Nigeria Tax Act 2025: Petroleum Royalties, Profits Tax, and the Push for Sustainable Compliance

Nigeria Tax Act 2025: Petroleum Royalties, Profits Tax, and the Push for Sustainable Compliance

The Nigeria Tax Act, 2025 continues its extensive framework for regulating how petroleum companies are taxed, shifting attention to royalties, petroleum profits, and the integration of environmental compliance into fiscal obligations. These provisions refine how petroleum production is valued, taxed, and reported, ensuring fairness, transparency, and alignment with Nigeria’s long-term sustainability goals.

Expanding the Scope of Petroleum Tax Obligations

The Act, beginning with Sections 88(3) and 89, expands the landscape of petroleum taxation by defining three key layers of tax responsibilities for companies involved in exploration, production, and related operations.

The first category involves general fiscal obligations such as income tax, development levy, VAT, and stamp duties, which form the traditional foundation of Nigeria’s tax system. These ensure that petroleum operators contribute directly to national revenue beyond their royalties and profit taxes.

The second category introduces levies tied to modern business principles — particularly environmental, labour, and health and safety regulations. This means petroleum companies are now required to meet not only economic obligations but also social and environmental compliance standards. Taxes or levies may now arise from laws aimed at improving workplace safety, protecting ecosystems, and ensuring community welfare around oil-producing regions.

The third layer focuses on future-oriented environmental taxation, allowing the government to impose new levies or duties under Nigeria’s Climate Change Act or any international agreement Nigeria is part of. This proactive clause ensures the law remains flexible, giving the country room to adjust its fiscal framework to meet global sustainability and carbon reduction goals without the need for constant legislative amendments.

Through these categories, Nigeria’s petroleum taxation model evolves from a purely revenue-driven system to one that actively supports sustainability, accountability, and modernization.

Royalties: Ensuring Accountability from the Ground Up

Section 89 introduces a crucial emphasis on royalties, confirming that all petroleum production, including production tests, is subject to royalty payments as provided in the Seventh Schedule of the Act.

This ensures that even during exploratory or testing phases — where crude oil is extracted to assess field capacity — companies must pay royalties on the volume produced. The Federal Inland Revenue Service (FIRS) is officially designated as the tax authority responsible for administering petroleum royalties, creating a unified system of oversight that enhances efficiency and transparency.

Previously, overlapping responsibilities between agencies like the Nigerian Upstream Petroleum Regulatory Commission (NUPRC) and the FIRS sometimes led to confusion. Under the 2025 Act, that ambiguity is resolved. FIRS now ensures consistent administration, proper valuation, and accurate collection of royalty revenues — improving fiscal discipline across the petroleum sector.

The Petroleum Profits Tax (PPT): Bridging the Old and the New

Section 90 begins Part II – Petroleum Profits Tax (PPT), which governs how profits from petroleum operations are calculated, assessed, and taxed. This section applies primarily to companies operating under Oil Prospecting Licences (OPLs) and Oil Mining Leases (OMLs) that have not yet transitioned to the Petroleum Industry Act (PIA) framework.

Essentially, this part acts as a transitional tax regime, maintaining fiscal order for companies still under the older structure while allowing Nigeria’s new petroleum fiscal reforms to gradually take full effect.

Under Section 90(2), petroleum companies are charged tax annually based on their profits for each accounting period. The goal is to ensure that every operator contributes equitably based on actual profitability, while minimizing opportunities for underreporting or tax evasion.

This annual assessment helps maintain Nigeria’s steady flow of petroleum tax revenue, especially as the government transitions from the Petroleum Profits Tax Act (PPTA) to the PIA-based system.

Calculating Petroleum Revenue and Chargeable Profits

Section 91 gives one of the most detailed explanations of how petroleum revenue is defined and calculated. The law consolidates all potential income streams to ensure companies report their true economic output.

The total revenue of a company in any accounting year includes:

  • All proceeds from the sale of chargeable oil — oil that has been sold and for which payment has been received or is receivable;

  • The value of chargeable oil disposed of, even if not sold directly (for example, oil used in barter trade, repayment in kind, or internal group transfers);

  • All income incidental to petroleum operations, such as pipeline tariffs, freight fees, and service income tied to exploration or production activities; and

  • Gains from the disposal of petroleum assets, including pipelines, rigs, and facilities, which are taxable under Section 56.

This comprehensive approach ensures that no income stream escapes taxation, whether the revenue is monetary, barter-based, or derived from asset disposals.

When a company disposes of oil without selling it directly, Section 91(2) ensures the value must match the statutory or market rate as determined by fiscal authorities. This prevents companies from undervaluing internal transfers to reduce their tax liabilities — a practice that had previously led to significant revenue losses for the government.

Finally, Section 91(3) introduces the crucial concept of “Adjusted Profit.” This represents a company’s total profit after deducting only those expenses the law recognizes as legitimate — such as operational costs, royalties, and other approved expenditures. It is a more refined measure of actual profitability and forms the foundation for determining the taxable amount under petroleum profits tax law.

Promoting Fairness, Transparency, and Sustainability

Together, these provisions of the Nigeria Tax Act, 2025 establish a comprehensive, fair, and forward-looking petroleum taxation system.

They ensure that companies pay taxes not just on sales but also on any value they derive from petroleum operations — while simultaneously integrating environmental and social obligations into the fiscal structure. The inclusion of climate-related levies and health and safety compliance taxes signals a shift toward global best practices, where profitability and sustainability go hand-in-hand.

By clarifying the rules for royalties, defining fair valuation, and maintaining accountability through FIRS oversight, the Act enhances both fiscal transparency and investor confidence.

Conclusion: Modern Taxation for a Modern Energy Sector

The Nigeria Tax Act, 2025 represents more than a tax reform — it’s a recalibration of Nigeria’s petroleum economy toward long-term accountability and sustainable growth.

At Baha’s Books, we help businesses navigate complex tax reforms like this one — ensuring full compliance, strategic planning, and optimized reporting that meet both regulatory and sustainability standards. Whether you operate in oil and gas, finance, or other regulated sectors, we provide the expertise you need to stay ahead.

Build compliance into your business success.
Visit bahasbooks.com to learn how our accounting and tax advisory services can help your business grow responsibly under the new Nigeria Tax Act.

Comments

Post a Comment

Popular posts from this blog

Understanding Debentures Under CAMA 2020: Sections 191–198 Explained

Understanding Debentures Under CAMA 2020: Sections 191–198 Explained By Baha’s Books Visit bahasbooks.com for expert accounting and corporate law insights. The Companies and Allied Matters Act (CAMA) 2020 provides the foundation for how Nigerian companies operate, borrow money, and secure financing. One of the most detailed and important aspects of this law lies in Sections 191 to 198 , which cover debentures — instruments that enable companies to borrow money from investors while offering structured rights and protections in return. These provisions explain how companies can use their property or uncalled capital to raise funds, the legal form and content of debentures, how they must be documented, what happens when they are lost or misused, and the various types of debentures available. Together, they form the financial and legal backbone for corporate borrowing in Nigeria. Let’s unpack each section carefully and see how they work in practice. Section 191 — Creation of De...
Read more

Capital Allowances Under the Nigeria Tax Act, 2025 (First Schedule): A Practical, End-to-End Guide

Capital Allowances Under the Nigeria Tax Act, 2025 (First Schedule): A Practical, End-to-End Guide By Bahas Books | bahasbooks.com Capital allowances are the bridge between your fixed-asset investments and your corporate tax bill. This portion of the Nigeria Tax Act, 2025—drawn from the First Schedule—spells out when and how a company can claim capital allowances, what happens when assets are sold or destroyed, how leases and partnerships are treated, how to apportion values when assets are bundled, and which expenditures never qualify in the first place. Read this as a life-cycle manual: acquisition → use → temporary disuse → replacement → disposal, with rules for special situations along the way. The rule that unlocks relief (Paragraph 6) If, during a basis period for a year of assessment, your company incurs qualifying capital expenditure wholly and exclusively for the purposes of its trade or business, you are entitled to a capital allowance for each year the asset is used i...
Read more

Understanding Capital Allowance Under the Nigeria Tax Act, 2025: What Every Business Should Know

Understanding Capital Allowance Under the Nigeria Tax Act, 2025: What Every Business Should Know By Baha’s Books | www.bahasbooks.com The First Schedule of the Nigeria Tax Act, 2025 delves into one of the most practical and impactful areas of taxation for businesses — Capital Allowance . This part of the law establishes the framework for how companies can recover the cost of their fixed assets over time, by deducting their value against taxable profits. It is not just an accounting procedure; it’s a fiscal policy tool designed to reward investment, promote productivity, and sustain economic growth through responsible asset management. At its core, capital allowance is the government’s way of recognizing that assets used for generating income—such as machines, buildings, vehicles, and software—wear out or lose value over time. Instead of allowing companies to deduct the entire cost in one year, the law spreads that deduction across several years. This systematic write-off mirrors ...
Read more