August 19, 2021/United Capital Research
Daily Insight
Petroleum Industry Act (PIA) Series 3: A little too late?
In the concluding part of our series, we will be considering the structural changes to tax and royalties collection aimed at attracting new investors into Nigeria’s upstream assets. The act introduces the collection of Hydrocarbon Tax of 15.0% – 30.0% by the Federal Inland Revenue Service (FIRS), along with a Company Income Tax of 30.0% and Education Tax of 2.0% (which will no longer be tax deductible). Lastly, these new tax requirements are expected to replace the now repealed Petroleum Profit Tax Act (PPTA) of 75.0%. This is a potential sweetener for International Oil Companies (IOCs) and Exploration & Production (E&P) firms as less tax deduction denotes more profit.
On the royalties front, as against the existing flat rate (regardless of output levels or type of well), royalties are now payable at 15.0% for onshore areas, 12.5% for shallow water, 7.5% for deep offshore & frontier basins, and 2.5% – 5.0% for natural gas. In addition, a price-based royalty ranging from 0.0% – 10.0% is payable and to be credited to the Nigerian Sovereign Investment Authority. As a result, drilling at reduced cost will be promoted, encouraging improved production in the industry.
In all, we note the PIB was expected to generate new foreign investor interest in Nigeria’s upstream assets. However, while the assent is commendable, we remain concerned that the assent may have come a little too late. This is because it comes at a time when foreign investor interest in Nigeria’s upstream assets is waning, reflected in the recent spate of sale to domestic investors. In addition, we note the paradigm shift towards clean energy poses a threat to increased investment in Nigeria’s fossil-fuel led assets.
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