PROBLEM AND PROSPECT OF PETROLEUM PROFIT TAX ADMINISTRATION IN NIGERIA CASE STUDY OF FEDERAL INLAND REVENUE SERVICE, FBIRS NIGERIA AND THE OIL AND GAS INDUSTRY


PROBLEM AND PROSPECT OF PETROLEUM PROFIT TAX ADMINISTRATION IN NIGERIA CASE STUDY OF FEDERAL INLAND REVENUE SERVICE, FBIRS NIGERIA AND THE OIL AND GAS INDUSTRY

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CHAPTER ONE

INTRODUCTION

1.0      BACKGROUND TO THE STUDY

As Africa’s most populous country, Nigeria boasts of the continent’s second largest oil reserves and has a very promising growth outlook. Poised to eclipse Africa’s largest economy by 2016, Nigeria is becoming a rather worthy recipient of foreign capital, receiving anywhere from $10-$12 billion per year. However, in order to take full advantage of what foreign investment has to offer, Nigeria has been trying to improve its economic and political climate.

Taxation remains a veritable instrument for national development. Apart from being a major source of revenue for the government, taxation provides goods and services needed by citizens. Taxation policies can stimulate economic growth and job creation through its impact on investment and capital formulation in the economy. In this respect reforms in the administration of petroleum tax system that ensure effectiveness, equity and efficiency are conditions for healthy public revenue. The decision to reform the Nigerian tax system is crucial in order to improve the revenue base for national development and attaining socio-economic goals for taxation.

The oil industry is thus the hub of the Nigerian economy, and needs to be sustained if the country is to achieve real economic growth. According to Nwete (2003), the oil glut of the 80’s that greatly impacted on global oil prices and the low OPEC quota, foisted on the country various fiscal regime for petroleum especially the petroleum profit tax of 85% and 20% royalty regime, all in a bid to get more revenue to oil the nation’s economy. Since then Nigeria has had lofty aims for its oil industry, including the desire to increase reserve from 34billion barrels to 40billion barrels by 2010 and subsequently its OPEC quota, optimization of oil revenue, increase in the industry’s local content, and continuous attraction of foreign investment as a way of promoting and sustaining investment in the oil industry.  If we compare it with other economic activities, the petroleum industry has wider attraction because of its special nature, which stems from the fact that till date, it remains the largest and most important industry in the world. It has continuously provided the world’s energy and industrial needs, from transportation to agriculture. It has also been a Monet spinner just for the oil production companies, providing them with the opportunity of economic and social development ,and second for the multinational oil companies engaged in its extraction, and by extension the industrialized market to which the earnings of the multinational oil companies. From exploration to eventual production, the cost of developing and operating an oil field is very high and probably higher than any other industry.

Before independence in 1960, agriculture was the mainstay of Nigeria economy, providing cash crops as well as food to the entire economy. The history of oil production in Nigeria dates back to 1908 when an affiliate of a German Exploration Company, the Nigerian bitumen company came to present day Ondo State to venture for Bitumen (tar sand). By 1971, a year after the Civil War, oil had started becoming more important to the economy4. With the boom in the late seventies of oil, attention shifted completely from the agricultural sector to the oil sector of the economy. The structure of Government’s participation, as well as its impacts on the entire sector of the economy, changed from been a mere ‘supportive’ sector it was in 60s to the predominant source of foreign exchange earnings and development finance as well as a viable access to international development opportunities. The very vital importance of oil to Nigeria dictates government’s involvement in the regulation of the Nigerian oil sector. It is noteworthy that prior to 1971, all of the multinational companies were wholly owned by their foreign parent companies. In that same year, government started acquisition of participating interest in the operation of these companies while citizens also acquired varied shareholding interests in the assets of these companies.

The Petroleum Profit Tax Act 1959(PPTA) provides for the imposition of tax on the chargeable profits of companies that are engaged in petroleum operations in Nigeria. Petroleum operations is defined under the PPTA as “the winning or obtaining oil in Nigeria by or on behalf of a company for its account by any drilling, mining, extracting or other like operations or process, not including refining at a refinery, in the course of a business carried on by the company engaged in such operations, and all operations incidental thereto and any sale of or any disposal of chargeable oil by or on behalf of the company” Nigeria economy is dependent on oil, as it cannot finance social and economic growth in the absence of a large oil revenue base. Oil accounts   for about 90-95% of the export revenue, over 90% of foreign exchange earnings and about 80% of government revenue.

Gelb (1981) averred that oil and gas production had been reveiving favorable tax treatment for many years, although one special provision dealing with percentage depletion was repeated for most oil and gas produces in 1975.The whole of the industry from exploration to production is filled with risks. From the high possibility that a hole in the ground will not yield reserves, the risks that the reserves if discovered will not be in commercial quantity to justify the investment, the technology risk in oil field development, to the failure of operations and vagaries of international oil prices. Thus upstream investment remains very risky and unpredictable. Most times development of new fields involve the sinking of capital before actual production reveals the reservoir characteristics, unlike most other economic activities. The objectives of petroleum taxation according to Nwete (2004) are numerous among which are: taxing in the petroleum industry is a way of achieving government’s objective of exercising right and control over the public asset, Government imposes very high tax as a way of regulating the number of participants in the industry and discouraging its rapid depletion in other to conserve some of it for future generation.

1.2. STATEMENT OF PROBLEM

Many researchers have argued the impact of Petroleum profit tax administration on economic growth of any nation. Some are of the opinion that tax administration has great effect on the growth of Nigerian economy while some of the authors are of the opinion that Petroleum profit tax administration has no effect on economic growth of the country rather the level of implementation of the revenue through government expenditure. In 2008, the Federal Government’s retained revenue increased to N3,193.4 billion or 13.3 per cent of GDP, from N2,333.7 billion or 11.2 per cent of GDP in 2007. Analysis of the revenue showed that the share from the Federation Account was N1,847.0 billion (57.8%); VAT Pool Account, N58.3 billion (1.8%); Federal Government Independent Revenue, N114.0 billion (3.6%); Budget Augmentation, N385.7 billion; share of excess crude account, N106.5 billion (15.4%); and “others” accounted for the balance of N682.0 billion (21.4%) (CBN, 2008). In terms of tax efforts, measured as a ratio of Internally Generated Revenue (IGR) to total revenue (TR), overall, the consolidated IGR/TR ratio of the state governments improved from 14.8 per cent in 2007 to 15.0 per cent in 2008, indicating that state governments made appreciable efforts to shore up their internal revenue (CBN, 2008). It is obvious from the statistics above that the potential of taxation as a source of government revenue is not adequately tapped in Nigeria.

PROBLEM AND PROSPECT OF PETROLEUM PROFIT TAX ADMINISTRATION IN NIGERIA CASE STUDY OF FEDERAL INLAND REVENUE SERVICE, FBIRS NIGERIA AND THE OIL AND GAS INDUSTRY

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As Africa’s most populous country, Nigeria boasts of the continent’s second largest oil reserves and has a very promising growth outlook. Poised to eclipse Africa’s largest economy by 2016, Nigeria is becoming a rather worthy recipient of foreign capital, receiving anywhere from $10-$12 billion per year. However, in order to take full advantage of what foreign investment has to offer, Nigeria has been trying to improve its economic and political climate... accounting project topics

PROBLEM AND PROSPECT OF PETROLEUM PROFIT TAX ADMINISTRATION IN NIGERIA CASE STUDY OF FEDERAL INLAND REVENUE SERVICE, FBIRS NIGERIA AND THE OIL AND GAS INDUSTRY