Nigeria Tax Act 2025: Redefining Petroleum Taxation for Transparency and Compliance

Nigeria Tax Act 2025: Redefining Petroleum Taxation for Transparency and Compliance

The Nigeria Tax Act, 2025 introduces one of the most comprehensive overhauls to petroleum taxation in the country’s history. It expands the rules governing income tax for petroleum operations, clarifies how profits and deductions are determined, and strengthens oversight on joint ventures, partnerships, and gas-related businesses. These updates are designed to create a fairer, more transparent taxation system that encourages investment while ensuring that Nigeria receives its rightful revenue from oil and gas activities.

Fair Taxation in Partnerships and Joint Ventures

The Act begins by addressing the complex structures of joint ventures and partnerships in the petroleum sector. Under Section 77, when multiple companies collaborate in exploration or production, the Federal Inland Revenue Service (FIRS) now has the authority to regulate how each company’s tax liability is determined.

This means FIRS can:

  • Compute the total tax as if one company managed all operations and then apportion it among partners according to their share of profits,

  • Or adopt any other equitable method that reflects each company’s true participation in the venture.

This change reflects a core principle of the Act — equity in taxation. No company should be taxed more than what it would owe if it had operated independently. In simple terms, every participant pays tax in proportion to their actual stake in operations, costs, and profits. This eliminates the risk of double taxation while discouraging profit manipulation in joint projects.

Universal Tax Application Across the Petroleum Value Chain

Section 78 extends the tax net to all companies engaged in petroleum operations — whether upstream, midstream, or downstream. This includes concessionaires, licensees, lessees, contractors, and subcontractors.

For income tax purposes, the value of chargeable crude oil or gas is determined by the sale proceeds or total value of oil and gas disposed of at the official measurement points. Importantly, the Hydrocarbon Tax (HCT) — which already applies to crude oil profits — cannot be claimed as an expense to reduce income tax liability.

In essence, companies must calculate tax based on their real earnings, without offsetting one form of tax against another. This structure ensures transparency and uniformity in how Nigeria’s petroleum companies report and pay taxes.

Separate Registration for Each Stream of Petroleum Operations

Section 79 introduces a structural reform — companies can no longer conduct both upstream and downstream operations under a single registration. Each business stream must now be a separate legal entity for tax purposes.

However, there’s a special exception for Integrated Strategic Projects (ISPs). These are domestic energy initiatives that connect upstream extraction directly to midstream processing or refining for local consumption. ISPs can consolidate their operations for tax purposes, provided they apply arm’s-length pricing — ensuring that transactions between the two segments reflect fair market value.

This approach strengthens accountability and transfer pricing integrity, preventing companies from manipulating internal prices to shift profits and reduce tax burdens.

Gas Sector Incentives and Expansion

Section 80 focuses on Nigeria’s growing gas industry, introducing a five-year tax-free period for investors in gas pipelines after their economic development incentive certificate expires. This incentive aims to attract long-term investment into gas infrastructure — a key pillar of Nigeria’s energy diversification strategy.

Once gas is transferred from the upstream to the midstream or downstream, however, it becomes taxable under Chapter Two of the Act. Natural gas liquids and derived petroleum gases are also subject to income tax at that stage, ensuring that the entire gas value chain contributes equitably to government revenue.

Allowable Deductions and Capital Allowances

Section 81 defines how capital allowances and deductible expenses apply in petroleum operations.
The acquisition cost of petroleum rights can be written off at a rate of 20% per year until fully depreciated, aligning with Nigeria’s general capital allowance framework. Other qualifying expenses must comply with the First Schedule of the Act, ensuring uniformity in how companies calculate and report deductions.

Deductible and Non-Deductible Expenses

Section 82 provides clarity on what petroleum companies can and cannot deduct when calculating taxable income.

Deductible Expenses Include:

  • Rents and royalties paid to the federal or state government,

  • Contributions to approved funds such as:

    • Decommissioning and abandonment funds,

    • Host communities’ development trusts,

    • Environmental remediation funds,

    • Other officially approved statutory schemes.

These ensure that petroleum companies meet both their environmental and social obligations, while also enjoying legitimate tax relief for these expenditures.

Non-Deductible Expenses Include:

  • Geological data acquisition not directly tied to petroleum exploration,

  • Penalties for gas flaring,

  • Signature or production bonuses,

  • Taxes paid on behalf of other companies,

  • Any “inputted” tax arrangements,

  • Excessive administrative or head office costs.

These restrictions prevent companies from inflating operational costs or shifting unrelated expenses to reduce taxable profits — reinforcing fiscal discipline and accountability.

Harmonized Accounting and Transfer Pricing Rules

Under Section 83, all upstream petroleum companies must align their accounting periods for income tax with those used for hydrocarbon tax. This creates consistency and simplifies audit processes for both the tax authority and the companies themselves.

Section 84 further tackles transfer pricing manipulation within corporate groups. When a company sells crude oil or gas to another entity in the same group, the sale must reflect fair market or fiscal value. If the declared price is lower, the government can impose additional income tax to capture the true taxable value. This provision ensures transparency and blocks one of the most common avenues for tax evasion.

Conclusion

The Nigeria Tax Act 2025 is a landmark reform that modernizes petroleum taxation in line with global best practices. It creates clear rules for partnerships, ensures fair profit allocation, enforces transparency in related-party transactions, and rewards investment in gas infrastructure.

At its core, the Act reflects Nigeria’s commitment to balancing economic growth, energy investment, and fiscal accountability.

For businesses, compliance isn’t optional — it’s strategic. Whether you’re managing petroleum assets, expanding into gas infrastructure, or structuring a joint venture, understanding the nuances of this Act is vital to staying compliant and competitive.

At Baha’s Books, we help businesses navigate Nigeria’s evolving tax landscape — from interpretation and compliance to regulatory reporting and strategic advisory.

💼 Stay compliant. Stay competitive.
👉 Visit bahasbooks.com for expert insights, tools, and tax advisory services tailored to your business.

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