Unpacking Capital Allowances for Oil & Gas: A Deep Dive into the Nigeria Tax Act, 2025

Unpacking Capital Allowances for Oil & Gas: A Deep Dive into the Nigeria Tax Act, 2025

The Nigeria Tax Act, 2025 establishes the fundamental fiscal architecture for the nation’s crucial oil and gas sector. Contained within Part III of Chapter Three, the Act meticulously details the provisions governing Capital Allowances for Petroleum Operations, a framework that is indispensable for companies operating under both the Petroleum Profits Tax (PPT) and the regimes of Deep Offshore and Inland Basin Production Sharing Contracts (PSCs). Bahas Books presents this comprehensive explanation of the key definitions, deduction mechanisms, and asset disposal rules that shape the tax liabilities of petroleum companies in Nigeria.

Foundational Definitions: Concessions, Leases, and Expenditure

The effective application of capital allowances begins with a clear understanding of the core concepts defined within the Act.

The term "concession" is given a broad scope, encompassing all formal rights to petroleum, specifically including an Oil Exploration License, an Oil Prospecting License, and an Oil Mining Lease. Beyond these, it covers any right, title, or interest in or to petroleum oil already in the ground, as well as any option to acquire such rights, ensuring that preparatory arrangements are included.

The definition of a "lease" covers agreements for a lease where the term has already commenced, any tenancy, and any agreement to let or hire an asset. Crucially, the definition makes a specific exclusion for a mortgage and similar agreements, a distinction that guides the interpretation of a "leasehold interest" for tax purposes. To maintain continuity, the Act dictates that an asset is deemed to remain under a lease for tax purposes if the original lessee remains in possession after the lease's termination without a new grant. Furthermore, if an old lease ends and a new one is granted to the same party for the same asset, the second lease is legally treated as a continuation of the first lease.

The bedrock of the allowance system is "qualifying expenditure," defined as specific capital expenditure incurred in an accounting period that is categorized into four main types:

  1. Qualifying Plant Expenditure: Capital spending on essential physical assets like plant, machinery, and fixtures.

  2. Qualifying Pipeline and Storage Expenditure: Investment in vital infrastructure such as pipelines and storage tanks.

  3. Qualifying Building Expenditure: Expenditure on the construction of buildings, structures, or permanent works, provided this expenditure is not already accounted for in the plant or pipeline categories.

  4. Qualifying Drilling Expenditure: This is a comprehensive category for all other capital expenditures incurred in connection with, or with a view to, petroleum operations. It explicitly covers costs for the acquisition of petroleum deposits or rights, expenses related to searching, discovering, testing, or winning access to deposits, and the construction of works or buildings that are likely to possess little or no value once the specific petroleum operations for which they were constructed are concluded.

A fundamental constraint is placed on this definition: qualifying expenditure shall not include any amount that can already be claimed as a deduction under the general provisions of section 92 of the Act, preventing any form of double taxation benefit.

The Allowance Structure: Rates, Deductions, and Special Provisions

The Act provides two distinct types of allowances for qualifying expenditure.

First, the Petroleum Investment Allowance is granted to a company that incurs qualifying capital expenditure wholly and exclusively for petroleum operations. This allowance is due in the accounting period when the asset is first used and is calculated at the appropriate rate set forth in Table I. Significantly, this allowance is designed to be in addition to the standard capital allowance and is subject to the same rules under Part III of Chapter Three.

Second, the Capital Allowance is the general mechanism for cost recovery. A company owning an asset and incurring qualifying expenditure wholly and exclusively for petroleum operations is due an allowance from the accounting period in which the expenditure was incurred, at the appropriate rate specified in Table II. The Act mandates that, for statistical purposes only, a notional amount of 1% of the qualifying capital expenditure must be recorded, though this has no bearing on the actual claimable allowance amount.

The standard allowance rates are straightforward: Section 14 fixes the rate for all four categories of qualifying expenditure (Plant, Pipeline, Building, and Drilling) at 20% annually for the first to the fifth years, indicating a five-year write-down period.

An important exception applies to high-risk exploration costs. Expenditure incurred on the first and second appraisal wells in the same field, related to exploration and appraisal during the pre-production phase, is treated as a 100% deduction in the year incurred. Any unrecovered portion of this specific expenditure is then amortized and deducted as a standard capital allowance at the 20% per annum rate, beginning from the commencement of the relevant accounting period.

The rule on the use of the allowance for PSCs is explicit: Capital allowance, for the purpose of computing hydrocarbon tax, is not available for cost recovery purposes in production sharing contracts, as cost recovery in these specific agreements is governed by the terms of the model contract itself.

Asset Management, Disposal, and Pre-Commencement Rules

The Act provides clear rules for tracking the value and managing the disposal of assets.

The Residue of an asset is defined simply as the total qualifying expenditure incurred on that asset up to a given date, less the total of all capital allowance made in respect of that asset before that date. This residue is key to the rule for Disposal without change of ownership. If an asset is disposed of but the original owner retains ownership, the owner is deemed to have bought the asset back immediately after the disposal for a price equal to the residue of the qualifying expenditure at the date of disposal, ensuring the continuation of the allowance calculation based on the remaining depreciated value.

Controls are placed on asset disposal: any asset for which capital allowance has been granted cannot be disposed of without the express authority of a Certificate of Disposal issued by the Commission. Furthermore, an asset is deemed "in use" for an accounting period if the company was the owner and the asset was in use for petroleum operations at the end of that period.

The Extension of application of "in use" provisions are generous, deeming an asset to be in use even during a period of temporary disuse. It also allows an allowance for assets initially acquired for petroleum operations but not used for that purpose, provided the owner subsequently brings them into use. A strict time limit applies here: if the allowance has been granted but the asset is not put to use within five years from the expenditure date, the previously claimed capital allowance shall be withdrawn and the amount added back to tax.

The text also details various scenarios constituting the Disposal of qualifying expenditure. Disposal occurs for permanent works (buildings, structures) when the interest is sold, or the interest or leasehold terminates without the reversionary interest holder acquiring the right to possess the land, or if the asset is demolished or ceases to be used for petroleum operations. Plant, machinery, or fixtures are disposed of if they are sold, discarded, or cease to be used. Assets linked to qualifying drilling expenditure are disposed of if sold, cease to be used, or if the company ceases operations and receives insurance or compensation monies.

The Value of an asset at disposal is its net proceeds of sale. If not sold, it is the amount the Service estimates the asset would realise in the open market, less reasonable selling expenses. Insurance or compensation monies received in disposal circumstances are generally treated as net proceeds of the sale. However, if the compensation is used to replace the lost asset, it is not treated as net proceeds. Instead, the allowance for the new asset is calculated based on its replacement cost, considering the residual or scrap value of the old asset.

Lastly, specific Provisions relating to qualifying petroleum expenditure manage pre-commencement expenses. Any qualifying expenditure incurred before a company's first accounting period (excluding the specific drilling activities) is legally deemed to be qualifying expenditure incurred on the first day of its first accounting period. Should an asset be disposed of before the first accounting period begins: any resulting loss incurred is treated as qualifying petroleum expenditure on the first day of the first accounting period; conversely, any profit realised on the disposal is treated as income of the company in its first accounting period under section 90(1)(d) of the Act.

This detailed tax structure, fully elaborated here, is crucial for all financial planning and compliance within Nigeria’s oil and gas sector. For further resources and detailed financial guides, please visit bahasbooks.com

Comments

Post a Comment

Popular posts from this blog

Understanding Debentures Under CAMA 2020: Sections 191–198 Explained

Understanding Debentures Under CAMA 2020: Sections 191–198 Explained By Baha’s Books Visit bahasbooks.com for expert accounting and corporate law insights. The Companies and Allied Matters Act (CAMA) 2020 provides the foundation for how Nigerian companies operate, borrow money, and secure financing. One of the most detailed and important aspects of this law lies in Sections 191 to 198 , which cover debentures — instruments that enable companies to borrow money from investors while offering structured rights and protections in return. These provisions explain how companies can use their property or uncalled capital to raise funds, the legal form and content of debentures, how they must be documented, what happens when they are lost or misused, and the various types of debentures available. Together, they form the financial and legal backbone for corporate borrowing in Nigeria. Let’s unpack each section carefully and see how they work in practice. Section 191 — Creation of De...
Read more

Nigeria Tax Act 2025: How Assessable Profits Are Determined for Individuals and Companies

Nigeria Tax Act 2025: How Assessable Profits Are Determined for Individuals and Companies The Nigeria Tax Act, 2025 provides a detailed framework for how both individuals and companies are taxed on their income and profits. It covers everything from continuity of trade to capital allowances, losses, and even situations where proper records are not kept. Let’s break down what this means in practical terms for entrepreneurs, businesses, and individuals. Continuity of Trade A business or profession does not stop being taxable simply because of a change in residence or because someone joins or leaves a partnership. As long as the trade itself continues in the same nature, it is treated as ongoing. This prevents individuals from escaping tax obligations by making formal changes while carrying on essentially the same business. Assessable Income for Individuals For individuals, assessable income includes business or professional profits, employment income, pensions, and chargeable gain...
Read more