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      1.1       Background to the Study

Before a country considers how best to administer its tax system it must first possesses a clear picture of its tax system. The quality and quantity of resources required by tax administrations are to a large extent determined by the type of tax system which it is introduced. A nation‟s tax goals are not achieved by designing a tax system which is fair. Any fair system which is not administered as planned becomes inequitable. Thus, a good tax system is capable of financing the necessary level of public spending in the most efficient and equitable way possible. It should also raise enough revenue to finance essential expenditures without recourses to excessive public sector borrowing, raise the revenue in ways that are equitable that minimized its disincentive effects on economic activities, to do so in ways that do not deviate substantially from international norms.

It is common knowledge that one of the problems plaguing taxation in Nigeria has been the widespread tax evasion and avoidance which in the view of many experts in the tax field which has led to the loss of revenue which can be blamed on our inefficient and inept tax administrative machinery[1]. There‟s no doubt that the administrative machinery in Nigeria still has a long way to go in terms of delivery and efficiency but it is believed that Nigeria‟s income tax law could in spite of their low rates and generous allowances, still have yielded much more revenue, but for the inefficient and defective assessment and collection machinery.[2]For no matter how sophisticated and progressive a tax legislation is, it cannot be effective unless it is properly administered with competence and integrity. This is why in this paper we will be examining the problems facing the administration of petroleum taxation.

The Nigerian tax system has undergone several reforms geared at enhancing tax collection and administration with minimal enforcement cost. The recent reforms include the

Petroleum Industry Bill 2012 which is with the National Assembly, introduction of TIN (Unique Tax Payers identification number which became effective since February 2008), automated tax system that facilitates tracking of tax positions and issues by individual tax payers-payment system which enhances smooth payment procedure and reduces the incidence of tax touts, enforcement scheme (special purpose tax officers), these are special tax officers in collaboration with other security agencies to ensure strict compliance in payment of taxes.

The tax authority now has autonomy to asses, collect and record tax. This enabling environment which came into being on the basis of (Section 8(q) of FIRS Establishment Act 2007) has led to an improvement in tax administration in the country.

Petroleum is no doubt a predominant source of Nigeria‟s revenue and foreign exchange. The petroleum industry is divided into two main segments. The upstream and downstream sectors. The upstream refers to activities such as exploration, production and delivery to an export terminal of crude oil or gas.

The downstream on the other hand encompasses activities like loading of crude oil at the terminal and its user especially transportation, supply tradition, refining, distribution and marketing petroleum. The Petroleum Profit Tax is applicable to upstream operations in the oil sector. It is particularly related to rents, royalties, margins and profit sharing elements associating with oil mining, prospering and exploration leases. It is the most important tax in Nigeria in terms of its share of total revenue, contributing almost 90 percent of foreign exchange earnings and government revenue. It covered oil and gas sector.[3]

The tax system is an opportunity for government to collect additional revenue needed in discharging its pressing obligations. A tax system offers itself as one of the most effective means of mobilizing a nation‟s internal resources and it lends itself to creating an

environment conducive to the promotion of economic growth.

Oil is the dominant source of government revenue,accounting for about 90 percent of total exports, and this approximates to 80 percent of total government revenues. Since the oil discoveries in the early 1970s,oil has become the dominant factor in Nigeria‟s economy. The problem of low economic performanceof Nigeria cannot be attributed solely to instability of earnings from the oil sector, but as a result of failure by the government to utilize productively the financial windfall from the export of crude oil from the mid-1970s to develop other sectors of the economy.

The Nigerian petroleum industry has been described as the largest among all industries in the country. This is probably due to the belief that petroleum is one of the major sources of energy worldwide.The size,international characteristics, androle assumed by the petroleum industry were noted to have originated from the notion that petroleum is versatile as it currently satisfies a wide variety of energy and related needs.

Petroleum is the most vital source of energy,providing over 50 percent of all commercial energy consumption in the world. The revenues obtained from crude oil in Nigeria are of absolute advantage to expenditure commitments on various projects at the local,state, and federal levels. The Nigerian economy relies heavily on the revenue derived from petroleum products,they provide 70 percent of government revenue and about 95 percentof foreign exchange earnings.Apart from this, the contribution of petroleum to national development is many and varied,employment generation,foreign exchange earnings,income generation, industrialization, and improvements in other economic variables.

While the major investors in the petroleum industry are the international oil companies (IOCs), the principal legislation governing petroleum operations in Nigerian is the Petroleum Profit Tax(PPT).under the PPT, the tax rate was set at 67.5 percent for the first five years of operations by the oil company and 85percent thereafter.

The petroleum industry is the largest and main generator of Gross Domestic Product (GDP) in Nigeria which is the most populous in African nations. Since the British discovered oil in the Niger Delta in the late 1950s;the oil industry has become the main stay of the

Nigerian economy. Agriculture was the mainstay of the country‟s economy. However, the regulatory regime, since its enthronement in the industry has not been without challenges.

      1.2       Statement of the Research Problem

It is obvious that petroleum income be it revenue from the sale of crude oil, petroleum profit tax, royalties etc. can cause an increase or a decrease in economic growth and development of a nation, depending on the type of policy and practical implementation the government in power adopts. Nigeria with all its oil wealth has performed poorly, with GDP per capita today.

The problems with Nigerian economy have been traced to failure of successive governments to utilize oil revenue and excess crude oil income in the development of other sectors of the economy effectively  and efficiently. overall, there has been poor performance of national institutions such as power, energy, road, transportation, politics, financial systems and investments environment have been deteriorating and inefficient.

There are problems affecting the Petroleum Profit Tax (PPT) in general. These include the problems relating to the PPT administration, the complexity of PPT/MOU calculation, and the problems of PPT avoidance and evasion.

The Corporate Tax Act has provided various offences and penalties, and the reason for these penalties are to discourage companies from evading or avoiding the payment of taxes as and when due.

Therefore even if tax avoidance strategies are legal, the question is whether they are ethical.in 1947 in the United States of America, a Federal Judge, Learned Hand answered this question in the following way:[4]

Over and over again courts have said that there is nothing sinister in so arranging one‟s affairs as to keep taxes as low as possible. Everybody does so, rich or poor; and all do right, for nobody owes any public duty to pay more than the law demands: taxes are enforced exactions, not voluntary contributions.to demand more in the name of morals is mere cant.


There is no doubt that about the significance of strong, able and effective administration in any system. It is widely agreed that one of the main aims of taxation is to raise revenue for the government to meet its needs of providing necessary services to the public. It is also agreed that tax evasion/avoidance cause government to loose huge amount of money. Consequently, there is the opinion that the loss of revenue as the result of widespread tax evasion/avoidance in Nigeria is due to the weak, inept and inefficient system of tax administration.[5]

In the oil sub-sector, the Federal Board of Inland Revenue (FBIR) is vested with the power to administer the petroleum Profit tax. It is also responsible for carrying out all acts deemed necessary and expedient for inter-alia the assessment of petroleum profits tax.6

Another problem that may affect petroleum Profit Tax as well as its assessment is the tax evasion/avoidance.An oil company can evade tax by deliberately delivering false returns, refusal to pay the tax at the right time or refusal to pay the tax at all. It can also avoid tax by manipulating some provisions from the petroleum Profit Tax Act. In other words, some oil companies may look for any lacuna in the PPT provisions so that they will make use of it to avoid tax. This also a serious matter that may render a significant amount of revenue coming from this sector to reduce. Subsequently, the government may not have enough money to use for public services; it is also a critical problem that has to be tackled.

Also, theft and illegal oil bunkering of oil by supposed criminal syndicates also reduces the country‟s revenue, possibly by several billion dollars every year.[6] In March 2003 for example, political turmoil resulted in force majeure declarations by Chevron, Texaco and Shell, the major oil producers in the country.

There is also the problem of the crises in Niger Delta area gives negative effect on the petroleum Profit Tax and subsequently affects its assessment. For example, on January 19, 2006, a group called the Movement for the Emancipation of the Niger Delta (MEND) grabbed four oil workers and also attacked pipelines and platforms of Royal Dutch Shell Company(which was the biggest oil producing company in the Niger Delta).the MEND was always behind the bombing of pipelines and kidnapping of oil workers. The group has also warned that it will drive oil companies like Shell, Chevron and Exxon-Mobil out of the area,[7]

Presently, Nigerian has been hit by growing unrest in the country‟s oil producing south by a new militant group calling itself the Niger Delta Avengers, this group attack on

Shell‟s Forcados underwater flow line in February used divers, showing they have the skills and knowledge of oil infrastructure to target areas that will significantly halt production.

Other attacks include the sabotage of Chevron‟s offshore okan gas valve platform, and bombings of Eni‟s infrastructure and Nigerian National Petroleum Corporation (NNPC)

pipelines, which provide gas to Lagos for power generation.

Nigeria has budgeted for production of 2.2 million barrels per day this year but the attacks have cut output to 1.4 million barrels per day according to the petroleum minister Emmanuel Kachikwu. The sabotage couldn‟t have come at a worse time, with Nigeria, which normally depends on oil export sales for 70 percent of government revenue, on the brink of a recession. The daily production output of the oil companies in the Niger Delta drops and so Nigeria loses revenue. Indeed, this is a tremendous problem of which an urgent solution should be provided.

Another major problem existing within the tax administration of the upstream oil subsector lies essentially on the design of the tax administrative system and the capability of the institution. This consequently leads to low efficiency and effectiveness of not only the assessment of petroleum profit tax, but also the collection of the tax.

The first need of any modern government is to generate enough revenue which is

indeed „‟the breadth of its nostrils‟‟. There is high incidence of  tax evasion and avoidance by tax payers. This may affect the amount of revenue collectible by the government for the running of the administration furthermore, it is hoped that people were wrongly assessed and the assessment sometimes result to regressive taxation. Thus, taxation is by far one of the most significant sources of revenue for the government .Nigerians regard payment of tax as a means through which government raises revenue at herself on the expense of their sweat. Operators in the Nigerian Oil and Gas industries have in recent times expressed concern over excessive taxes which have impeded their ability to operate at optimal level as well as achieve the desired level of growth. In contracts, government has rolled out various incentives to investors in these sectors to facilitate a favourable business environment and enhance international competitiveness.

It is good to note that no taxation succeeds without the tax payers‟ co-operation. Here, we can ask some thought provoking questions such as:

  1. What makes taxation such a difficult issue?
  2. Why do people feel cheated when it comes to tax? iii. Is government making judicious use of tax payers‟ money? iv.            What are the problems affecting the successful operation of tax system in Nigeria?

In view of the above questions this study is going to be carried out to offer solutions to them.There is high incidence of tax evasion and avoidance by tax payers. This may affect the amount of revenue collectible by the government for the running of administration.

Furthermore, it is hoped that people were wrongly assessed and the assessment sometimes result to regressive taxation.

Tax as a whole has been the most dependable government revenue source. This is because of the certainty of revenue to be derived data at a particular time. Despite these there have been some problems on the part some taxation authority in ensuring the smooth and efficient use of machinery of collection of taxes.

Taxation in petroleum industry is not a simple task especially in Nigeria where voluntary compliance is lacking in effecting the problems of tax collection constitute area ban to the achievement of target the peculiar problems which prompted this research viz.

The rate of taxes have several implication for taxation in petroleum industry if the rates are high, people will reject them and if they are low the government  will lose large revenue . How then will the board reconcile these two interest? What rate should it charge?

Most of the tax law are outdated and are being subjected to different need of amendment which makes it difficult to identify the real law. What then is the government doing to prevent saboteurs from taking advantage of these poor legal systems.

In recent years there had been increase of sharp malpractices and practices and mismanagement of tax revenue, by issuing of duplicated receipt and forged certificate and collecting revenue and not paying it into government treasury, who is responsible for such malpractices? Does it mean the collection machinery is ineffective?  Or are the staff purity treated? If they are, how does the board intend to solve it?

Another problem is the conflict between government policies and the objectives, so how does government intend to harmonize these two issues? Despite these problems it does not mean problem taxation was bad, but it will perform better if these problems are solved.

Empirical studies like those of (Sanni 2002) and (Dotun 1996) have reported different views on tax incentives as a catalyst for economic growth and development. A school of thought believes that tax incentive encourages economic growth and development while another believes that it reduces revenue to the government. As a result of this , it does not stimulate economic growth and development .It must be noted that some of the measures taken so far by the government to improve the economy has not produced good results. The Naira exchange rate has not been able to stimulate the economy. The poverty alleviation program aimed at reducing the rate of poverty among Nigerians was introduced. This program covered provision of jobs for able and unemployed youths, provisions of loans to small and medium scale enterprises at a minimum lending rate.

With all these measures and policies Nigerian economy has not shown any

appreciable progress. Nigeria still remains one of the developing nations. Given this gap, the study seeks to examine the nature of tax incentives that are extended to deserving companies and the interactions that exists between tax incentives and the economy.Also,it is will be important to examine the impact of petroleum profit Tax (PPT) on economic growth in


      1.3        Aim and Objectives

The research mainly aims at examining the problems and identifying any loophole in the provisions relating to the tax assessment of the upstream oil sector, under the Petroleum Profit Tax Act.[8]Also, to examine the impact of petroleum profit tax on economic growth in Nigeria.

The general objective of this study is to assess the effect that taxation has towards the development/growth of Nigerian economy. Taxation is known to be one of the most important sources of revenue to government, the efficiency and effectiveness of its management is therefore very important. Unfortunately, this is not what is operative and so the main objectives of this study are stated below;

  1. To examine the extent the Government has been using revenue generated by tax ii. To examine the causes and reasons for high tax evasion and avoidance, andthe effect on economy.
  • To determine the reaction of people towards payment of tax.
  1. To study and analyze the machinery of collection of taxes available
  2. To examine the revenue collection in the form of taxes for the past years from available records and to highlight areas of weakness and to make necessary recommendation on how to improve on it.
  3. To find out the various internal and external problem confronting the petroleum industry taxation revenue service in the administration of tax with a view to suggesting possible solutions.

      1.4       Scope of the Research

The scope of this study covers critical examinations on the impact of taxation on Nigerian economy. It will also analyze other related issues such as structure and administrative machinery of tax in Nigeria and their associated problems. The essence of this digression is to possibly find out the obstacles if any, that hinder the effective collection and administration of tax in the country.

This research work shall also cover the following areas:

  1. An evaluation of petroleum tax administration in Nigeria; ii. The offences and penalties in Nigerian tax law.

iii. Critical tax administration challenges in the 21st century Nigeria and; iv.    Measures required by tax authorities and practitioners to meet these challenges

This work shall focus mainly on the issues and problems that are specifically related to the petroleum profit tax of the upstream sector. These issues shall be traced and examined based on the petroleum Profit Tax Act.

      1.5        Justification

The justification for embarking on a research work in this area is inspired by the fact that petroleum industry is currently one of the most important industries in the economic life of Nigeria and yet no adequate and well researched literatures that covers the law and practice of the petroleum industry activities and operations together is readily available for those looking for information or those that want to acquire knowledge in this area. This work will therefore contribute to the knowledge by providing an insight to the laws, practice and regulations available in the petroleum industry in Nigeria. Students and lecturers in the faculties of laws in the Nigerian universities, particularly, (students and lecturers of oil and gas law),legal practitioners, other professionals in the petroleum industry and the general public will find this work very useful.

      1.6       Research Methodology

The methodology employed in this research is purely doctrinal and it makes use of both primary and secondary legal materials. It will therefore depend on the research from textbooks written by scholars and legal sages. In order to buttress relevant points, legal statutes shall be quoted. Nigerian or foreign cases would be cited to explain or support any point deemed necessary. Journals and articles related to the research topic shall be used. Newspapers may also be used. Reports and conference papers on the topic or any other topic related to it would also be utilized. Relevant materials available on the internet website shall be used.

Finally solutions to the problems of the research shall b proffered by way of recommendations.

      1.7       Literature Review

Notwithstanding the inadequacy of literatures authored by local writers in the field of petroleum law in Nigeria, there are however few Nigerian authors who have written extensively and have made meaningful contributions as far as Petroleum Law in Nigeria is concerned.

For instance Etikerentse[9] who is the first author to have written a comprehensive text on Petroleum Law in Nigeria as far back as 1984 has yet published another work titled Nigerian Petroleum Law11 which is very comprehensive in nature as far as petroleum law in Nigeria is concerned.

Abdulrazaq M.T in his book titled Nigerian Tax Offences and Penalties[10] provided a comprehensive and detailed analysis of „Offences and Penalties‟ and therefore, highly commendable, However, the following are some of the researcher‟s observations and comments. At page 37-38 of the book,Nigerian Tax  Offences and Penalties, it is stated that:

“In Nigeria there are some monetary penalties and criminal sanction in connection with tax evasion, including the Revenue Boards power to sell off defaulting tax payers goods or other chattels,bonds or securities as well as his premises so that the amount owed can be recovered.”


One is therefore, bound to ask questions in view of the above comments of Prof Abdulrazaq M.T.,does the Federal Board of Internal Revenue (FBIR) have the absolute power to sell off defaulting tax payers property (s)?

With due respect to the learned Professor Abdulrazaq M.T, it is submitted by the writer that the revenue Board do not have the absolute power to sell off defaulting taxpayers goods or other chattels, bonds or securities and where such power exist,recourse must be made to the courts. For instance the Act[11] provides that; „‟nothing in this section shall be construed so as to authorize the sale of any immovable property without an order of a High court, made on application”

That is to say where the court fails to make an order the Revenue Board cannot proceed to sell any defaulting tax payer‟s property (s) that is,his premises. This provision is considered to be of very important in order to protect the defaulting tax payer from the hands of overzealous tax officials and more so where the payment of tax is being contested in court by the tax payer.

In a similar vein the Act,[12] also provides that „‟for the purpose of levying any distress under this section an officer duly authorized by the Executive Chairman may apply to a judge of the Federal High Court sitting in chambers under oath for the issue of a warrant under this section‟‟.   That is to say where the court is of the opinion not to grant the application,the duly authorized officer cannot proceed to levy or distain the tax payer‟s goods,chattels bonds or other securities, not to talk of even selling them off.

Also Professor Ayua.I.A also touched some issues in his book entitled the „‟Nigerian

Income Tax Laws‟‟[13], Chapter 12 extensively discussed petroleum profit tax.

The book entitled „‟Income Tax Law and Practice in Nigeria‟‟[14] has also treated some issues related to assessment of PPT. The issues like peculiarities of assessment of petroleum profits, administration of the tax,persons liable to pay tax as well as assessment of petroleum tax are all discussed.

According toAyodeleOdusola 2006,PPT is a tax applicable to upstream operations in the oil industry. It is particularly related to rents,royalties,margins and profit sharing elements associated with oil mining,prospecting and exploration leases.it is the most important tax in Nigerian in terms of its share of total revenue contributing 95 and 70 percent of foreign exchange earnings and government revenue respectively.

A petroleum operation as defined in the PPTA essentially involves petroleum exploration, development,production, and sale of crude oil. The Petroleum Profit Tax is regulated by the Petroleum Profit Tax Act of 2007.although the initial law was passed in 1959 to capture the first oil export made in that year.

Section 8 of the Petroleum Profit Tax Act (PPTA) states that every company engaged in petroleum operations is under an obligation to render return, together with properly annual audited accounts and computations, within a specified time after the end of its accounting period, Petroleum profits tax is charged, assessed and payable upon the profits of each accounting period of any company engaged in petroleum operations during any such accounting period, usually one year ( January to December).

Another text worthy of review is a book written by Olisa entitled Nigerian Petroleum Law and Practice[15] which focuses more on the activities and services that are cantered on the petroleum industry.

The books fail to pinpoint the loopholes in the provisions governing the taxation of oil producing companies. Furthermore, theproblem of tax evasion/avoidance has not been specifically pointed out. Most of the books are out-dated; they are therefore devoid of discussing contemporary problems in the oil upstream sub-sector. Most of these books reviewed have failed to address key issues and challenges in the petroleum industry arising from implementation of the regulatory laws. For these reasons there is need to make research specifically on this topic.


      1.8       Organizational Layout

This research work is made up of five chapters with sub-headings discussed there under; This research work is made up of five chapters with sub-headings discussed there under.

Chapter One provides a general introduction and the usefulness of the research. It also discusses a vivid literature review of some existing literatures on the subject matter.

Chapter Two deals with the governing legal frameworks of the Petroleum Industry in


Chapter Three examines generally the petroleum profit under the Nigeria‟s Petroleum

Profit  Tax.

Chapter four will examine the criminal offences and penalties provided under some federal laws in Nigeria in relation to Petroleum Profit Tax in Nigeria.

Chapter five draws the curtain to this research work with summary/conclusion, findings/observations and the recommendations.

[1] A.O.Philips, (1968)‘’Nigeria’s Companies Income Tax’’. The Nigerian Journal of Economics and Social Studies, Vol. 3, at p.333.

[2] United States v. Butler,2279 US (1936) at p.61

[3] Ayodele (2006) Tax Policy Reforms in Nigeria, Research Paper No. 2004, National centre for Economic Management and Administration, Ibadan, (Nigeria),

[4] See Commissioner v. Newman-159 F.2d 848,850 (CA-2,1947)

[5] Ayua,I.A. (1996) Nigerian Tax Laws, Spectrum Law Publishing,Ibadan,1st edition, p.165 6 Ibid.P.150

[6] Mahatni, (2006) D, Financial Times Reporter, ’’Fight over oil money percolates in Nigeria” Retrieved July 20,2006 from http://www.npr.org

[7] Opele,S. (2006) “Oil and Youth Restiveness in Niger Delta”. Retrieved September 10,2006 from  http://www.nigerdeltacampaign.com

[8] Cap.P.13 Laws of the Federation of Nigerian,2004.

[9] Etikerentse. G.(2005)“Petroleum Law Nigeria”,(2nd edition) Dredew  Publishers, Lagos 11Op.cit.

[10] Abdulrazaq. M. T. (1993) “Nigerian Tax Offences and Penalties”, Batay Law Publications Limited,1993.

[11] Section 33(6) FIRS Act 2007.

[12] Ibid Section 33(3).

[13] Ayua, I. A. (1996), Spectrum Law Publishing. Ibadan Nigeria

[14] Ola, C.S. (2001),“Income Tax Law and Practice in Nigeria”, Heinemann Educational Book(Nigeria)Plc Ibadan,pp.534-544.

[15] OLISA,M. M. (1997) “Nigerian Petroleum Law and Practice” (2nd edition) Jonia Ventures Limited Lagos.



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