Understanding How Nigeria’s 2025 Tax Act Regulates Petroleum Profits and Deductions

Understanding How Nigeria’s 2025 Tax Act Regulates Petroleum Profits and Deductions

By Baha’s Books

The Nigeria Tax Act, 2025 continues to refine how the government taxes companies operating in the upstream petroleum sector, ensuring greater accountability, transparency, and fairness. It focuses on how oil revenues are valued, what expenses are considered legitimate deductions, and how losses should be treated when calculating taxable profits.

Determining Crude Oil Revenue and Profits (Section 67)

Under Section 67, the Act explains how to determine a petroleum company’s revenue for each accounting period.
A company’s crude oil revenue is based on the “value of chargeable oil” — meaning the total proceeds from all crude oil sold or disposed of during the period. This value is aligned with the royalty assessment framework under the Petroleum Industry Act (PIA) and other related laws.

To calculate profit, the law introduces three key concepts:

  • Adjusted Profit: This is the company’s profit after all legally allowed deductions or additions are applied.

  • Assessable Profit: This is the adjusted profit after subtracting qualifying deductions (such as allowable operating costs).

  • Chargeable Profit: This final figure represents the amount actually taxed.

This system ensures that petroleum companies report their earnings using transparent and standardized valuation methods consistent with Nigeria’s petroleum fiscal regime.

Allowable Deductions (Section 68)

Section 68 focuses on what expenses oil companies are permitted to deduct when determining adjusted profit.
Only costs that are “wholly and exclusively incurred” for petroleum operations qualify. This includes:

  • Rents paid under petroleum leases or prospecting licenses.

  • Royalties paid to the Federal Government for crude oil and gas.

  • Repair and maintenance costs for plants, machinery, or production tools.

  • Exploration and drilling costs (especially for initial exploration wells).

  • Decommissioning and abandonment contributions, provided these are approved by the relevant regulatory body.

  • Levies and community contributions, such as to host community development or environmental remediation funds.

  • Gas reinjection expenses, provided they comply with environmental requirements and are ratified by the appropriate commission.

By limiting allowable deductions to these specific, verifiable costs, the law ensures that tax computations reflect genuine business activity, not inflated operational expenses.

Non-Allowable Deductions (Section 69)

Not all expenses are eligible for tax deduction — and Section 69 lists those that are strictly prohibited.
Non-deductible expenses include:

  • Costs not directly tied to petroleum production, like geological or geophysical data purchases.

  • Penalties for gas flaring, financial charges, or bad debts.

  • Head office and affiliate costs, including research and shared administrative overheads.

  • Production bonuses, signature bonuses, and other payments made for acquiring petroleum rights.

  • Taxes such as VAT, development levies, and other statutory charges.

  • Customs duties and depreciation of fixed assets.

  • Pension and provident fund payments unless explicitly approved by the National Pension Commission (PenCom).

These exclusions prevent companies from disguising unrelated or excessive expenses as production costs, ensuring that only genuine operational costs reduce taxable income.

Assessable Profits and Treatment of Losses (Section 70)

Section 70 outlines how companies determine their assessable profit and how they handle losses from previous years.
The assessable profit for each accounting period is calculated by subtracting any prior-year losses from the adjusted profit. Each class of chargeable tax is treated separately — meaning companies must distinctly calculate taxes for different types of petroleum operations.

Losses can be carried forward and deducted from future profits until they are fully recovered. However, this must be done in chronological order, and the deductions must be finalized within five months after the accounting year ends, or within an extended period approved by the tax authority. Once a deduction is elected, it becomes binding, ensuring consistency and accountability in reporting.

Why It Matters

These sections collectively ensure that upstream petroleum operators report income, deductions, and losses transparently, in full compliance with Nigeria’s petroleum and tax laws.
By setting clear rules for what counts as a legitimate business expense and what does not, the Act strengthens the integrity of Nigeria’s tax system — while promoting fair contribution from oil and gas companies operating in the country.

Source: Nigeria Tax Act, 2025
For detailed breakdowns, compliance guidance, and professional tax advisory, visit bahasbooks.com

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