By Ibrahim Tijjani Monguno Esq, Ibrahimtijjanimonguno@gmail.com

Taxation is the process of collecting dues or levies from people living in a particular geographical location as part of their civic responsibility. The money generated is used for the provision of infrastructure and social amenities.

In the case of Mathews v Chickory, Marketing Board of Vitoria Australia, (1938) 60 CLR

263-276, Latham CJ defined tax as “a compulsory exaction of money by a public authority for public purpose”. On the other hand, oil and gas are brought into being by decomposition of plants and animals that were buried beneath the earth due to heat and compression. There is no gain saying the fact that oil and gas have enhanced the conditions of lives of people in all aspects, such as electricity, transport and infrastructure. It is the preeminent source of energy and the most globally marketed comodity.

In 1962, the ownership, authority and administration of oil and gas were vested in the Government of Nigeria by virtue of Resolution 1803 of the United Nations Organization. Resolution 1803 has been codified under Section 44 (3) of the 1999 Constitution, which provides:

Notwithstanding the foregoing provision of this section, the entire property in and control of mineral oil and natural gas in and under or upon any land in Nigeria or in or under or upon the territorial waters and the exclusive economic zone of Nigeria shall vest in the Government of the Federation and shall be managed in such a manner as may be prescribed by the National Assembly.

In view of the foregoing, the Federal Government of Nigeria has complete authority over oil and gas inside its territory and in not more than 200 maritime miles.

Nevertheless, by Section 162 (2) of the 1999 Constitution, derivation policy has been enshrined into the Constitution to the effect that oil and gas producing States in Nigeria should be entitled to 13 percent of the revenues that accrue to the Federal Government from the proceed of sale of oil and gas from such States. It is however worthy of note that principle of derivation is only applicable to oil and gas extracted from land mass of the oil producing States. It is not applicable to oil and gas extracted offshore. Therefore, littoral States in Nigeria cannot assert the 13 percent derivation principle in respect of oil and gas extracted offshore. In Attorney General of the Federation v Attorney General, Abia State & ors, (2002) IINWLR (pt 725) 680, the Supreme Court held per Wali JSC that all littoral States are part and parcel of the Federation of Nigeria. Hence, none of them can exercise authority over oil and gas beyond the land mass of their respective States. By virtue of Section 162 (2) of the 1999 Constitution, the Federal Government has absolute authority over oil and gas extracted offshore.

Sequel to the fact that the Federal Government has authority over oil and gas inside Nigeria’s territory, the Federal Government issued oil exploration licenses; oil prospecting licenses and oil mining licenses to various international and indigenous oil companies. These companies are taxed by the Federal Government. According to Nigeria Extractive Industry’s Report in 2021, Nigeria’s earning from oil and gas amounts to about 75 percent of its annual revenue.

Due to the fact that, the Federal Government is duty bound to provide infrastructure and social amenities to its citizenry, one of the modes of generating money for provision of such infrastructure and social amenities include imposition of tax in the oil and gas industry. In the same vain, Federal Government can use taxation to discourage quick exhaustion of oil and gas within its territory.

In Nigeria, oil and gas operations are two fold viz: upstream activities, which involve exploration and extraction of raw crude oil and downstream activities, which presupposes modification of the raw crude oil into utilizable form such as Petroleum Methylated Spirit, Kerosene, Diesel and conveyance of the modified products to the eventual consumer or intermediate industry. Upstream activities are taxed under the Petroleum Industry Act 2021, whereas, downstream activities are subject to tax under the Companies Income Tax Act CAP C2, Laws of the Federation of Nigeria 2004.

The Federal Inland Revenue Service is responsible for collecting and accounting for taxes from the oil and gas industry. The Federal High Court and Tax Appeal Tribunal are vested with jurisdiction over disputes arising from taxation in the oil and gas industry as Courts of first instance.

Revenue generated from taxation in the oil and gas industry has not been commensurate with the potential of the Nigeria’s oil and gas industry. For instance, In September 2021, the Nigeria

Extractive Industries Initiatives revealed that Nigeria lost 30 billion dollars between 2005 to 2019 due to oil companies inadequate payment of tax, despite the fact that companies operating in the oil and gas industry earn immense financial gains and 77 oil and gas companies are indebted to Nigeria to the tune of 2.659 Trillion Naira vide evasion of petroleum profits tax.

The Petroleum Industry Act, levies tax on 30 percent of the chargeable profit of companies operating in onshore and shallow water area and 15 percent in respect of offshore. These tax rates are one of the lowest in the world. As a result, Nigeria could not generate the revenue that it supposed to generate from taxation in the oil and gas industry.

Tax disputes involving oil companies take a long time to resolve and the final judgment might not be satisfactory to either party. A typical example is the case of SPDC Nigeria Limited v FBIR, (1996) LPER-305 (SC), in this case, litigation commenced before the Body of Appeal Commissioners in 1973 between an oil company and a tax agency of the Federal Government. The parties litigated through the hierarchy of Courts up to the Supreme Court, where the Supreme Court entered judgment in 1996. Consequently, the parties litigated for 23 years in the case. In the same vein, in the recent case of Shell Nigeria Exploration and Production Limited v FIRS (2021) LPER-53075 (CA), it took the parties 13 years to reach the Court of Appeal from the Tax Appeal Tribunal. It might take another 5 years before the Supreme Court disposes the case, if the aggrieved party decides to appeal.

Conflicts of jurisdiction among tiers of government and Courts are also a problem to be reckoned with.

The Constitution vests The Federal High Court with jurisdiction over adjudication of tax disputes including disputes arising from taxation in the oil and gas industry. Likewise, the Federal Inland Revenue Establishment Act 2007, gave original jurisdictions to the Tax Appeal Tribunal in respect of tax disputes relating to taxation of the oil and gas industry, thereby creating a conflict of jurisdiction between the Federal High Court and the Tax Appeal Tribunal. In CNOOC Exploration Nigeria Limited & Anor v NNPC & Anor (unreported) CA/L/1144/2015, the Federal High Court invoked the principle of Supremacy of the Constitution and held that, it is the Federal High Court that has original jurisdiction over taxation of companies including oil and gas companies.

In spite of the glaring supremacy of the Constitution, the Court of Appeal overturned the decision of the Federal High Court and held that approaching the Tax Appeal Tribunal is a condition precedent for a party who wishes to approach the Federal High Court. Although, this is the position of the law for the time being, companies operating in the oil industry are anxious about what the Supreme Court will say. This anxiety might deter prospective investors from investing in the Nigerian oil and gas industry.

For quite a long time, there has been a fierce Constitutional battle between the Federal and State Governments as to which of the two has power to collect value added tax under the Constitution.

This battle culminated in Lagos and Rivers States enacting their own Value Added Tax Laws, despite the existence of the Value Added Tax Act, CAP 2 Laws of the Federation of Nigeria 2004, which empowers the Federal Government to collect value added tax. In Attorney General of Rivers State v Federal Inland Revenue Service (unreported) FHC/PH/CS/149/2020, the Federal High Court Port Harcourt Division, held that it is State Governments that have power to collect value added tax. The Federal Government has appealed to the Court of Appeal. The scramble for collection of value added tax between the Federal Government and States Government has put oil companies in limbo as they do not know the tier of government to which they should remit valued added tax. Even though, the Court of Appeal ordered that Status co ante should be maintained pending final determination of the case.

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