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.