Understanding Capital Allowance Rules for Upstream Petroleum Operations under the Nigeria Tax Act, 2025

Understanding Capital Allowance Rules for Upstream Petroleum Operations under the Nigeria Tax Act, 2025

(Published on bahasbooks.com)

The Nigeria Tax Act, 2025 introduces a refined and highly structured approach to capital allowances—especially for upstream petroleum operations. This part of the Act delves into how companies in the oil and gas sector can claim tax deductions for their investments in exploration, drilling, and production assets, while ensuring the system remains transparent, fair, and resistant to manipulation. It expands the general principles of capital allowance and adapts them to the unique realities of petroleum operations, where assets are expensive, complex, and often shared among multiple projects.

This portion of the law is technical, but it forms one of the most crucial parts of Nigeria’s fiscal framework for the oil sector. It explains how to treat assets that are sold or bought together, what happens when an asset is used partly for petroleum and partly for other operations, and under what circumstances certain expenditures are excluded from capital allowance. Each provision is designed to ensure that every deduction claimed by petroleum companies reflects genuine economic use, rather than accounting maneuvers or duplications.

1. Apportionment Rules for Sale and Purchase of Assets

In upstream petroleum operations, companies frequently sell or purchase multiple assets together—such as rigs, pipelines, pumps, or platforms. The law acknowledges that when this happens, it is not always easy to determine how much of the total transaction value applies to each asset. To ensure accuracy, the Tax Act introduces the principle of apportionment.

Apportionment means dividing the total value or sale price among the assets in a fair and just manner based on their relative market worth. For example, if a petroleum company sells both a drilling platform and a pumping system in one combined deal, the Federal Inland Revenue Service (FIRS) will determine what share of the total price belongs to each item. These values will then form the basis for tax calculations—especially when determining capital allowances, balancing charges, or balancing allowances.

This rule prevents tax manipulation. Without apportionment, a company could deliberately assign a low value to an asset that would generate taxable gain or inflate the price of another to increase its deductible loss. The apportionment requirement closes that loophole, mandating that values must reflect the true market price or fair value of each asset involved in the transaction.

The Act goes even further in subsection (3) to clarify that when several assets or interests are bought or sold together in a single deal—even if the contract assigns different prices to each—the entire package is still treated as one combined transaction. In practice, this means the tax authority can disregard artificially separated prices if they are deemed unrealistic.

However, subsection (4) introduces a slight modification. When the transaction involves a relevant interest (for example, a concession, lease, or part ownership in an oilfield), the apportionment rules still apply, except in cases where the transaction involves selling or disposing of concessions or partial interests that fall under different valuation rules. These exceptions exist because petroleum concessions are governed by production-sharing contracts and government approvals that already contain their own valuation mechanisms.

2. Exclusion of Certain Expenditures

Paragraph 11 of this section introduces a critical safeguard—not all expenditures qualify for capital allowance. Specifically, if a company has already deducted an expenditure under another section of the Nigeria Tax Act, that expenditure cannot again qualify as capital expenditure under this petroleum provision.

The idea is simple but essential: a company cannot enjoy the same deduction twice. This prevents double benefits that would unjustly reduce taxable profits. For example, if a petroleum company deducts maintenance costs for drilling machinery as an operational expense, it cannot later reclassify that same cost as a capital expenditure to claim capital allowance. Each deduction must fit only one tax category.

This provision upholds fiscal discipline, ensuring that capital allowances apply strictly to genuine capital investments—assets that add long-term value—rather than to routine expenses.

3. Assets Used Partly for Petroleum Operations

Perhaps one of the most practical aspects of this section is the rule for assets or expenditures used partly for petroleum operations and partly for other business purposes. This is covered in paragraph 12, titled “Asset used or expenditure incurred partly for the purpose of petroleum operations.”

In the oil and gas industry, shared use of assets is extremely common. A company might use a helicopter to transport petroleum engineers to offshore platforms, but the same aircraft might also be used to move executives between business meetings. Similarly, a building might store drilling equipment but also serve as a logistics hub for another division of the same company.

The Act recognizes these realities and introduces a principle of proportional allowance. Under subsection (1)(a), when a company incurs qualifying expenditure that serves both petroleum and non-petroleum purposes, only the portion directly related to petroleum operations qualifies for capital allowance. Subsection (1)(b) mirrors this rule for cases where the expenditure benefits both petroleum and other types of activities—the petroleum-related part alone can attract the allowance.

Subsection (2) provides the mathematical basis for this rule. It says that the company should first compute what the full capital allowance would be if the asset were used entirely for petroleum operations. Then, this allowance should be reduced in proportion to the share of petroleum-related use. For example, if a warehouse is used 70% for petroleum operations and 30% for general storage, only 70% of its capital cost qualifies for allowance.

This ensures that tax relief is tied precisely to actual use. It prevents companies from claiming full tax deductions on assets that partly serve unrelated business functions.

4. The Discretionary Role of the Tax Authority

Subsection (3) assigns a crucial responsibility to the Federal Inland Revenue Service (FIRS). It gives the Service the discretion to determine what is “just and reasonable” when apportioning allowances for mixed-use assets. In exercising this discretion, the Service must consider all evidence available—such as usage logs, maintenance schedules, flight records, production data, and other operational documents—to ensure the apportionment accurately reflects reality.

This clause highlights an important philosophical principle of the Nigeria Tax Act, 2025: tax equity through factual assessment. Rather than relying solely on company declarations, the law empowers the tax authority to ensure deductions correspond to genuine business use. This helps the government preserve tax revenue while ensuring companies receive fair and proportionate tax relief for their legitimate investments in petroleum production.

5. The Broader Policy Intention

Beyond the technicalities, this section of the Nigeria Tax Act embodies a broader fiscal philosophy—precision, fairness, and transparency. Capital allowances are not meant to serve as a loophole for avoiding taxes; they are designed to encourage real investment in productive assets that generate long-term economic value.

In the upstream petroleum sector, where capital costs are enormous and the risks are high, the law provides relief through structured allowances. But at the same time, it closes all possible gaps for abuse—such as double deductions, inflated asset values, or exaggerated petroleum-related claims.

By doing so, the Act achieves balance. It supports the petroleum industry’s need for predictable and equitable tax treatment while safeguarding the government’s fiscal interests. Every rule—from apportionment to exclusion and proportional use—is a reflection of Nigeria’s commitment to fostering responsible investment, accurate reporting, and sound public finance management.

Conclusion

The Nigeria Tax Act, 2025, through its detailed capital allowance provisions for upstream petroleum operations, sets a robust foundation for accountability in one of the country’s most vital economic sectors. It ensures that tax benefits align strictly with real economic activity, preventing distortions that could undermine both tax revenue and fair competition.

By defining how assets are valued, used, and recorded for tax purposes, the Act strengthens Nigeria’s fiscal integrity and promotes a transparent partnership between government and industry players. For companies, it brings clarity; for regulators, it offers control; and for the nation, it provides a steady framework for sustainable resource taxation.

For a complete understanding of Nigeria’s evolving tax framework, visit bahasbooks.com — your trusted resource for accessible legal and business education

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