed form by the FIRS from time to time (currently the eTP filing platform). The declaration shall be made and submitted to the FIRS not later than eighteen months after the date of incorporation or within six months after the end of the accounting year, whichever is earlier.  The Regulations requires each business unit to make an updated declaration where there is a change in management, ownership, or control. The updated declaration shall be made and submitted within six months after the end of the accounting year in which the changes occurred.  Failure to file a TP declaration attract a penalty of ₦10million in the first instance and ₦10,000 for every day the failure continues. Failure 182 NNPC Limited Finance and Accounts Process and Procedures to file an updated TP declaration/provide notification about directors - ₦25,000 for every day in which the default continues. Disclosures  Each business unit shall make disclosure of related party transactions with all connected persons within or outside NNPC Limited and its subsidiaries in the prescribed form by the FIRS. The disclosure shall be made and submitted to the FIRS not later than eighteen months after the date of incorporation or within six months after the end of the accounting year, whichever is earlier.  Failure to file a TP disclosure attracts a penalty of the higher of: ₦10million or 1% of the value of related party transactions not disclosed; and ₦10,000 for every day in which the default continues. Incorrect disclosure of transactions attracts a penalty of the higher of: ₦10million or 1% of the value of related party transactions incorrectly disclosed. Procedure for filing Transfer Pricing Returns The Transfer Pricing Returns as prescribed by FIRS are:  Transfer Pricing Declaration Forms; and  Transfer Pricing Disclosure Forms. The following are the prescribed procedures for filing Transfer Pricing returns:  Identify related party transactions – Transactions that occurred between connected persons within a financial year shall be identified and recorded. The nature, volume and value of the transactions should also be documented, for appropriate characterization of the transactions.  Register on the FIRS’ e-TP platform – Fill the e-TP platform registration form with details of the company and company’s contact person responsible for the filing of TP returns and forward 183 NNPC Limited Finance and Accounts Process and Procedures completed forms to the FIRS. The form is used to create a profile for the company on the e-TP platform.  Create a profile for the particular year of assessment for which the filing relates.  Complete the TP disclosure and declaration form sections on the platform with information and details of the related party transactions and connected persons.  Complete the Statement of profit or loss and Statement of financial position sections on the platform.  Upload the required supporting documents which are;  Audited financial statements  Income tax and capital allowance computations  CIT and TET self-assessment forms  Evidence of payment of income tax liabilities.  Submit the completed profile and wait for approval by the FIRS. Documentation  Each business unit shall record, in writing or on any other electronic device or medium, sufficient information or data with an analysis of such information and data to verify that the pricing of its related party transactions is consistent with the arm’s length principle.  Transfer Pricing documentation is expected to be put in place prior to the due date for filing the respective year's income tax returns and is to be submitted to the FIRS within 21 days, upon request.  The contemporaneous TP documentation shall contain the following:  Master file: The master file shall provide an overview of the global business operations of NNPC Limited and its subsidiaries including organizational structure, description of the Company’s 184 NNPC Limited Finance and Accounts Process and Procedures business, Intangible assets, NNPC Limited’s intercompany financial activities, and financial and tax positions. Each SBU is expected to maintain its TP documentation.  Local file: The local file shall be prepared by each business unit and shall include an overview of the business unit covering its organizational and management structure, business strategies, value chain analysis, related party relationship and transactions, comparability analysis, selection and application of approved TP methods to ascertain the arm’s length nature of each related party transaction, and all other support document relevant to the related party transactions or requested by the FIRS.  The CFO shall have overall responsibility for the Transfer Pricing Policy Document and general compliance in this regard.  The Head of F&A (N-3/4) at business entity level shall ensure that the relevant returns are prepared and forward to NNPC Limited Tax Department for approval under the supervision of the CFO. 18.4 Procedures 4.1 Corporate Tax Planning Procedure Overview Steps 1 2 Responsibility Head, Group Tax(N-3) Head, Group Tax(N-3) Task Notify Heads, F&A (N-3/4) across the Group of commencement of tax planning activities and obtain necessary input such as audited financial statements, CAPEX budget, current and deferred tax liabilities, assets, and other relevant information required. Review previous year’s tax liabilities including evidence of tax returns, tax receipts, etc. to ensure alignment of Job Aid E-mail 185 NNPC Limited Finance and Accounts Process and Procedures Group tax practices with provisions in tax laws. 3 Head, Group Tax(N-3) Identify areas of non-compliance and possible tax optimisation opportunities. Based on review, develop a corporate tax plan to optimise tax liabilities, allowances, and tax reliefs due to the Group. Note: Tax plan shall detail:    4 5 6 7 8 9 Head, Group Tax (N-3) Finance Department (N-3/4) CFO Head, Group Tax(N-3) Finance Department (N-3/4) Finance Department (N-3/4) MS. PowerPoint MS Excel Tax optimisation recommendations based on restructured cost/expenditure Schedule of estimated tax liabilities for subsequent year Proposed payment plan for the settlement of outstanding tax liabilities Forward proposed tax plan to Finance Department for review and approval Review proposed tax plan for reasonableness and completeness and forward to Group CFO for approval. Review proposed tax plan, make necessary adjustments where applicable and approve. Forward tax plan to the Finance Department of each business unit for operating location for circulation to relevant departmental/unit heads. Forward proposed tax schedule to the Budget Officer to make provision for subsequent year’s tax liabilities during budget preparation. Implement corporate tax plan for the business unit. E-mail E-mail E-mail E-mail End. 186 NNPC Limited Finance and Accounts Process and Procedures Input and Output Documents Document Description Timely preparation of tax plan Accuracy of tax schedule Type Frequency Source Recipient Input Yearly Head, Group Tax (N-3) Heads, F&A of Business Units Output Yearly Head, Group Tax (N-3)  CFO  Heads, Finance and Account of Business Units (N-4) Key Performance Indicators Performance Measure Timely preparation of tax plan Accuracy of tax schedule Timely remittance of taxes Basis of Measurement Timeframe Target Latest time for completion of the corporate tax plan Annually ≤ 1st week in December % Variance between actual tax liabilities per annum and tax plan. Latest time from remitting taxes before incurring penalty Annually ≤ 10% As needed 187 NNPC Limited Finance and Accounts Process and Procedures 4.2 Petroleum Profit Tax / HCT Procedure Overview Steps 1 Responsibility Tax Accountant (N-6) Task PPT/HCT Estimates Payments and Monthly Obtain the annual budget for the current year and compute the estimated tax charge based on the estimated assessable profit. 2 3 4 5 6 Head, Finance and Account (Business Unit) (N-4) Head, Group Tax (N-3) Head, Finance and Account (Business Unit) (N-4) Head, Finance and Account (Business Unit) (N-4) Tax Accountant (N-6) The assessable profit estimate shall factor in current crude oil prices and estimated annual production volumes and production costs. Review the estimated chargeable profit and tax computations and forward to the Group Tax Department for review. Job Aid Annual production budget Ms Excel Review the estimated chargeable profit computations and provide review comments if any. File estimated return for the estimated tax charge and the estimated assessable profit for the year with FIRS. Commence payment of equal monthly instalments of estimated tax payable to FIRS no later than 31st March of the assessment year. Each of the remaining monthly instalments shall be paid on or before last day of the month of instalment. Create monthly journal entries in the financial system to record the installment PPT/HCT payments. SAP Workflow the journal and PPT schedules to the Head, F&A for review and endorsement. 188 NNPC Limited Finance and Accounts Process and Procedures 7 8 Head, Finance and Account (Business Unit) (N-4) Tax Accountant (N-6) Approve journal entries and forward approved PPT/HCT schedules to Treasury Department for payment.  Ms. Excel  E-mail Go to Payment Processing Follow-up with Treasury Division to obtain e-receipts and file the tax receipts accordingly. Actual Tax Computations (PPT/HCT) 9 Tax Accountant (N-6) Obtain from the Head, Finance & Accounts, the audited accounts and the analysis of expenditure and other relevant information for the year. 10 Tax Accountant (N-6) Access the financial system and print out the GL reports for the following accounts: - Expenditure - Sales and revenue - Fixed asset disposals Profit/Loss on transactions foreign  Ms. Excel  E-mail SAP FI Module exchange 11 Tax Accountant (N-6) Based on the audited accounts and analysis of expenditure, revenue, and capital assets, prepare the actual tax returns for the year 12 Tax Accountant (N-6) Forward the actual tax returns to the Head F&A for review. Ms. Excel  Ms. Excel  E-mail Note: The PPT/HCT computation schedules must be supported by: - Audited accounts - Expenditure and revenue analysis - Details of fixed asset disposals Capital allowance computation schedule 13 Head, Finance and Account (Business Unit) (N-4) Review the actual tax returns and forward to the Group Tax Department for review. 189 NNPC Limited Finance and Accounts Process and Procedures 14 15 16 Head, Group Tax (N-3) Review the actual tax returns and provide comments/ make necessary adjustments to the tax computation. Head, Finance and Account (Business Unit) (N-4) File the actual tax returns with FIRS. Head, Finance and Account (Business Unit) (N-4) Obtain the tax clearance certificate upon settlement of annual PPT/HCT liability and file appropriately. The assessment for the difference between the estimated tax paid and tax based on the actual tax returns filed will be raised and this has to be paid within 21 days after the service of the notice of assessment. Where the business unit has overpaid PPT, a tax credit shall be obtained. End 4.3 Royalties Procedure Overview Steps 1 Responsibility Tax Accountant (N-6) Task Job Aid Obtain Monthly Stock Certificate Report/ Production Data Report from Planning & Commercial Department. Note: The Monthly Stock Certificate Report serves as the basis for computing royalties for Land and Swamp production (onshore). Production data serves as the basis for computing royalties for offshore production. 2 Tax Accountant (N-6) Based on the Monthly Stock Certificate Report/ Production Data Report apply approved rates per meters and water depth. Ms. Excel 190 NNPC Limited Finance and Accounts Process and Procedures Print and forward Royalty schedule and Memo on Payment Request to the Tax Supervisor(N-5) for review. 3 Tax Supervisor (N-5) Review the Royalty computation and Payment Request Memo for accuracy and completeness.  Ms. Excel  E-mail Endorse computation and forward to Head, Tax for endorsement. 4 5 6 Head, Group Tax (N-3) Head, Finance and Accounts (N-4) Approving Authority (N-3) Review the Royalties computation and Payment Request Memo for correctness and appropriateness.  Ms. Excel  E-mail Endorse computation and forward to Head, Finance and Accounts for approval. Approve and forward Payment Request Memo along with approved Royalties schedules to appropriate authorizer for financial approval in line with approval limits.  Ms. Excel E-mail Approve Payment Request Memo and return to Tax Accountant (N-6).  Ms. Excel  E-mail Note: Payment Requests shall be approved in line with established financial authority limits. 7 Tax Accountant (N-6) Create journal entries in the financial system to book the Royalties entries. SAP Print and forward the journal, Royalties schedules to the Tax Supervisor (N-5) for review. 8 Tax Supervisor (N-5) Review journal entries for accuracy and endorse. Endorse journal entries and forward approved Royalties schedule to Head, Tax for approval.  Ms. Excel  E-mail 191 NNPC Limited Finance and Accounts Process and Procedures 9 Head, Group Tax (N-3) Approve journal entries and forward approved Royalties schedules to Tax Accountant(N-6) for further processing.  Ms. Excel  E-mail Go to Payment Processing 10 Tax Accountant (N-6) Follow-up with treasury to obtain ereceipts and file the tax receipts authorities. Note: Receipts represent evidence of remittance of Royalties to relevant authorities. 4.4 Taxes and Statutory Remittances (non-payroll related) Procedure Overview Steps 1 Responsibility Tax Accountant (N-6) Task At period end Generate and forward schedule the following documents to the Tax Supervisor (N-5) for review: - Job Aid SAP Schedule of statutory remittances Schedule of month-end journal entries Payment instruction Note: 2 Tax Supervisor (N-5) 3 Tax Manager (N-4/5) Other statutory remittances include: Company income tax, concession rentals, WHT, VAT, ITF, NDDC, and NCD. Review the schedule of statutory remittances computation and payment request memo for accuracy and completeness. Where there are no discrepancies/ errors Endorse computation and forward to Head, Finance and Accounts for review and approval.  Ms Excel  E-mail  Ms Excel  E-mail 192 NNPC Limited Finance and Accounts Process and Procedures 4 5 6 Head, Finance and Accounts (N-4) Review the schedule of statutory remittances and payment instruction for correctness and appropriateness.  Ms Excel,  E-mail Head, Finance and Accounts (N-4) Approve the payment instruction along with the schedule of statutory remittances and forward to the Treasury Division for payment processing.  Ms Excel,  E-mail Tax Accountant (N-6) Follow-up with Treasury Division to obtain e-receipts and file the tax receipts accordingly. End. 4.5 Taxes and Statutory Remittances (payroll related) Procedure Overview Steps 1 2 3 Responsibility Payroll Officer (N6) Payroll Officer (N5) Head, Payroll (N-4) Task From HR Processing Generate monthly payroll schedules for the month and extract the tax components based on the pre-defined parameters. Note: Payroll Report consists of PAYE deductions and other deductions such as Pension, Salaries, Third party deductions, Union due, Loan (Compassionate and Vehicle), Cooperatives, NHF, NSITF, etc. Forward Payroll report and schedule of tax liabilities to the HR Manager for review and endorsement Review payroll report, endorse if satisfactory and forward tax computation to Tax Manager Job Aid SAP  SAP  Ms Excel  Ms Excel 193 NNPC Limited Finance and Accounts Process and Procedures 4 Tax Manager (N4/5) Review schedule of computed payroll tax liabilities for completeness and accuracy. Endorse if satisfactory and forward to the Finance Manager 5 6 7 Head, Finance and Accounts (N-4) Review tax computation, approve if satisfactory and forward to Treasury Manager for payment processing. Payroll Accountant (N-6) Payroll Accountant (N-6) Follow-up with treasury division to obtain e-receipts. Record tax payment on SAP and file the tax receipts accordingly. SAP Input and Output Documents Document Description Statutory remittance schedule Payroll Schedule Type Frequency Source Recipient Input Monthly SAP Tax Accountant (N-6) Input Monthly SAP • • Tax GL Report Tax Liability Schedule Tax receipts/ Input Monthly SAP Tax Accountant (N-6) Output Monthly Tax Accountant(N6) Head, Finance and Accounts (N-4) Output As required Tax/ Statutory Authority Tax Accountant (N-6) Input Annually Head, F&A  Tax Authorities Credit notes Audited financial statements HR, Manager (N-4/5) Tax Accountant (N-6) 194 NNPC Limited Finance and Accounts Process and Procedures Key Performance Indicators Performance Measure Compliance with taxes and statutory remittance timelines Accuracy of tax computations Accuracy of recognition of tax liabilities or tax credits in the financial records Basis of Measurement Number of instances of late filling of tax returns and/or late payment of taxes Number of correcting / adjusting journals raised in subsequent month Number of tax related audit journals raised by the external auditors Timeframe Monthly/ Annually Target Nil Monthly Nil Annually Nil 18.5 Compliance Governance, Risk and Compliance (GRC) shall perform a biennial review of the execution of this Policy for compliance and report any infringement to the Board. Where the need arises, the GCEO is authorized to grant exceptions to the application of this policy, and thereafter seek ratification from the NNPC Limited Board. 18.6 References This policy is an integral part of the NNPC Limited Finance and Accounts Policy Manual. 195