Nigeria - Developments in the Oil and Gas Industry

New Guidelines for Foreign Companies

In August 1996 the Federal Government announced a review of the laws and regulations guiding foreign companies in the oil industry. Highlights of the announcement are:

A. Operating permits of major oil service companies are to be reviewed and the companies were directed to reapply under new approval criteria. Failure to reapply would lead to revocation of a company's permit.

B. Oil producing companies were issued new guidelines aimed at enhancing transfer of technological know-how, curbing perceived misconduct, and ensuring greater accountability and transparency in the operation of their joint ventures with the Government.

The perceived misconduct of the oil producing companies included:

• a preference for employing foreigners where qualified Nigerians were available
• excessive charging of head office costs to Nigerian operations thereby increasing off-shore profits and taxation at the expense of Nigerian profits and taxation
• failure to develop marginal oil fields within their concessions
• environmental degradation
• non-payment of Nigerian taxes by foreign oil service companies.

Under the new laws and regulations:

• only Nigerian-registered companies are to be awarded contracts in the oil industry
• appropriate withholding tax for each contract must be deducted at source and paid to the tax authorities in the currency of the contract
• expatriates may not be employed where qualified Nigerians are available
• undeveloped marginal fields will be recovered and re-allocated by the Government
• oil companies must design and implement strategies to combat environmental degradation.

The Federal Government also gave notice that henceforth existing laws and regulations governing conduct of the industry would be rigorously enforced.

Privatisation of The Down Stream Sector

The policy of opening up the down stream sector of the oil industry to private investors crystallized early this year with approval being granted for the establishment of two privately owned oil refineries. Following on from this the Federal Government recently invited oil producing and marketing companies to submit proposals for the management by them of government owned refineries.

Deductibility of Expenses

In September 1996, in the case of Shell Petroleum v. Federal Board of Inland Revenue, the Supreme Court had to decide whether the following:

• currency exchange losses
• Central Bank charges
• educational scholarship awards

were deductible as expenses from the taxpayer's earnings. The Court held that where there is a statutory or contractual obligation to incur an expense then it is deductible even where the expenditure is not directly related to the taxpayer's 'petroleum operations'. Since such statutory and contractual obligations existed in the instant case the expenses were deductible. This decision will be analysed in a subsequent article.

Education Tax

The Hon. Minister of Finance in his Mid-year Review of the 1996 Budget indicated that government intends to institute legal action to enforce payment of education tax by oil producing companies. This is a 2% tax introduced in 1994. Oil producing companies have been pressing to be allowed to deduct payments made in respect of this tax from their earnings instead of paying this tax on top of the 85% income tax rate already being paid by them.