Understanding Section 92(1) of the Nigeria Tax Act 2025: What Petroleum Companies Can (and Can’t) Deduct
Understanding Section 92(1) of the Nigeria Tax Act 2025: What Petroleum Companies Can (and Can’t) Deduct
The Nigeria Tax Act 2025 continues to redefine how businesses, especially those in the petroleum industry, report income and manage tax compliance. One of the most detailed and crucial provisions for petroleum operators is Section 92(1) — a section that focuses on how to determine adjusted profit and what expenses can legally be deducted before tax.
At Baha’s Books, we help businesses and compliance professionals break down these provisions into actionable insights. Section 92(1) provides a structured approach to ensure that companies are taxed fairly on their real profits while maintaining transparency in how operational expenses are reported.
What Section 92(1) Really Means
This section lays down the rule that only outgoings and expenses wholly and exclusively incurred for petroleum operations can be deducted before calculating taxable profit. In simpler terms, only costs that are directly connected to exploring, extracting, or producing petroleum are allowed.
By doing this, the Act separates legitimate operating expenses from unrelated or inflated costs that companies might otherwise use to reduce taxable income. It strikes a balance — protecting Nigeria’s revenue base while allowing operators to recover genuine costs of doing business.
Legitimate Operational Deductions Explained
Section 92(1) lists ten specific categories of allowable deductions for petroleum companies, covering everything from land rents to employee pensions.
Rents and Surface Rights:
Petroleum companies can deduct rents paid for land or buildings used under an Oil Prospecting License (OPL) or Oil Mining Lease (OML), including compensation for disturbing surface rights. These expenses are directly tied to the company’s access to oil fields — making them legitimate deductions.
Non-Productive Rents:
Even when a leased area hasn’t yet yielded oil or gas, rents paid for such non-productive fields can still be deducted. This acknowledges that exploration is a vital (and costly) part of the petroleum process.
Royalties:
Royalties — payments made to the government for the right to extract natural resources — are fully deductible. This includes royalties on natural gas sold to the Nigerian National Petroleum Company Limited (NNPCL) or crude oil sold domestically or internationally.
Customs and Excise Duties:
Companies can deduct customs duties or excise taxes paid on machinery and goods imported for petroleum operations. This ensures they aren’t taxed twice on critical production equipment.
Repairs and Renewals:
Expenses for repairs or renewals of plants, machinery, or fixtures are also deductible. The law recognizes that maintaining production efficiency requires constant reinvestment — but excludes capital expenditures, which are handled differently under the First Schedule.
Interest on Borrowed Funds:
If a company borrows money to finance petroleum operations, the interest paid is deductible — as long as it complies with Transfer Pricing Regulations and reflects fair market conditions. The Federal Inland Revenue Service (FIRS) must also be satisfied that the loan directly supports petroleum activities.
Intangible Drilling Costs:
These are the non-physical costs involved in exploration — geological studies, seismic surveys, and technical expertise — all deductible because they are vital to locating petroleum reserves.
Exploration and Appraisal Costs:
Tangible and intangible costs for drilling exploration and appraisal wells are deductible, even if those wells turn out to be unproductive. However, companies can’t double-count these costs as both operational and capital expenses.
Employee Welfare Contributions:
Contributions to pension or provident funds approved under the Pensions Reform Act are deductible. This aligns with Nigeria’s goal of promoting social welfare while rewarding compliant employers.
Why This Matters for Compliance and Revenue Integrity
The intent of Section 92(1) is twofold — to encourage responsible reporting by petroleum companies and to ensure the government collects tax only on true profits. It eliminates ambiguity by defining what constitutes a “deductible expense” and protects the system against tax evasion tactics like inflating head-office charges or classifying capital expenses as operational ones.
By enforcing this clarity, Nigeria strengthens its position as a fair and transparent host country for petroleum investments while safeguarding national revenue.
The section also mirrors international tax standards in the extractive industries, emphasizing accountability, economic substance, and fair taxation — all core values that Nigeria continues to embed in its fiscal reforms.
What Baha’s Books Thinks
At Baha’s Books, we see Section 92(1) as more than a technical tax rule — it’s a reflection of Nigeria’s evolving approach to fiscal discipline. For companies in the petroleum industry, compliance is not just about submitting figures — it’s about proper documentation, audit readiness, and alignment with the FIRS’s expectations.
Our team helps clients implement QuickBooks automation, cloud accounting, and regulatory interpretation tools that make these compliance processes smoother and more accurate. With our systems, deductions are automatically categorized in line with approved tax laws — giving petroleum operators the confidence to stay compliant and audit-ready year-round.
The Takeaway
Section 92(1) redefines petroleum taxation with precision and fairness. It ensures that only costs directly tied to exploration and production are deductible, while enforcing strong governance and fiscal integrity.
By adopting clear, automated accounting systems and staying informed about evolving tax laws, companies can avoid penalties, gain transparency, and build long-term trust with regulators.
Baha’s Books — Modern Accounting. Smarter Tax. Seamless Compliance.
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