ICAN ADVANCE TAXATION

WEEK 10 QUESTIONS
TOPIC: PETROLEUM PROFIT TAX
Kindly go through chapter 14 in the video lecture before you attempt the questions
because the topic have been simplified and analyzed for easy understanding.

REVIEW QUESTIONS
QUESTION 1
a. Briefly discuss the following:
i. Exploration Well
ii. Appraisal Well
iii. Investment Tax Credit
iv. Petroleum Investment Allowance
b. Outline four legislations that regulate the activities in the Oil and Gas Industry in Nigeria.

QUESTION 2

In computing the adjusted profit of a business engaged in petroleum operation, depreciation is disallowed as a charge against
income. The second schedule of PPTAct sets out the classes of qualifying expenditure and rates of capital allowance.

(a) Explain the term “Qualifying Expenditure and list Five (5) types of qualifying expenditure specified in PPT Act.

(b) What are the conditions that must be met before capital allowances are granted for qualifying expenditure?

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 (c) Describe two types of capital allowances.

QUESTION 3
In relation to Petroleum Profit Tax, list:
(a) (i) Five (5) expenses allowable for the purpose of calculating Petroleum Profit Tax.
(ii) Five (5) expenses not allowable for the purpose of calculating Petroleum Profit Tax.

(b) Describe four (4) main activities carried out in the upstream sector of the Nigerian
Oil & Gas Industry.

QUESTION 4
Ado Petroleum Co. Ltd, a company in JV with NNPC since 2000 and operating offshore at water depth of 90m, incurred the
following qualifying capital expenditure for the year ended 31st December 2015:-
i. Plant Expenditure N10,500,000
ii. Pipeline and Storage N15,750,000
iii. Tangible Drilling Costs N27,450,000
Tax written down value of qualifying capital expenditure at 1st January, 2015 amounted to N6,800,000 for plant expenditure and
N10, 400,000 for Tangible drilling costs.
You are required to compute
i. Petroleum Investment Allowances
ii. Annual Allowances.

QUESTION 5
a. Distinguish between Estimates and Final Petroleum Tax Returns.
b. Molad Petroleum Development Co. Ltd submitted it 1st estimate to FIRS for 2008 on 27th February 2008 with tax
payable of N60m. In July 2008, it submitted its 2nd estimate with tax payable of N84m. In November 2008, it also
submitted a 3rd estimate with tax payable of N90m.
You are required to:
i. Indicate the due dates for payment of the monthly instalments payable.
ii. Compute the monthly instalments payable.

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 iii. If the final returns showed tax payable of N113.65m, Determine the 13th instalment payable.

QUESTION 6:
(a) Define the following terms in respect to petroleum operations.
(i) Fee
(ii) Rent
(iii) Royalty

(b) ABC Ltd is a Petroleum Company. During the year ended 31st December, 2010, the company produced 40million barrels of
crude oil out of which 12 million barrels were either cost or used or returned. The posted price of crude oil of gravity
320 was N51, and the agreed adjustment was N1.00 for every 10if the gravity at the point of production was 280 and
the rate of royalty is 20%.

Required:
Compute the amount of royalty payable by the company in that accounting period.

QUESTION 7

Oriade Petroleum Nigeria Ltd has the following information in its books as at 31st December 2013.
Quantity of crude oil exported is 5,000,000 barrels.
N N
Selling Price 1,975
Adjusted Price Per Barrel 23.16
Administrative Expenses 6,100,000
Production Expenditure 2,300,000
Customs Duties:

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 - Company’s Assets 80,000
- Employee’s Goods 30,000 110,000
Royalties - Export 2,500,000
- Local 500,000 3,000,000
Intangible Dwelling Cost 10,000,000
Other Income Incidental to Petroleum Operation 151,500
Capital Allowances (Agreed) 24,000,000
Losses Brought Forward 8,000,000

Required:
(a) Compute the fiscal value of chargeable oil.
(b) Calculate the chargeable tax.

QUESTION 8
Tom Johnsons Petroleum Nig. Ltd. makes up its account to 31st December every year.
The following details were extracted from its records for the year ended 31December, 2011.

N’000
Cost of exploration and production 29,600
Cost of transportation 2,600
Cost of refined products 17,400
Sales of crude oil 62,400
Sales of DPK 6,200

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 Sales of AGO 5,800
Sales of PMS 12,400
Incidental income 3,400
Non-productive rent 1,400
Royalties 3,000
Customs duties 800
Management and admin expenses 12,000
Capital allowances 6,400
Petroleum investment allowance 3,600
MOU credit 3,000

You are required to ascertain the tax liability payable.

Note that 1/3 of the incidental income, management expenses and capital allowances is attributable to downstream operation.

QUESTION 9

(a) With respect to Petroleum Profits Tax Cap P13 LFN 2004, explain briefly:
(i) G-Factor
(ii) Chargeable oil
(iii) Chargeable Natural Gas
(iv) Posted Price

(b)Sadery Petroleum Limited presented the following report for the year ended 31 December 2007
N‟000 N‟000
Net fiscal value of sales 124,315

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Sundry income 14,352 138,667
Less:
Operating expenses 52,305
Intangible drilling cost 44,765
Royalties 12,750
Custom duties 975
Rentals 1,352 (112,147)
Net profit 26,520
It is also given that:
(i) The Company is entitled to an Investment Tax Credit of N230,000.
(ii) Capital allowance for the year is N23,564,000.
(iii)Balancing charge available is N200,000.
(iv) Memorandum of Understanding credits is N1,000,000.
You are required to compute the Chargeable Tax.

QUESTION 10
Endurance Petroleum Nigeria Limited has been in the Oil business for several years. There was however, a dispute between the
Company’s Management and its External Auditors/ Tax Consultants on fees-related issues.
You have just received a letter from the Company Secretary of Endurance Petroleum Nigeria Limited, stating the Board’s resolution
appointing you as the Tax Consultant to the Company.
The following details were extracted from the Financial Records of the Company for the Accounting Year Ended 31 December,
2012.
N’000
Custom Duties on essentials 3,125
Capital allowances 30,000
Fines for contravening traffic rules 350
Unabsorbed concession rental (Non-Productive rent) 1,500
Royalties on sales in Nigeria for local refining purposes 300
OPL and OML Rents and Royalties on export 13,500
Surveys preparatory to drilling 2,500
Loan interest (Parent Company) 2,750

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 Depreciation 12,000
Intangible drilling expenditure 10,000
Production and administrative expenses 15,000
Miscellaneous Income 200
Sales of Crude Oil and Gas within Nigeria 5,000
Chargeable Oil exported 107,500
You are required to advise the Company on the Total Tax Liabilities for the relevant Year of Assessment.

QUESTION 11
The Independent Auditors to Jisosi Petroleum Limited submitted the draft Audited, Financial Statements for the year ended 31
December 2013 for management’s discussion. The executive summary revealed total revenue of N286,650,000 and Profit before
Taxation of N82,642,000.
In order to arrive at the proposed Dividend for the consideration of the Board, there is the need to determine the total tax liabilities
for the year. The draft Statement of Profit or Loss has the following items among others:
N
Royalty on Crude Oil sold 13,500,000
Cost of Well drilling 25,000,000
Custom duties 500,000
Clearing of oil spillage 7,500,000
Depreciation 32,000,000
Donations 4,500,000
Community relations expenses 10,000,000
Transportation expenses for 2012 8,500,000
The revenue for the Year Ended 31 December 2013, includes: N
Profit on Property, Plant and Equipment sold 48,000
Income from transportation of crude oil 16,894,000
The officials of Federal Inland Revenue Service and the Company agreed as follows:
N
Annual Allowances on exploration 25,500,000
Balancing Charge on exploration 242,000
Capital Allowances on exploration b/f 11,000,000
Petroleum Investment Allowance 18,500,000

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 Capitalised Intangible Drilling cost 14,000,000
Losses b/f 10,000,000
Capital Allowances on transportation 750,000
You are required to: Determine the Total Tax Liabilities of the Company for the consideration of the Directors, with a view to
taking a decision on the Proposed Dividend.

QUESTION 12
The Federal Government of Nigeria is encouraging Nigerians in diaspora to return home and invest in the economy in order to
create jobs.
In response to the patriotic call, NNEOCHI OK Ltd was incorporated to engage in Petroleum operations.
The company operates a joint venture with NNPC.
The Chief Executive of the company is uncertain as to which tax statute regulates companies engaged in Upstream Petroleum
Operations. He was also confused when the issue of Basis of Assessment and what constitutes the profit of an accounting period
including treatment of losses were raised at one of the heated Board meetings of the company. He is desirous of updating his
knowledge in these areas.
The Company commenced its operation immediately after incorporation, it bidded for and was granted Oil Mining Lease (OML) by
the Federal government. After some years of prospecting, the company successfully struck oil and its first year of production data
are given below:
The following information is provided for the year ended 31 December 2012
N’ 000
Direct lifting costs 70,000
Direct handling/transportation costs 40,000
Other direct production costs 20,000
Field overheads 30,000

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 Environmental protection 11,000
Safety 7,000
Personnel amenities 14,000
Materials handling and storage expenses 19,000
Other general and administrative expenses 9,000
Exploration costs 36,000
First two Appraisal Well costs 26,000
Intangible drilling and development costs 60,000
Capital allowances 98,000
Fees received for services ancillary to petroleum operations 22,000
Production of crude oil for the year - 44,000,000 barrels
You are required to:
As Tax Consultant, state briefly the points to be raised in a Tax Advisory Memorandum addressed to the Chief Executive of the
company by providing a clearer understanding of the issues raised above, using the following as a guide in analysing the data.
a. Computation of the Operating Cost per barrel (T1)
b. Computation of the Capital Investment Costs (T2)
c. The tax statutes regulating the Upstream and Downstream operations
d. The Basis Year applicable to the Upstream operations
e. The components of profit of an accounting period for Upstream operations
f. The treatment of losses in Upstream operations

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QUESTION 13
From the audited data regarding period ending 31st December, 2010 below, you are required to prepare the tax liability of Muniru
Petroleum Limited, which also operates two oil tankers for transportation of crude oil from the Nigeria port of export.
Income :- N
Proceeds of Chargeable Oil: - 4.4 million barrels (Export) 237,600,000
- Local Sales 21,800,000
Freight for Transportation of Crude Oil 15,000,000
Value of natural Gas Sold 33,745,000
Other Oil related income 1,127,400
Expenses:- Salaries & Wages 12,496,020
Rent on Staff Accommodation 9,674,046
Compensation to host communities 920,500
Royalties on Export Crude 8,674,076
Royalties on Local Sale of Crude Oil 1,674,926
Royalties on Local Disposal of Natural Gas 4,375,000
Interest on loan from parent company 1,645,920
Bad debts written off 849,750
Depreciation 13,849, 200

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Exploration & Drilling Costs:
1st Appraisal Well 3,749,250
2nd Appraisal Well 1,160,494
3rd Appraisal Well 3,849,250 8,758,994
Contribution to Pension Fund 3,074 920
Custom Duties on Essentials 1,579,250
Administration Expenses 13,949,920
The summary of qualifying expenditure incurred is as follows:
Location N Year
On shore operations 4,279,200 2003
Territorial waters within 100 meters of water depth 3,564,500 2005
Off shore between 100 & 200 meters depth 3,564,500 2005
Off shore beyond 200 meters water depth 4,928,750 2005
Assume that one quarter of administration expenses and qualifying expenditure for on shore operations relate to the transportation of
crude oil by Ocean – going Vessel and that the rate of Petroleum Profit Tax is 85% .

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