Nigeria’s 2025 Tax Act: Understanding How Petroleum Profits Are Taxed

Nigeria’s 2025 Tax Act: Understanding How Petroleum Profits Are Taxed

The Nigeria Tax Act, 2025 introduces detailed frameworks for how upstream petroleum companies calculate their taxable profits, claim allowable deductions, and pay taxes on crude oil income. For business owners and professionals in the oil and gas sector, these sections clarify how the Federal Government ensures fair taxation, transparent accounting, and consistent compliance within the petroleum industry.

Determining Chargeable Profits and Allowances (Section 71)

The law begins by outlining how petroleum companies must determine their chargeable profits for each accounting year.
Chargeable profits represent the total taxable amount after removing approved allowances from a company’s assessable profits. These allowances include:

  • Capital allowances under the First Schedule of the Act — depreciation of assets like plants, machinery, and equipment used in petroleum operations.

  • Production allowances under the Sixth Schedule — expenses associated with extracting and producing crude oil.

  • Acquisition costs of petroleum rights, which are subject to depreciation of 20% annually until fully written off.

Importantly, the total reported costs must not exceed the cost-price ratio established in the Sixth Schedule. This ensures companies cannot overstate costs to minimize tax. The Act also specifies that tax computations must be separated for different categories of petroleum operations, keeping each stream of income distinct.

Furthermore, where VAT or import duties were not paid on imported assets, those expenses cannot qualify as deductible capital expenditures. This rule links tax benefits to full regulatory compliance.

The Hydrocarbon Tax and Its Rates (Section 72)

A major feature of Nigeria’s petroleum taxation is the Hydrocarbon Tax (HCT) — a specific tax charged on profits from crude oil operations. Under Section 72, the tax rate depends on the nature of the petroleum license or lease:

  • 30% of profits from petroleum mining leases; and

  • 15% of profits from petroleum prospecting licenses and onshore/shallow-water operations.

This structure ensures that more established operations contribute proportionally higher taxes than exploratory ones, balancing government revenue with investor incentives.

Preventing Underpricing and Transfer Mispricing (Section 73)

The Act addresses potential manipulation of prices between related companies. When one company sells crude oil to another within the same group, the government compares the sale value with the fiscal oil price established by the Petroleum Industry Act (PIA).
If the internal sale price is lower than the fiscal price, the difference is taxed through an additional chargeable hydrocarbon tax.

The Commission determines the fiscal oil price based on export parity and global crude benchmarks. If no fiscal price exists for a particular crude stream, it will establish one that maintains fairness and reflects international market conditions. This prevents multinational oil companies from shifting profits through artificial pricing and ensures Nigeria receives its fair tax share.

Recognizing Pre-Production Costs (Section 74)

Petroleum exploration is capital-intensive, often requiring billions in investment before any oil is sold. The Act recognizes this by allowing companies to treat pre-production expenses — such as exploration, drilling, and development — as qualifying pre-production capital expenditures.
These costs can be amortized and deducted once production begins, aligning tax relief with actual income generation. This provision ensures companies can recover legitimate start-up expenses while maintaining accurate profit reporting.

Transfers and Consolidation of Petroleum Operations (Sections 75 & 76)

When a petroleum business or asset is sold or transferred from one company to another, the transaction must comply with Section 190 of the Act. This guarantees that tax liabilities tied to the original business are properly accounted for before transfer, preventing abuse of restructuring for tax avoidance.

Additionally, companies operating across multiple petroleum terrains are permitted to consolidate costs and revenues for income tax purposes. However, for hydrocarbon tax, consolidation is limited to assets within the same class of operations. This distinction ensures consistency while maintaining tax integrity across different exploration zones.

Partnerships, Joint Ventures, and Tax Responsibility (Section 77)

The Act also regulates partnerships and joint ventures in upstream petroleum activities.
It is an offence for an individual, rather than a company, to operate petroleum activities for profit without proper structure. For companies engaged in joint ventures or partnerships, tax is assessed based on each participant’s equity interest in the project. Each company pays tax on its share of profits, deductions, and liabilities.

When no formal agreement exists, the Federal Inland Revenue Service (FIRS), guided by the Petroleum Commission, has the authority to determine each company’s equity interest and assess taxes accordingly.
This prevents confusion and ensures that every participant in shared petroleum ventures pays their fair tax obligation in line with their actual stake.

Why This Matters

These sections of the Nigeria Tax Act, 2025 are critical to Nigeria’s effort to modernize petroleum taxation. They create a balance between encouraging investment and ensuring transparency and compliance in the oil and gas industry.
By defining what counts as allowable deductions, how to treat pre-production costs, and how to tax joint ventures and related-party transactions, the Act strengthens accountability while protecting national revenue.

For businesses in Nigeria’s upstream petroleum sector, understanding these tax rules is not optional — it’s essential for compliance, audit readiness, and long-term profitability.

Source: Nigeria Tax Act, 2025
For expert tax advisory, compliance planning, and business accounting solutions, visit bahasbooks.com

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