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The Deep Offshore and Inland Basin Production Sharing Contracts Decree 1999 was recently promulgated by the Federal Government . This Decree provides, amongst other things, for the amendment of certain legislation in order to give effect to the fiscal incentives granted to various petroleum exploration and production companies who operate in the deep offshore and inland basin areas under production sharing contracts with Nigerian holders of oil prospecting licenses .

Specifically, the Decree does the following.

1. It amends the Petroleum Profits Tax Act so far as petroleum operations within a production sharing contract area is concerned. For such operations the petroleum profits tax rate is to be 50% instead of the usual 85% of chargeable profits.
    

2. It provides that in respect of production sharing contracts entered into prior to 1^st July 1998 the parties shall be entitled to an Investment Tax Credit equivalent to 50% of the qualifying expenditure for the accounting period in which an asset was first used. This Investment Tax Credit is to be set off against assessable tax. For production sharing contracts entered into after 1^st July 1998 the parties shall be entitled to an Investment Tax Allowance equivalent to 50% of the qualifying expenditure for the accounting period in which an asset was first used. This Investment Tax Allowance is to be set off against profits rather than taxes.

3. It amends the Petroleum (Drilling and Production) Regulations to provide that royalty payable in respect of oil produced within deep offshore production sharing contract areas is to run from 0% for areas in excess of 1,000 meters water depth to 12% for areas between 201 and 500 meters water depth.

4. The provisions are to be subject to review to ensure that if the price of crude oil should exceed $20 per barrel the share of the Federal Government in the additional revenue shall be adjusted "to such extent that the Production Sharing Contracts shall be economically beneficial to the Government". In any case, the provisions are to be reviewed in 2008 and every five years thereafter.
    

New  criteria  for the  sale of Nigerian crude oil  was recently  announced by the Federal Government. Under the new guidelines which came into effect at the end of July 1998 only companies which fall into the categories listed below will now be permitted to lift Nigerian crude oil.

1. An upstream oil company which has acquired an oil prospecting license and has completed a prescribed amount of work on the concession.
2. A company that has built an oil export refinery in Nigeria.
3. Bona fide end-users who own refineries and retail outlets abroad.
4. Well established and recognized large volume oil traders.

All such companies must have a minimum annual turnover of $100 million and must show a commitment to the development of the Nigerian economy by making a sizeable investment in Nigeria.

Companies in categories 3 and 4 must post a $1 million performance bond. This bond will be forfeited if after six months of a crude oil contract such company has not taken steps towards fulfilling its commitment to invest in the Nigerian economy.
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 Early this year the Federal Government passed necessary subsidiary legislation to bring into force the double taxation agreements which it had entered into with the governments of Pakistan, Belgium, France, Canada, Romania and the Netherlands, respectively. As these agreements had been signed several years ago they are to take effect retrospectively from the following dates:

Pakistan      -    1st January 1990
Belgium       -    1st January 1990
France        -    1st January 1991
Canada       -    1st January 1993
Romania      -    1st January 1993
Netherlands -    1st January 1994.

Each of the agreements covers the following Nigerian taxes:

i.  personal income tax;
ii. companies income tax;
iii. petroleum profits tax; and
iv. capital gains tax.

Also, each agreement deals with issues such as the meanings of the terms 'Fiscal Residence' and 'Permanent Establishment'; as well as indicating in which of two contracting states the following may be taxed:

'Income from Immovable Property'
'Business Profits'
'Shipping and Air Transport'
'Associated Enterprises'
'Dividends'
'Interest'
'Royalties'
'Capital Gains'

'Dependent and Independent Personal Services'
'Director's Fees', and
'Pensions and Annuities'.

The focus of each of the agreements is essentially to provide that a contracting state give credit for taxes paid in the other contracting state. Provision is also made for the exchange of information between the taxation authorities of contracting states.

Note: Until this time the only double taxation agreement which had come into force was the agreement with Great Britain which came into force on the 5th of July 1988.
 

Personal Income Tax

Under the Personal Income Tax Decree 1993 every individual who is resident in Nigeria is liable to income tax on his income from all sources whether "inside or outside Nigeria". A large number of foreigners working in Nigeria receive only a part of their income locally with the balance being received outside Nigeria. Nigerian tax authorities have for some time been concerned that many foreigners have been declaring only the Nigerian portion of their incomes or at best have been under reporting the foreign portions. As a result, the authorities have recently begun to assess foreigners to tax on the basis of deemed incomes. These deemed incomes vary according to the nationality and managerial grade of the foreigner.

Assignments of Oil Field Leases
Under the Petroleum Act 1969 the holder of an oil prospecting license or an oil mining lease could with the consent of the Minister assign his license or lease to an assignee whom the Minister considers to be:

· of good reputation;
· likely to have sufficient technical knowledge and financial resources; and
· in all other respects acceptable to the Federal Government.

In addition, the Petroleum (Drilling and Production) Regulations 1969 provide that in an application for the assignment of an oil prospecting license or oil mining lease "an applicant should furnish in respect of the assignee all such information as is required to be furnished in the case of an applicant for a new license or lease". These provisions mean that an applicant for assignment must have identified a prospective assignee before presenting its application.

Recently an oil company in Nigeria, Ashland Oil Nigeria Limited, sought permission for the assignment of its Nigerian oil mining leases to an assignee with whom it had reached agreement on terms. In response, the Nigerian government accused Ashland Oil of assigning its interests "without approval" and proceeded to revoke its (Ashland Oil's) leases and to take over its operations. Although the reasons for the Government's action are unclear it seems that the Government now takes the view that any company considering assignment of its lease must first obtain from the Government approval in principle for the assignment before proceeding to seek willing assignees. It is possible that this view follows from the Petroleum (Amendment) Decree of 1966 by virtue of which the Head of State became empowered to "cause the farm-out of a marginal field if the marginal field has been left unattended for a period of not less than 10 years from the date of the first discovery of the marginal field". The Decree defines a marginal field as "such field as the Head of State ...... may, from time to time, identify as a marginal field". Therefore, the Government, it seems, now considers itself to have a right of first refusal on assignments of leases.
 

In a recent ruling on an application for injunction to restrain infringement the Federal High Court held that where a drug has not been registered with the National Agency for Food and Drug Administration and Control [NAFDAC] then marketing or advertising of such drug in Nigeria was not lawful. Since lawful marketing or advertising in Nigeria could not occur, a trader could not acquire in Nigeria any reputation or goodwill in respect of such goods. Consequently an action for passing off could not succeed. Also, although the plaintiff (a foreign trademark owner) had filed a trademark application in Nigeria the trademark had not yet been registered and as a result the statutory right of action against infringement was also not available.

The Federal High Court after a hearing inter partes therefore discharged an order of injunction which it had earlier granted. The earlier order of injunction had been granted after a hearing ex parte. This decision serves to emphasise the importance of prompt registration of foods and drugs with the NAFDAC.

The National Agency for Food and Drug Administration and Control (NAFDAC) was established in 1992 and is charged with regulating and controlling the importation, exportation, manufacturing, advertisement, distribution, sale and use of food, drugs, cosmetics, medical devices, bottled water and chemicals. Since 1995 it has released the following regulations:

Drug Products Advertisement Regulations
Pre-packaged Food (Labeling) Regulations
Bottled Water (Advertisement) Regulations
Food Products Registration Regulations
Bottled Water (Labeling) Regulations
Cosmetic and Medical Devices (Advertisement) Regulations
Bottled Water Registration Regulations
Pesticide Registration Regulations
Non-Nutritive Sweeteners in Food Products Regulations
Non-Nutritive Sweeteners in Drug Products (Prohibition) Regulations
Food Products (Advertisement) Regulations
Food Grade (Table or Cooking) Salt Regulations

Under these regulations many foods and drugs may not be marketed or advertised in Nigeria unless they have been registered with the NAFDAC.
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 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.
 

The National Agency for Food and Drug Administration and Control (NAFDAC) is the agency charged with regulating and controlling the importation, exportation, manufacturing, advertisement, distribution, sale and use of food, drugs, cosmetics, medical devices, bottled water and chemicals. This agency recently published the following regulations dealing with foods and drugs. The regulations are:

· Drug Products Advertisement Regulations
· Pre-packaged Food (Labeling) Regulations
· Bottled Water (Advertisement) Regulations
· Food Products Registration Regulations
· Bottled Water (Labeling) Regulations


Briefly, the thrust of these regulations is to protect members of the public by providing, inter alia, that:

¨ food products and drug products must be registered with NAFDAC before they can be sold or advertised in Nigeria;
¨ the of any product must indicate the name of the product and the constituents of or ingredients in the product as well as the manufacturer of the product;
¨ the expiry date of any product must be indicated on its packaging;
¨ the trademark, or advertising of any product must not misrepresent the nature, qualities or origin of the product or be otherwise misleading;
¨ information regarding ionization or other special treatment of pre-packaged food must be provided;
¨ for food products, details of any nutritional claim must be stated on labeling;
¨ advertisements for drug products must have the prior clearance and approval of NAFDAC;

¨ labeling or advertising statements claiming or implying a superlative function may not be used unless the statements can be substantiated;
¨ directions for use must be provided with packaging; for drug products, indications for use as well as contra-indications must also be provided;
¨ no advertisement may claim that a drug is for the treatment, prevention or cure of any of a list of 65 diseases, disorders or abnormal physical states;
¨ prescription drugs may not be advertised to the public.

POST SCRIPT

The following regulations have also been published:

· Cosmetic and Medical Devices (Advertisement) Regulations
· Bottled Water Registration Regulations
· Pesticide Registration Regulations
· Non-Nutritive Sweeteners in Food Products Regulations
· Non-Nutritive Sweeteners in Drug Products (Prohibition) Regulations
· Food Products (Advertisement) Regulations
· Food Grade (Table or Cooking) Salt Regulations
· Cosmetic Product (Prohibition of Bleaching Agents, etc.) Regulations

Foreign trademark owners continue to instruct their agents in Nigeria to file service mark applications and 'Paris Convention' applications even though such applications are not presently available. It is therefore necessary to remind such trademark owners that Nigerian law does not presently provide for the registration of service marks. Only trademarks falling within International classes 1 to 34 are provided for.

Although Nigerian law, since 1965, has contained a provision for the making of 'Paris Convention' applications, the necessary ministerial declaration which would indicate the countries that were to be recognised in Nigeria as 'Convention' countries has never been made. Consequently the Trademarks Registry has not been accepting 'Convention' applications. Recently, however, a number of applications claiming 'Convention' priority were advertised in the official Trademarks Journal. [See issues dated 30th October 1995 and 8th April 1996.] It is not clear, however, whether these applications are entitled to 'Convention' priority. The point has never been tested in court.

Nigeria -    Trademarks: (1) No 'Convention' applications.
Although Nigerian law, since 1965, has contained a provision for the making of 'Paris Convention' applications, the necessary ministerial declaration which would indicate the countries that were to be recognised in Nigeria as 'Convention' countries has never been made. Consequently the Trademarks Registry has not been accepting 'Convention' applications. Recently, however, a number of applications claiming 'Convention' priority were advertised in the official Trademarks Journal. [See issues dated 30th October 1995 and 8th April 1996.] It is not clear, however, whether these applications are entitled to 'Convention' priority. The point has never been tested in court.
  

The Nigerian Enterprises Promotion Decree of 1989 provided for restrictions on foreign ownership of Nigerian companies. As a result the Corporate Affairs Commission did not allow foreigners to register companies until such foreigners had obtained the appropriate regulatory permits and approvals. [The Corporate Affairs Commission is the body responsible for the registration of companies in Nigeria.] As it often took months (and sometimes years) to obtain these permits and approvals, a foreigner who wished to promptly establish his Nigerian business vehicle and secure his preferred company name had to use Nigerian nominees as the initial shareholders of the company.

In order to encourage foreign investment in Nigeria the Nigerian government recently repealed the Nigerian Enterprises Promotion Decree and promulgated the Investment Promotion Commission Decree of 1995. The restrictions on foreign ownership no longer exist. Consequently, the Corporate Affairs Commission has indicated that it will now allow the registration of companies whose subscribers or shareholders are foreigners. The foreigners may then proceed to apply for such permits and approvals as may still be required, secure in the knowledge that the proposed business vehicle is in place.

 

The Corporate Affairs Commission, the body responsible for the registration of companies, recently completed the transfer from a manual register onto a computer database of the names of all registered companies. Anyone conducting a search can now obtain a computer printout showing the names of registered companies which are similar to any name provided by the enquirer. As a result, it is now much easier for trademark owners to take advantage of the provisions of section 30 of the Companies & Allied Matters Decree 1990 in protecting their trademarks. The Decree came into force on the 31st of December 1990 and s.30 provides, inter alia, that no company may be registered by a name which "in the opinion of the Commission would violate any trade mark .... registered in Nigeria unless the consent of the owner of the trade mark .... has been obtained". Where a company is registered with a name that conflicts with an existing trademark and the consent of the trademark owner has not been obtained, section 31 gives the Commission power to require the company to change its name. At present the Commission does not carry out any examination to determine whether use of a name would violate the rights of any trademark owner. It is therefore incumbent on trademark owners to take steps to alert the Commission to such violations. Owners of famous trademarks (registered in Nigeria) would be particularly interested in this development as it is usually such marks that are copied or adopted by infringers seeking to enhance their image by using such marks in their company names. As service marks are not yet registrable in Nigeria, trademark owners who provide services and have registered their marks in, for example, Class 16, 25 or 28 should also be interested in this development.