Filing of tax returns by companies in the upstream, downstream industries

Our focus this week is on filing of returns by companies engaged in petroleum operations, either in the upstream or downstream sectors. The petroleum industry is usually divided into three major components: Upstream, midstream and downstream.

Midstream operations are usually included in the downstream category. The upstream oil sector, generally known as the exploration and production (E&P) sector, is a term commonly used to refer to the searching for and the recovery and production of crude oil and natural gas. The sector includes the searching for underwater oil and gas fields, drilling of exploratory wells, and subsequently operating the wells that recover and bring the crude oil and/or raw natural gas to the surface.

Upstream operations deal primarily with the exploration stages of the oil and gas industry, with upstream firms taking the first steps to first locate, test and drill for oil and gas. After reserves are proven, upstream firms will extract any oil and gas from the reserve. The large oil companies that are known as “integrated” generally combine upstream activities with midstream and downstream operations, which take place after the production phase through to the point of sale.

The incomes of oil exploration and production companies are subjected to tax in accordance with the provisions of Petroleum Profits Tax Act Cap. P13 LFN 2004 (as amended). On the contrary, operators in the downstream subsector of the oil industry include the oil marketing companies, the refineries, petrochemical companies, oil servicing companies, gas distribution and marketing companies.

The downstream stage in the production process involves processing the materials collected during the upstream stage into a finished product. The downstream stage further includes the actual sale of that product to other businesses, governments or private individuals. The type of end user will vary depending on the finished product.

They are activities that take place from receipt of crude oil into tanks or gas into petrochemical tanks to the transportation of refined products to the final user of processed products to secondary industries. The downstream sector is concerned with the post-production stages of oil and gas up to the refining and processing stages. The companies involved in the downstream sector are taxed under the Companies Income Tax Act, Cap. C 21 LFN 2004 (as amended). Section 39 1 (a) to (e) and 2 provides incentives todownstream operations which includes an initial tax-free period of three years, which may, subject to the satisfactory performance of the business, be renewed for an additional period of two years.

Quite a number of legislation regulates the Oil and Gas Industry both operationally and fiscally. The Petroleum Profits Tax Act Cap. P13 LFN 2004 (as amended) is one of the principal ones. Others are:

• Associated Gas Re-Injection Act Cap A 25 LFN 2004

• Capital Gains Tax Act Cap C1 LFN 2004

• Companies Income Tax Act Cap 21 LFN 2004 (as amended)

• Deep Offshore and Inland Basin Production Sharing Act Cap. D3 LFN 2004

• Niger-Delta Development Commission (Establishment, etc.)Act Cap 86 LFN 2004

• Nigeria LNG (Fiscal Incentive, Guarantees and Assurances) Act 1990

• Nigerian Oil & Gas Industry Content Development Act 2010

• Oil Pipeline Act 1959

• Petroleum Act 1959

• Petroleum production (Drilling and Production) Regulations of 1969

• Value Added Tax Act Cap VI LFN 2004 (as amended)

• Stamp Duties Act Cap S8 LFN 2004

• Personal Income Tax Act Cap P8 LFN 2004 (as amended)

• Tertiary Education Trust Fund (Establishment, etc.) Act 2011

Teju Somorin