INTRODUCTION Government’s policy of discouraging gas...

Ascension Consulting Services 178B, Prince Ade Odedina Str, Off Sinari Daranijo Str,

Victoria Island, Lagos, Nigeria.

Tel: +234 1 700 1006 Mobile: +234 809 041 6509 [email protected]

INTRODUCTION

The Tax Appeal Tribunal (TAT) sitting in Lagos on the 17th day of March 2015 had allowed the gas flare fee incurred in the course of petroleum operations as tax deductible. The case was between Mobil Producing Nigeria Unlimited (Appellant) and Federal Inland Revenue Service (Respondent), the TAT adjudged the case in favour of the Appellant and discharged the additional assessment issued by the Respondent.

2. HIGHLIGHT OF THE CASE

2.1 The Dispute

The Respondent assessed the Appellant to an additional Petroleum Profit Tax (PPT) from 2006 to 2008 in respect of gas flaring fees. Meanwhile, the Appellant disagreed on the basis that the sum it paid for the period under assessment for flaring gas were wholly, exclusively and necessarily incurred for the purpose of its petroleum operations.

The Appellant argued that the payments made in respect of 2006-2008 years of assessment for gas flaring are tax deductible, considering the fact that they were wholly, exclusively and necessarily incurred in the course of producing crude oil at the time when utilization and re-injection of the gas were not feasible.

Contrarily, the Respondent canvassed that flaring of gas without gas flaring certificate from the Minister of Petroleum Resources offends the provisions of the Law and is against the Federal

Government’s policy of discouraging gas flaring within Nigeria and it attendant hazardous consequences.

2.2 The Law and Parties Position

The Petroleum Profits Tax Act (PPTA) governs transactions and taxation in the upstream sector of the oil and gas industry. Sections 10 of the Act provides for deductions allowable when computing the adjusted profit of any company in the upstream sector of oil and gas industry during an accounting period.

The Section captures outgoings and expenses wholly, exclusively and necessarily incurred whether within or outside Nigeria during an accounting period as tax deductible before arriving at taxable profit. The Appellant contested that the sum expended within 2006 – 2008 year of assessment for flaring of gas were wholly, exclusively and necessarily incurred for the purposes of petroleum operations, relying on Section 10 (1) of PPTA.

The Appellant also referred the Tribunal to Section 11 of PPTA and stated that Section 11(1) of PPTA is subject to Section 11(2) (b); Section 11 (2) (b) provides;

“The Incentives specified under subsection (1) of this section shall be subject to the following conditions, that is – the company shall pay the minimum amount charged by the Minister of




Petroleum Resources for any gas flared by the company.”

On the strength of the foregoing provisions of the law, the Appellant submitted that it made payments for gas flaring during 2006 – 2008 accounting period and that the sums paid to the government should be deducted as outgoings and expenses for the purposes of computing the adjusted profits of the company. It was of the view that the Respondent wrongly disallowed the sum and issued an additional notice of assessment.

On the contrary the Respondent referred the Tribunal to Sections 3 of the Associated Gas Re-Injection Act (AGRA) which provides:

“(1) Subject to subsection (2) of this section, no company engaged in the production of oil or gas shall after 1 January, 1984 flare gas produced in association with oil without the permission in writing of the Minister. (2) Where the Minister is satisfied after 1 January, 1984 that utilization or re-injection of the produced gas is not appropriate or feasible in a particular field or fields, he may issue a certificate in that respect to a company engaged in the production of oil or gas- (a) specifying such terms andconditions, as he may at hisdiscretion choose to impose, for thecontinued flaring of gas in theparticular field or fields; or(b) permitting the company tocontinue to flare gas in theparticular field or fields if thecompany pays such sum as theMinister may from time to timeprescribe for every 28.317Standard cubic metre (SCM) of gasflared:Provided that, any payment dueunder this paragraph shall be madein the same manner and be subjectto the same procedure as for thepayment of royalties to the Federal

Government by companies engaged in the production of oil.”

The Respondent opined that the relevant section in the AGRA was meant to discourage indiscriminate flaring of associated gas by operators. They argued that section 3(1) of AGRA make flaring of gas without the Minister’s certification unlawful. The Respondent referred the Tribunal to Section 4 of AGRA which provides penalty for non-compliance with Section 3 of AGRA, and submitted that flaring of gas by the Appellant without the Minister’s permission in writing is illegal.

In the Appellant’s response, they submitted that payment for flaring of gas fees precedes issuance of certificate by the Minister of Petroleum Resources. They stated that Section 3(1) of AGRA is subject to Section 3(2) of AGRA, where compliance of Section 3(2) of AGRA is established, compliance with Section 3(1) of AGRA becomes irrelevant. Briefly Section 3(1) uses “shall” while Section 3(2) uses “may”, therefore the Minister may issue a certificate not must/shall issue a certificate to the company were it is satisfied that utilization or re-injection of the produced gas is not appropriate or feasible in a particular field or fields.

Whereas the Respondent asked the Tribunal to allow the notice of additional assessment for the 2006 – 2008 accounting period issued to the Appellant to pay the total sum of the additional PPT, the Appellant urged the Tribunal to discountenance the additional notice of assessment, considering the fact that the Minister has not adjudged the Appellant of default in meeting with its obligations under Section 3 of AGRA having paid the prescribed fees. The Appellant submitted that it has not breached Section 3 of AGRA and Section 4 which provides for penalty of default of Section 3 cannot apply to them.

2.3 Tribunal’s Resolution

The Tribunal stated that PPTA and AGRA does not expressly require that a company must obtain gas flare certificate before expenses incurred can be taxed deductible. It rejected the report of Nigeria




Extractive Industries Transparency Initiative (NEITI) relied on by the Respondent which states that gas flare fee paid by the Appellant for the said years of assessment is not tax deductible, stating that the NEITI report cannot overrule either PPTA or AGRA.

It agreed with the Appellant that Section 3 (1) of AGRA is subject to Section 3(2) of AGRA, stating that the Minister may issue certificate if it so desires, if it is satisfied that utilization or re-injection of the produced gas is not appropriate or feasible. It stated that the Minister has the discretion to issue a certificate to a company to continue to flare gas.

The Tribunal stated inter alia that the Appellant applied for gas flaring certificates and made requisite payments for the period from 2006 - 2008, to continue flaring gas, the Minister did not issue the certificate or sanction the Appellant for illegal gas flaring. Consequently, the Tribunal was of the view that the Minister did not consider the flaring of gas by the Appellant from 2006 – 2008 accounting period as illegal. Therefore the Tribunal held that the Respondent was wrong in disallowing the gas flare fee incurred by the Appellant in the course of its petroleum operations and set aside the additional notice of assessment issued to the Appellant.

3. Our Comment

3.1 Gas Flaring

It is no news that Nigeria suffers loss of revenue and environment depletion from the flaring of associated gas produced in the course of exploration of crude oil in the various oils fields in Nigeria. This was what motivated the National Assembly to enact the Associated Gas Re-injection Act (AGRA), to encourage optimum utilization of associated gas and to discourage unnecessary flaring of gas.

Firstly, we commend the TAT for their seasoned ruling. A cursory look at the decision of the TAT may seem like the judgment is encouraging gas flaring without obtaining certificate from the Minister of Petroleum Resources. On the contrary, we believe that the TAT were more particular with

complying with the law. Also considering the fact that the company has been making requisite payment for flaring gas and had applied for gas flaring certificate, also the government cannot be seen to be approbating and reprobating. We agree with the Tribunal that by not sanctioning the company for the period under assessment, it connotes a tacit approval and implied affirmation that the company should flare gas for the period covered by the payment.

It is our view that the AGRA may be encouraging gas flaring, if the Act continues to retain the provision that payment could be made to the government to allow a company to flare gas. The Act should have provided basis for determining when it will not be appropriate or feasible to utilize associated gas, in order to effectively regulate flaring of gas.

3.2 Gas Flaring Certificate

Another issue that arose in the case was whether the company was right to flare gas when the Minister had not issued it with a certificate to that effect. It is clear from the relevant law that the Minister may issue certificate to a company where it becomes obvious that utilization or re-injection is not appropriate or feasible in a particular field or fields. The Minister’s power is hinged on the fact that flaring of gas is prohibited without the Minister’s permission in writing or certificate to that effect.

We also agree with the Tribunal when it held that by collecting payment for gas flaring for three years from the company without sanctioning the company, it means that it had tacitly given the company a go-head to flare gas for that period. We believe that gas flaring certificate should be issued as promptly as possible and where the certificate will not be granted it should also be communicated to the company in writing to enable the company concerned reposition itself and take the appropriate measure.

3.3 Allowing Fees Incurred on Gas Flaring

The PPTA provides deductions to be made before taxable profit of an Oil company is arrived at. The dispute before the TAT in the instant case is on




Azeez Alatoye 08099934520

[email protected]

Ademola Olanrewaju 08098568889

[email protected]

Adeniyi Sunmola 08099934537

[email protected]

For further

enquiries

please

contact:

refusal by the FIRS to allow fees incurred in gas flaring. The judgement has put to rest the issue of whether gas flaring fees is allowable or not.

Conclusion

Unless the FIRS appeals the judgment, the position will remain that gas flaring fees are allowable deduction for PPT purposes in respect of companies operating in the upstream sector of the oil and gas industry.

Disclaimer

Please note that this memorandum is not intended to

give specific technical advice and it should not be

construed as doing so. It is designed to alert clients to

some of the issues. It is not intended to give exhaustive

coverage of the topic. Professional advice should

always be sought before action is either taken or

refrained from as a result of information herein. In any

case, Ascension does not accept any responsibility for

any decision whatsoever made based thereon or any

liability incurred for failure to consult with professionals

on any specific areas of issues raised.

mailto:[email protected]

mailto:[email protected]

INTRODUCTION Government’s policy of discouraging gas...

Documents

Transcript of INTRODUCTION Government’s policy of discouraging gas...