Divestment of interests in Oil Mining Leases (OML) is common in the Nigerian upstream petroleum industry. It comes with diverse legal implications which include regulatory requirements, chiefly, the requisite ministerial consent, and perfection of the financial arrangements to facilitate such transactions. But, the tax perspective, with myriads of issues in multiple areas of tax, is arguably the most intricate legal aspect of interest alienation in an OML. From a background that examines the legal nature of assignment of OML rights, and the relevant taxes, this article proceeds to analyze the statutory provisions and judicial decisions on the various types of tax relevant to assignment of an OML in Nigeria. The analyses highlight complexities of the tax aspects of OML disposal like balancing charge and Capital gains Tax, while the VAT and Stamp Duty angles hold numerous uncertainties of statutory law. With the trend of divestment of interests in the Nigerian upstream petroleum scene, statutory amendments and judicial resolutions are much required to simplify the relevant tax laws.
Keywords: Oil Mining Lease, Tax, Upstream, Petroleum, Divestment.
Petroleum stands as Nigeria’s major economic resource, and by extension, petroleum operations, retain its place as mainstay of the Nigerian economy. With an average daily production of over two million barrels in 2019, Nigeria is the eleventh largest oil producer worldwide. The petroleum industry accounts for about nine percent of Nigeria’s GDP and for over 90 percent of all export value. This high rate of activities in the Nigerian upstream petroleum industry entail frequent acquisition and disposal of operational rights and interests in the industry. Incidental to this is a recent trend divestment of such rights and interests by the International Oil Companies (IOCs) in Nigerian oil and gas concessions.
Since 2009, there has been several sales of oil blocks by the Oil Majors including Shell, BG, Agip, Total, Petrobras, Chevron, and ConocoPhillips, involving: OPL 332, 286 and 284; OML 4, 38 and 41; OML 26 and 30; OML 34, 40 and 42; and OMLs 60-63. The common factors attributed to this spate of divestments include: Abandonment of assets for several years; reduced productivity of the oil well; insecurity; change of business model; increasing operating costs and dwindling returns.
A petroleum exploration and production company can sell its stake in an OML entirely or in part. But the ambit of assignment of interest in OML has been widened beyond the regular transaction in sale and purchase agreements through which percentage holdings in OMLs are sold. In the course of expounding the assignments of licenses and leases for which the prior consent of the Petroleum Minister is required under the Petroleum Act, judicial decisions and subsequently, regulatory guidelines, have recognized a range of transactions like: acquisition of shares in an upstream petroleum company and corporate mergers and acquisitions, as falling under the scope of assignment of OML under the Petroleum Act.
A greater source of controversies in assignment of interests in OML however, is the tax implications of such assignment. A network of mostly ambiguous statutory provisions highlight myriads of issues embedded in disposal of interests in an OML. This includes: determining the scope of balancing charge under Petroleum Profit Tax Act (PPTA); applicability of Capital Gains Tax (CGT) to asset disposal at the company’s pre-production stage; relevant statutory changes in respect of Value Added Tax VAT; and determination of the applicable Stamp Duty rate to OML assignment. Dissensions on most of the above still persist, despite judicial intervention, while some of the controversial laws are yet to come under judicial test.
2.1 Ownership and Control of Petroleum Resource in Nigeria
A reference to petroleum in the relevant laws encompasses crude oil and natural gas. Thus Section 15 of the Petroleum Act defines petroleum to mean: “mineral oil (or any related hydrocardon) or natural gas as it exists in its natural state in strata, and does not include coal or bituminous shale or other stratified deposits from which oil can be extracted by destructive distillation.”
Section 2 of the Petroleum Profit Tax Act, defines the term “petroleum” in agreement with the definition in the Petroleum Act, to mean “any mineral oil or relative hydrocarbon and natural gas existing in its natural condition in Nigeria but does not include liquefied natural gas, coal, bituminous shales or other stratified deposits from which oil can be extracted by destructive distillation.”
The ownership and control of all petroleum resources in Nigeria is vested in the Federal Government of Nigeria. Section 44(3) of the Constitution of the Federal Republic of Nigeria, 1999 (as amended) provides that: “the entire property in and control of all minerals, mineral oils and natural gas in under or upon any land in Nigeria or in, 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 manner as may be prescribed by the National Assembly.”
In like manner, Petroleum Act is introduced in its long title as an Act to provide for the exploration of petroleum from the territorial waters and the continental shelf of Nigeria and to vest the ownership of, and all on-shore and off-shore revenue from petroleum resources derivable therefrom in the Federal Government and for all other matters incidental thereto. Section 1(1) of the Petroleum Act provides that the entire ownership and control of all petroleum in, under or upon any lands to which the section applies shall be vested in the State. Subsection (2) extends the application of this ownership provision to all land in Nigeria including land covered by water, land under the territorial waters of Nigeria; land forming part of the continental shelfs; or forming part of the Exclusive Economic Zone of Nigeria.
The above laws explain the Federal Government’s exercise of ownership powers over the petroleum resources of Nigeria. Individual or State Government’s ownership of petroleum is alien to Nigerian Law. This exercise of power manifests mostly in the grant of rights and interests over petroleum by the Minister of Petroleum Resources. Beyond this, the Federal Government, through its relevant agencies, regulates Petroleum operations, while specific laws vest on the Federal Government of Nigeria, the taxing powers over petroleum activities and the profits arising therefrom.
Federal Government’s grant of the right to search for, work, win and carry away petroleum resources in Nigeria is evinced in the form of licences and leases, precisely: Oil Exploration License (OEL), Oil Prospecting License (OPL) and Oil Mining Lease (OML). Thus, the Minister of Petroleum Resources can, by virtue of Section 2(1) of the Petroleum Act, grant OEL, OPL, or OML, to search for, win, work, carry away and dispose of petroleum. The deeper discussion below highlights the relationship among these three grants.
2.2 Overview of OML
A mineral lease is generally defined by the Black’s Law Dictionary as “a lease in which the lessee has the right to explore for and extract oil, gas, or other minerals”. An OML is a mineral lease which confers on the lessee an exclusive right to search for, carry away and dispose of all petroleum in, under or throughout the land covered by the lease. The rights of the lessee are limited to the interests in the petroleum discovered in the sub-soil of the leased area.
OEL, OPL and OML are distinct in character, but nonetheless share a significant relationship in the sense that OEL and OPL are preliminary grants that culminate in OML. A brief enquiry into the meaning of OEL and OML would therefore aid proper understanding of the nature of OML.
The Petroleum Minister grants Oil exploration License OEL to a company for a duration of one year, to make preliminary search for petroleum resources in specific are not exceeding 12,950 sq. km using surface geological and geophysical methodology including aerial surveys with right to drill below 91.4 metres.
An Oil Prospecting License is granted to a company to search for Petroleum resources in a specified area not exceeding 2,590sq.km. by all geological and geophysical methods including drilling and seismic operations. The holder of an OPL is empowered to carry away and dispose of petroleum won during prospecting operations in so far as he has fulfilled the obligations placed on him by or under the Petroleum Act or by the Petroleum Profit Tax act. At the expiration of the OPL, it is either relinquished back to the government or converted into an Oil Mining Lease. An application for the conversion is made to the Minister who grants the OML if he is satisfied upon evidence adduced by the licensee, that the licensee is capable of producing at least 10,000 barrels of crude oil per day from the licensed area.
An OML therefore proceeds from the satisfactory operation of an OPL. It is granted only to the holder of an Oil Prospecting License who has:
- Satisfied all the conditions imposed by the license or otherwise imposed on him by the Act, and
- Discovered Oil in commercial quantity.
When shall oil be deemed to have been discovered in commercial quantities by the holder of an OPL to warrant grant of an OML to the licensee? By Paragraph 9 of the 1st Schedule to the Petroleum Act, such commercial discovery of oil is deemed when the Petroleum Minister, upon evidence adduced by the licensee, is satisfied that the licensee is capable of producing at least 10,000 barrels per day of crude oil from the licensed area.
The initial term of an OML is twenty (20) years which is subject to renewal upon an application to the Minister not less than twelve (12) months before the expiry date of the lease and on payment of the prescribed fee.
2.3 Assignment of OML
Black’ Law Dictionary simply defines assignment as “the transfer of rights or property.” But the dictionary further adopted a more elaborate definition of the term by author, Alexander Burrill as, “a transfer or setting over of property or some right or interest therein, from one person to another, the term denoting not only the act of transfer, but also the instrument by which it is effected.”
From the above definition, an assignment entails the conveyance of rights or property from one party to another subject to the agreed terms.
Beyond contractual specifications binding parties to an OML transfer, statutory laws have set stipulations for a valid assignment of any interest in an OML from the original lessee to subsequent assignees. The most pronounced condition, namely: ministerial consent to an assignment, stems from the Petroleum Minister’s authority to grant the lease ab intio. Paragraph 14 of the 1st Schedule to the Petroleum Act states as follows:
“Without the prior consent of the Minister, the holder of an oil prospecting licence or an oil mining lease shall not assign his licence or lease, or any right, power or interest therein or thereunder.”
But the above provision leaves a lacuna on the scope of assignments contemplated in the Act. In other words, what would constitute a transfer of right or interest in an OML to necessitate the consent of the Petroleum Minister for its validity. The holder of an OML can sell a percentage or the entirety of its stake in the OML. A company can also purchase shares of an OML holder or acquire the holder in a corporate restructuring scheme. The era of marginal field acquisition and operations in the Nigerian petroleum sector has also introduced farm-out arrangements whereby an OML holder transfers a marginal field in its lease area to another company. Do all these constitute assignment of OML in the context of the Petroleum Act, as to require ministerial consent? This was the cardinal question in Moni Pulo Limited v. Brass Exploration Unlimited & 7 Others. In that case, PetroSA holding 100% share capital in Brass which had 40% participating interest in OML 114, sought to transfer the controlling shares and the 40% interest to Camac. PetroSA did not apply to the Petroleum Minister for consent to the transfer. The Federal High Court stated that:
“the requirement that the Minister of Petroleum Resources’ approval for the transfer or sale and/or acquisition of the entire (100%) share capital of the 1st Defendant [Brass] from the 2nd, 3rd, and 4th Defendants [PetroSA] by the 5th, 6th, and 7th Defendants [Camac] is not in doubt.”
In view of its findings, the court held inter alia that:
“whoever buys, acquires and takes over the controlling shares of Brass ultimately buys, acquires and takes over the right, power and interest in the Brass’ 40% participating interest in OML 114 and must obtain the approval of the Minister of Petroleum Resources before such an assignee can exercise such right, power and interest.”
The above decision gave basis to the Department of Petroleum Resources, on the authority of the Petroleum Minister, to release the Guidelines and Procedures for Obtaining Minister’s Consent to the Assignment of Interest in Oil and Gas Assets in 2014. Paragraph 2.0 of the Guidelines broadened the ambit of an interest in a licence or lease as, “any arrangement such as PSC, PSA, farm-in or farm-out agreement, sale, purchase, mortgage or other business arrangements by which a right, privilege, power, benefit, gain or advantage in a licence, or lease is transferred to or conferred either directly or indirectly on a third party.”
In its Paragraph 3.1, the guidelines describe an “assignment” as involving “the transfer of a licence, lease or marginal field or an interest, power or right therein by any company with equity, participating, contractual or working interest in the said OPL, OML or marginal field in Nigeria, through merger, acquisition, take-over, divestment or any such transaction that may alter the ownership, equity, rights or interest of the assigning company in question, not minding the nature of upstream arrangement that the assigning company may be involved in, including but not limited to Joint Venture (JV), Production Sharing Contract (PSC), Service Contract, Sole Risk (SR) or Marginal Fields operation.”
By the guidelines, instances of an assignment shall include but not limited to the following:
- Assignment by way of exchange or transfer of shares: This shall entail the acquisition of part or all of the shares of a company which holds an OPL, OGPL, OML, or Marginal Field in Nigeria.
- Assignment by way of the private or public listing of a part or of the whole of the shares of a company which holds an OPL, OGPL, OML, or Marginal Field in a Stock Exchange anywhere in the world.
iii. Assignment by way of merger, wherein a company which holds an OPL, OGPL, OML or marginal field combines with one or more companies to form another company by way of payment, exchange of shares or by any other means whatsoever.
- Assignment by way of acquisition, wherein the acquiring company directly or indirectly takes over or acquires the whole rights or interest in a license or lease or marginal field and associated assets of the assigning company, including acquisition of interest by an entity in a parent company whose affiliate has interest in a licence, lease or marginal field or associated assets in Nigeria.
- Assignment to a company in a group of which the assignor is a member and is to be made for the purpose of re-organization in order to achieve greater efficiency and to acquire resources for more effective petroleum operations.
vi Assignment brought about by reason of devolution of ownership of shares or interest in ownership of shares by way of operation of law and testamentary device. Operation of law shall refer to a judgment of a competent court of law or an award from an Arbitration Panel. Testamentary device shall refer to the transfer of shares through a will or letters of Administration, or Deed of Gift.”
So wide is the scope of assignment of interests in OPL and OML, and so strong is the requirement of the Minister’s prior consent to any such assignment that the consent cannot be deemed, even under the Federal Government Executive Order on Ease of Doing Business which provides for deemed executive consents. Thus in LEKOIL 310 Limited & Afren Investment Oil & Gas (Nigeria) Limited v. Hon. Minister of Petroleum Resources & Anor., A subsidiary of Lekoil made an agreement to acquire Afren’s participating interest in OPL 310. Afren applied for the Petroleum Minister’s Consent to the agreement in January 2016. The Minister neither granted the consent nor explained his refusal of it. In 2017, the Presidency issued Executive Order 1 mandating governmental agencies to publish procedures and timelines for obtaining relevant approvals. The Order further required government agencies to approve or explain refusal of an application within the timeline as published on its website, failing which the applicant would be deemed approved under the Order. Based on this Order, Lekoil and Afren sued the Minister at the Federal High Court, Lagos, seeking the court’s declaration that the Minister’s inaction on their application for consent has given rise to a deemed Consent under the Executive Order. But the court refused the prayer and held on the contrary that the provision on deemed approval under Executive Order 1 does not override the prerequisite consent of the Minister for assignment of interest in an OPL or OML under the Petroleum Act.
3.1 Tax Issues in OML Assignment
Exercise of rights under an OML has embedded tax compliance obligations, comprising primarily the filing of Petroleum Profit Tax (PPT) Returns, and payment of the PPT. When interests in the OML is transferred, the assignment process attracts incidents of tax. The common tax considerations in an OML assignment include: Balancing Charge, Capital Gains Tax, Stamp Duties and Value Added Tax.
3.2 Understanding Balancing Charge
An upstream petroleum company acquires assets to facilitate its petroleum operations. The fundamental asset is the OML which legitimizes the company’s petroleum operations. It is an intangible asset. Tax law acknowledges that a company incurs expenditure on its capital items known as Qualifying Capital Expenditure (QCE). These comprise: Qualifying Plant Expenditure, Qualifying Pipeline and Storage Expenditure, Qualifying Building Expenditure and Qualifying Drilling Expenditure.
Capital expenditure on acquisition of the right over petroleum embodied in an OML is represented by Qualifying Drilling Expenditure. Paragraph 1(1)(d) of the 2nd Schedule to the PPTA defines Qualifying Drilling Expenditure as expenditure incurred in connection with petroleum operations in view of:
- the acquisition of, or of rights in or over, petroleum deposits;
- searching for or discovering and testing petroleum deposits, or winning access thereto; or
- the construction of any works or buildings which are likely to be of little or no value when the petroleum operations for which they were constructed cease to be carried on.
Capital expenditure as discussed above is distinguished from operating expenditure. Section 10 of the PPTA provides for the operating expenditure as those incurred wholly exclusively and necessarily in respect of petroleum operations. The latter expenses are required by Section 10 to be deducted in computing the adjusted profit of the company in the course of ascertaining its PPT liability. It is to guard against a mix-up of the two classes of expenditure that a proviso to Paragraph 1(1) of the 2nd Schedule states that qualifying expenditure shall not include any sum which may be deducted under the provisions of section 10 of the PPTA.
Qualifying Capital Expenditure is written off in allowances comprising Petroleum Investment Allowance and Annual Allowance. Upon sale of the asset, the amount at which the sales value exceeds the residue of the expenditure not yet recovered from the allowances is deemed an income of the company, and subjected to tax as balancing charge. Paragraph 9 of the 2nd Schedule to PPTA provides for balancing charge in the following words:
“Subject to the provisions of this Schedule, where in any accounting period of a company, the company owning any asset in respect of which it has incurred qualifying expenditure wholly and exclusively for the purposes of petroleum operations carried on by it, disposes of that asset, the excess (hereinafter called ―a balancing charge) of the value of that asset, at the date of its disposal, over the residue of that expenditure at that date shall, for the purposes of subsection (1) (a) of section 9 of this Act, be treated as income of the company of that accounting period.”
The purpose of above provision is to bring to tax the total of all the allowances a taxpayer had claimed in respect of the Qualifying Capital Expenditure incurred on an asset, if at the time of disposal of that asset the taxpayer was able to recover from the proceeds of the sale, the Qualifying Capital Expenditure. The effect of this principle is that if an amount of expenditure on an asset had been allowed as tax deductible; and the taxpayer later got a refund or waiver of that expenditure in form of allowance, the refund or waiver must be brought to tax upon disposal of the asset.
Under the PPTA therefore, a company’s QCE entitles the company to an Annual Allowance and a Petroleum Investment Allowance. Where the company disposes of the OML, having claimed capital allowance on the QCE incurred thereon, PPTA requires the company to determine the “balancing charge” due on the disposal and include it as part of its income for the accounting year in which the disposal is made.
Balancing Charge is obtained by comparing the sales proceeds on disposal to the tax written down value of an asset as at the time of disposal. The tax written down value is the cost of acquiring the asset minus any capital allowances claimed on the asset. Balancing charge arises when the sales proceeds on disposal of a QCE exceed the tax written down value of the asset at the time of disposal. It is the excess of the value of an asset (on which capital allowance has been claimed) at the date of its disposal over the “residue” of the qualifying expenditure incurred on the asset as determined also at the date of disposal. This excess of the value of the asset at the date of the disposal, over the residue of the expenditure at that date is treated as an income of the company for that accounting period and as such, is taxable.
The “residue” of qualifying expenditure is defined as the total qualifying expenditure incurred on an asset less the total of annual allowances due to the owner of the asset as of a given date.
When, on the other hand, the sales proceeds on disposal is less than the tax written down value of the asset as at the time of disposal, the company would be entitled to balancing allowance.
3.3 Controversies of Balancing Charge
In divestments of their interests in OMLs, the upstream oil companies encounter three key points of controversy with FIRS, namely: whether items tagged intangible under the OMLs are subject to balancing charge; whether Petroleum Investment Allowance is to be added to Annual Allowance in computing balancing charge; and whether balancing charge is liable to Education Tax. Highlights of the conflicting positions of FIRS and the taxpayers are provided below.
3.3.1 Tangible and Intangible Assets in Balancing Charge Computation
Companies selling their percentage holdings in OMLs usually sell alongside, accompanying assets like plants, buildings, pipelines, and flow stations, while the nucleus of the transaction is the right to work, win and carry away petroleum as embedded in the OML. It is a common practice in structuring the asset sale transaction, to group the assets into tangible and intangible. The core intangible is the right to work, win and carry away petroleum, and to this is allotted the bulk of the purchase price. The transacting companies compute and pay balancing charge on only the tangible assets thereby reducing to the barest minimum, the accrued balancing charge.
This segregation of the sold assets into tangible and intangible is usually sought to be justified with the contention that the acquired right to work, win and carry away petroleum incurs no qualifying capital expenditure, and hence attracts no capital allowance, thereby drawing no balancing charge. The Federal Inland Revenue Service (FIRS) however counters this argument with Paragraph 1(1) of the 2nd Schedule to PPTA which defines “qualifying drilling expenditure” to mean, expenditure incurred, inter alia on the acquisition of, or of rights in or over, petroleum deposits. By that Paragraph, the PPTA indicates the intention of bringing all expenditure on the acquisition of an OML under the genus of qualifying capital expenditure attracting capital allowance, and therefore liable to balancing charge.
3.3.2 Inclusion of Petroleum Investment Allowance in Balancing Charge
Annual Allowance and Petroleum Investment Allowance are allowances that are claimed on a company’s assets based on the QCE incurred on the assets. When the asset is eventually sold by the company, Balancing Charge on the asset is the amount by which the sales proceed surpasses the remainder of the QCE not yet claimed through the allowances. The companies exclude Petroleum Investment allowance while computing balancing charge. Their ground is Paragraph 10 of the 2nd Schedule which provides as follows:
“The residue of qualifying expenditure, in respect of any asset, at any date, shall be taken to be the total qualifying expenditure incurred on or before that date, by the owner thereof at that date, in respect of that asset, less the total of any annual allowances due to such owner, in respect of that asset, before that date.”
The companies’ stance is that considering the specific mention of “annual allowance” in the definition of residue of qualifying expenditure, Petroleum investment allowance is excluded in determining residue of QCE which ultimately leads to balancing charge.
However, Paragraph 5(2) of the Second Schedule to the PPTA lends a basis to the opposing view of FIRS by providing that:
“For the purpose of this Act, the Petroleum Investment Allowance shall be added to the annual allowance computed under paragraph 6 of this Schedule and shall be subject to the same rules under this Act.”
The above provision of Paragraph 5(2) evinces a clear intention of the law that Petroleum Investment Allowance must be added to annual allowance before the latter can be applied wherever it is applicable for any purpose under the PPTA, including the purpose of balancing charge. In other words, annual allowance can never be applied in isolation, but together with petroleum investment allowance. The use of “shall” in the provision creates a mandatory tone, which spells a compulsory requirement to always add petroleum investment allowance to the annual allowance for any purpose under the PPTA including the purpose of balancing charge once both allowances have been claimed. By settled law, the word “shall” as used in Paragraph 5(2) of the Second Schedule to the PPTA is a mandate to do exactly what the law says, and entertains no discretion. In Bamaiyi v A.G. of the Federation and; Ogidee v The State.
3.3.3 Balancing Charge and Education Tax
Paragraph 9 of the 2nd Schedule to the PPTA considers Balancing Charge an income, and subjects it to the same treatment of regular income under Section 9 of the PPTA. On this basis, FIRS seeks to subject balancing tax to Education Tax in the same manner as regular income of the company. The transacting companies in OML disposal, on the other hand contend that Education Tax is computed as 2% of assessable profit. Under Section 20(1) and (2) of the PPTA, Annual Allowance, which is subtracted from total QCE to determine residue of QCE for the purpose of arriving at Balancing Charge, is not yet deducted at the time of determining assessable profit, thus forming part of assessable profit. For this reason, the companies maintain that Balancing Charge has no relationship with assessable profit, and by extension, Education Tax.
3.3.4 Judicial Intervention
The three issues analyzed above were present in Total Exploration & Production Nigeria Limited v. Federal Inland Revenue Service. In that case, Total sold its 10% participating interest in OMLs 4, 38, 41, and 42. In the Sale and Purchase Agreement, it identified the specific assets under the sold OML and segregated them into two broad classes, namely tangible and intangible assets. The latter included the right to win, work and carry away petroleum. Total computed and paid balancing charge on the tangible assets, but purportedly freed from balancing charge, the intangibles to which it had allotted the bulk of the purchase price. This substantially reduced the balancing charge accruing from the disposal of the OML, and expectedly drew a review from FIRS who subjected the entire assets to balancing charge. FIRS also added Petroleum Investment Allowance to the Annual Allowance in computing balancing charge, and further assessed the balancing charge to Education Tax.
The Tax Appeal Tribunal analyzed the relevant provisions of the PPTA alongside the parties’ transaction, and reached the following decisions:
- There is no basis for Total’s segregation of the assets into tangible and intangible for the purpose of balancing charge.
- Determination of residue of QCE for the purpose of balancing charge involves annual allowance specifically, and does not involve, Petroleum Investment Allowance.
- While Section 1(2) and (2) of the Tertiary Education Trust Fund Act, 2011 provides that Education Tax is to be computed as 2% of assessable profit, assessable profit cannot be determined from Balancing charge, and hence, balancing charge is not liable to Education Tax.
An appeal of the above decision to the Federal High Court, Lagos Division, did not feature the part of the tribunal’s decision which discountenanced segregation of the sold assets into tangible and intangible. In its judgment delivered on September 28, 2020, the Federal High Court overturned the judgment of the TAT in respect of petroleum investment allowance, and held that based on Paragraph 5(2) of the Second Schedule to the PPTA, which provides that “petroleum investment allowance shall be added to the annual allowance computed under paragraph 6 of this Schedule and shall be subject to the same rules under this Act”, the PIA should be added to annual allowance for any purpose, including when computing balancing charge for PPT purpose. In so ruling, the court gave force to the word, “shall” in the provision as bearing a mandatory import which entertains no discretion.
In the earlier judgment by the Tax Appeal Tribunal, the tribunal was persuaded in its own decision by the express mention of Annual Allowance in the computation of residue of QCE for the purpose balancing charge under Paragraph 10 of the 2nd Schedule to PPTA, which it considered to have impliedly excluded Petroleum Investment Allowance under the interpretative principle, expressio unus est exclusion ulterius (the express mention of a thing in a statutory provision, excludes any other thing not so mentioned). This reasoning would have been flawless, but for the scope of the provision of Paragraph 5(2) of the 2nd Schedule to PPTA which mandates the entwining of Petroleum Investment Allowance with Annual Allowance. The opening words of that provision creates a wide ambit of circumstances where the two allowances must be joined, and such circumstances include the computation of balancing charge. Paragraph 5(2) opens thus: “For the purpose of this Act,…” This, coupled with the word, “shall” within that paragraph, means that for all purposes of the PPTA, including the purpose of balancing charge, Petroleum Investment Allowance must be added to annual allowance, and lends a strong ground to the Federal High Court’s decision.
In respect of Education Tax and Balancing Charge, the Federal High Court upheld the decision of the tribunal, and held that a balancing charge is not an element of assessable profit, and so cannot be subjected to Education Tax. However, neither the tribunal nor the court made in-depth analyses of the conflicting positions on this issue, in order to properly weigh the positions and produce a stronger basis for their common position.
Paragraph 9 of the 2nd Schedule to PPTA deems balancing charge an income of the company. Constituting an income of the company for the relevant accounting year means that balancing charge should come under the provision of Section 9(1)(a) of the PPTA, and be considered in determining the profits of the company. Computing the profits from adjusted profit to the point of assessable profit is the point at which Education Tax is charged. However, what would support the upheld decision on Education Tax is that balancing charge cannot represent assessable profit upon which Education Tax is charged, and hence, does not attract Education Tax. By way of analysis, Section 1 of the Tertiary Education Trust Fund Act provides that Education Tax is charged on assessable profit. But in determining the assessable profit of the company, annual allowance is not yet deducted. Hence, annual allowance is subsumed in assessable profit. It is the deduction of the allowances from assessable profit that results in chargeable profit upon which Petroleum Profit Tax is charged. On the other hand, annual allowance is subtracted from total QCE in order to determine retinue of QCE for the purpose of balancing charge. This subtraction and absence of annual allowance in balancing charge implies that balancing charge cannot represent assessable profit under any circumstance, as assessable profit still holds annual allowance, and since Education Tax is charged on assessable profit, Education Tax cannot be charged on balancing charge.
The Total’s Case and similar cases have created much enlightenment on the Petroleum Profit Tax implications of disposal of OML, and considerable reference points to upstream petroleum companies divesting their interests in OMLs. However, as pointed out above, many more clarifications are desired in the provisions of the law as applicable to parties’ transactions in selling their OML interests. It is hoped that appellate decisions would make these clarifying analyses.
3.4 Capital Gains Tax and Assignment of OML
Capital Gains Tax (CGT) is a tax on the profit obtained from disposal of some classes of assets. By Section 2(1) of the Capital Gains Tax Act, CGT is charged at a flat rate of 10% of chargeable gains. All chargeable assets are subject to Capital Gains Tax when disposed at a gain, except those specifically exempted by the Act.
Section 3 of the Act lists Chargeable Assets into the following broad classes:
- options, debts and incorporeal property generally;
- any currency other than Nigerian currency; and
- any form of property created by the person disposing of it, or otherwise coming to be owned without being acquired.
An OML is in the class of incorporeal property among the chargeable assets outlined above. The Black’s Law Dictionary defines incorporeal property as “An in rem proprietary right that is not classified as corporeal property. A legal right in property having no physical existence.” In line with this definition, an OML is a legal right with no physical form or existence. It is an intangible property wherein the value is realized only in the exercise of the right. Being among the assets captured under Section 3 of the CGTA, the assignment of an interest in an OML is a disposal of asset under the CGTA? Section 6(1)(c) and (d) of the CGTA refers to disposal of assets for the purposes of the Act, as follows:
“a disposal of assets by a person where any capital sum is derived from a sale, lease, transfer, an assignment, a compulsory acquisition or any other disposition of assets, notwithstanding that no asset is acquired by the person paying the capital sum, and in particular-
(c) where any capital sum is received in return for forfeiture or surrender of rights, or for refraining from exercising rights;
(d) where any capital sum is received as consideration for use of exploitation of any Asset.”
The above provision perfectly captures the alienation of an interest in an OML. The disposal can be termed a sale, transfer or assignment of right under the general provision of Section 6(1), and particularly under Section 6(1)© and (d).
As discussed in the case of PPTA, any transfer or assignment of interest in an OML, irrespective of the mode or instrument of the transfer, is well recognized in law as a disposal of upstream petroleum asset. Thus, the assignment can be by the typical sale and purchase agreement, transfer of shares in an OML holding company or by a farm-in agreement, but it nonetheless constitutes disposal of OML. By the combined effects of Paragraph 14 of the First Schedule to the Petroleum Act, and Paragraph 4(a) and 4(b) of the Petroleum Regulations, a transfer, assignment, sale and/or takeover of an oil mining lease or any right, power, or interest therein or thereunder is a disposal of petroleum asset which cannot be validly effected without the prior consent of the Minister of Petroleum Resources first sought and obtained.
However, a limitation to the scope of disposal of an OML interest in the case CGT is where such disposal is by way of acquisition of shares of the holder of the OML as recognized in Moni Pulo Limited v. Brass Exploration Unlimited & 7 Others. (2012) 6 CLRN 153 – 235. The court, in Moni Pulo held as follows:
“whoever buys, acquires and takes over the controlling shares of Brass ultimately buys, acquires and takes over the right, power and interest in the Brass’ 40% participating interest in OML 114 and must obtain the approval of the Minister of Petroleum Resources before such an assignee can exercise such right, power and interest.”
But, gains accruing on the sale of stocks and shares are not chargeable gains under the Capital Gains Tax Act.
It is not certain under the law whether a disposal of interest in an OML which takes place before the first accounting period of the holder company would be subjected to CGT. Paragraph 1(2) (b) of the Second Schedule to the Petroleum Profit Tax Act (PPTA) provides that profit realized from the disposal of an asset of the company which took place before its first accounting period, shall be treated as an income of the first accounting period. Section 12(1) of the CGTA also excludes from consideration in the computation of Capital Gains Tax, any money charged to Petroleum Profit Tax or any of the other income taxes. A combination of these two provisions raises some crucial questions on the possible intendments of the law on treatment of such capital gains from sale of assets before the company’s first accounting period. Does it imply that the gains from disposal of assets like an OML and its accoutrements before the company’s first accounting period is to be subjected to Petroleum Profit Tax (PPT) in the first accounting period? If so, can the capital gains still attract Capital Gains Tax, having been reserved for Petroleum Profit Tax as an income of the company for the first accounting period?
Affirmative answers to the above questions may not be safe. If capital gains realized before the first accounting period is indeed treated as an income of the first accounting period under Section 9(1)(a) of the PPTA in line with Paragraph 1(2)(b) of the Second Schedule to PPTA, then the income must undergo the journey of petroleum profit from adjusted profit to assessable profit before chargeable profit which is then subjected to Petroleum Profit Tax. At the stage of adjusted profit, CGT and any other tax, if paid, would be deducted.
Section 9(3) and (4) of the PPTA provides as follows:
(3) The adjusted profit of an accounting period shall be the profits of that period after the deductions allowed by subsection (1) of section 10 of this Act and any adjustments to be made in accordance with the provisions of section 14 of this Act.
Even as Paragraph 1(2)(b) of the Second Schedule to the PPTA deems the profit from an asset disposal which occurred prior to the first accounting period as a part of the income of the first accounting period under Section 9(1), the aggregate income under Section 9(1) can only be taxed after making the deductions in Section 10. Section 10(1)(L) provides as follows:
“In computing the adjusted profit of any company of any accounting period from its petroleum operations, there shall be deducted all outgoings and expenses wholly, exclusively and necessarily incurred, whether within or without Nigeria, during that period by such company for the purpose of those operations, including but without otherwise expanding or limiting the generality of the foregoing-
(L) all sums, the liability of which was incurred by the company during that period to the Federal Government, or to any State or Local Government Council in Nigeria by way of duty, customs and excise duties, stamp duties, education tax, tax (other than the tax imposed by this Act) or any other rate, fee or other like charges;”
The effect of Section 10(1)(L) above is that in computing the profit to be taxed from the aggregate income under Section 9(1)(a)(b) and (c), expenses incurred by way of any tax paid to the Federal Government other than Petroleum Profit Tax must be first excluded before the profit to be taxed in PPT is determined. Capital Gains Tax from asset disposed by the company at any period is a tax paid to the Federal Government which is not PPT. Therefore, even if the profit from asset disposal before the first accounting period is included in the aggregate income of the first accounting period under Section 9(1)(a)(b) and (c), by the combined effect of Section 9(3) and (4) and Section 10(1)(L), the CGT on that asset disposal, being a tax to the Federal Government other than PPT, must first be excluded from that aggregate income in Section 9(1)(a)(b)(c) before the aggregate income can be subjected to Petroleum Profit Tax of the first accounting period. This requirement for its exclusion in the computation of the Petroleum Profit Tax implies that it must have been paid, but having been so paid, it is then deducted as an allowable expense of the company under Section 10(1)(L) before the aggregate income in Section 9(1)(a)(b) and (c) can be subjected to PPT.
In the computation of the CGT, the following costs are deducted:
(a) Costs incidental costs to the acquisition of the asset by the owner;
(b) Expenditure incurred wholly, exclusively and necessarily by the owner in enhancing the value of the asset;
(c) Expenditure incurred wholly, exclusively and necessarily by the owner in establishing, preserving or defending his title to, or right over the asset; and
(d) Costs incidental to the disposal of the asset by the owner.
3.5 VAT and Assignment of OML
3.5.1 Before the Finance Acts, 2019 and 2020
Value Added Tax in Nigeria is charged on the supply of taxable goods and services. Before the introduction of precise meanings for “goods” and “services” (for purposes of the VAT Act) by the Finance Act, it was not clear whether VAT would be chargeable on the transfer of intangible assets.
Section 2 of the VAT Act is the charging provision in the VAT Act, and has always been the key to determining the presence or absence of VAT liability in all cases, while Section 46 defines the relevant terms, thereby placing them in the context of the Act. Section 2 of the VAT Act provides:
“The tax shall be charged and payable on the supply of all goods and services (in this Act referred to as “taxable goods and services”) other than those goods and services, listed in the First Schedule to this Act.”
Section 46 provides:
“supply of goods” means any transaction where the whole property in the goods is transferred or where the agreement expressly contemplates that this will happen and in particular includes the sale and delivery of taxable goods or services used outside the business, the letting out of taxable goods on hire or leasing, and any disposal of taxable goods”
Section 2 did not give a precise definition of “taxable goods and services” to capture incorporeal assets like OML; neither did “supply of goods” in Section 46 expressly include assignment of such assets. The vagueness of these two provisions therefore left uncertainties on VAT-liability of such intangibles as interests in an OML and rights over land and property thereon.
Judicial decisions of the pre-Finance Act era considered assignments of such rights and interests as failing the tests of liability under the VAT Act, and hence freed them from VAT. Thus, in the old era, assignment of an OML could not be considered a supply of taxable goods? Section 2 of the VAT Act defined taxable goods and services as those not exempted under the schedule to the Act. An OML or any right or interest therein is not exempted from VAT under the First Schedule to the VAT Act, but assignment of OML would not pass the test of supply of goods under Section 46 which entails transfer of the whole property in the goods.
The underlying statutory laws in assignment of OML, impede an assignor’s transfer of the entire property in the OML to the assignee as required under Section 46 of the VAT Act for a taxable supply of goods to have taken place. That was why, assignment of interests in an OML was judicially considered not liable to VAT. In CNOOC Exploration & Production Nigeria Limited v. A-G Federation & Ors the sale of interests in an OML was sought to be assessed to VAT. The Federal High Court held that the right in an OML is a chose in action and does not constitute goods or services under Section 46 of the VAT Act, the sale of which would amount to supply and be liable to VAT under Section 2 of the VAT Act.
Indeed, an OML cannot be sold in the context of Section 46 of the VAT Act. An OML is an invisible right granted by the Petroleum Minister for activities over petroleum subject to revocation, renewal or time lapse. This is because the holder of an OML holds no property in it, and so cannot transfer any property, let alone the whole property in it by way of sale as required in Section 46 of the VAT Act. Thus, incorporeal properties like rights and interests in an OML had no place among items liable to VAT before the amendments introduced by the Finance Act, as the VAT Act did not specify what constituted goods or services, and the intangibles could not be placed among goods or services.
An obiter dictum in the CNOOC decision stated that the VAT Act would have to be amended in the order of the United Kingdom for an outright sale, assignment or alienation of residue of a terminal right, to constitute a supply in Section 46, capable of attracting VAT in Section 2. The UK law on VAT so referred to, is explicit on what VAT applied to. The UK Value Added Tax Act defines supply of goods to include the grant, assignment or surrender of any major interest in land, provided consideration is paid.
3.5.2 Under the Finance Acts
Perhaps in response to the call in the CNOOC decision, the Finance Act, 2019 gave a more precise definition of “goods” beyond the vague definition of taxable goods and services in the VAT Act as just anything not expressly exempted in the VAT Act. The Finance Act, 2019 defined “goods” to include any intangible product, asset or property over which a person has ownership or rights, or from which he derives benefits, and which can be transferred from one person to another excluding interest in land. This vividly captured the sale of interests in OML under transactions that attract VAT, for an OML is an intangible asset over which the holder/assignor has rights, and from which he derives benefits, and which he can transfer to another.
But in a sharp swing, the subsequent Finance Act, 2020 moved incorporeal assets, which of course include OMLs, from goods to services by repositioning the above-stated definition of goods in the Finance Act, 2019, under services in the new Finance Act, 2020. The implication is that assignment of an OML is liable to VAT, but as a service and not as goods. It is thus settled now that incorporeal properties, including assignment of rights and interests in OMLs are now classified as “services” for VAT purposes.
The later Finance Act of 2020 went a step further to identify three circumstances where the supply of service in respect of an incorporeal property shall be deemed to have taken place in Nigeria for the purpose of VAT, namely:
- “the exploitation of the right is made by a person in Nigeria;
- The right is registered in Nigeria, assigned to or acquired by a person in Nigeria, regardless of whether the payment for its exploitation is made within or outside Nigeria, or
- The incorporeal is connected to a tangible or immoveable asset located in Nigeria.”
3.6 Stamp Duty Considerations
Stamp Duty is chargeable on a wide range of instruments captured in the Stamp Duties Act. It is assessed by two modes, namely: fixed rate and ad valorem.
For documents charged under flat, a fixed sum is chargeable irrespective of the value of the transaction or the consideration on the dutiable instrument or document. For documents charged under ad valorem, stamp duty payable is a percentage of the consideration on the instrument.
The Stamp Duties Act has no special provisions for assessment of assignment of rights in an OML, and this ushers in a huge controversy. Section 3(1) of the Act suggests the effect that all instruments relating to an act to be performed in Nigeria must be stamped, except if such instrument is expressly exempted from duty in the Act. But, the outstanding and knottier issue is whether the assignment is liable to a fixed duty rate or ad valorem.
Section 68 of the Stamp Duties Act provides:
“1) An agreement for a lease, or with respect to the letting of any lands or tenements, shall be charged with the same duty as if it were an actual lease made for the term and consideration mentioned in the agreement.
- A lease made subsequently to, and in conformity with, such an agreement duly stamped, is to be charged with the duty of ten kobo only.”
The above provision create an impression of settling the applicability of a flat duty rate of Ten Kobo to assignment of interest in an OML. But it holds avenues of doubts. Section 68(1) refers to the charging of an agreement for a lease as if it were a lease, while Section 68(2) subjects to a fixed duty rate of 10K (Ten Kobo) a subsequent actual lease made pursuant to the agreement for a lease. Which of the above two can be said to have captured the agreement for the sale of interests in an OML, in order to determine the applicable rate to such an agreement?
An OML is a form of lease, but the combined reading of Section 68(1) and (2) raises doubts on the applicability of Section 68 to assignment of interests in an OML. Section 68(1) provides for an agreement for a lease. Subsection (2) then captures an actual lease made pursuant to an agreement in subsection (1), and subjects the subsequent lease to a fixed duty rate of Ten Kobo. For an assignment of OML to be deemed a subsequent lease in the context of Section 68(1), the original grant of the OML must pass for an agreement for a lease. An agreement for a lease is a temporary agreement made in contemplation of a subsequent definitive agreement that would embody the final terms of the lease. Section 68(2) opens with the words, “A lease made subsequently to, and in conformity with, such an agreement…” meaning that the subsequent lease in subsection (2) is subsequent to and must conform with the agreement in subsection (1). The grant of an OML by the Petroleum Minister to a company under the Petroleum Act scarcely matches the “agreement for a lease” in Section 68(1) in order for an assignment of the OML to pass for the “lease made subsequently to, and in conformity with” the agreement as envisaged in Section 68(2).
If Section 68(2) is viewed in the mirror of sub-leases, assignment of interest in an OML may not pass for a sub-lease. Black’s Law Dictionary defines a sublease as:
“A lease by a lessee to a third party, conveying some or all of the leased property for a term shorter than or equal to that of the lessee, who retains a reversion in the lease.”
From the above definition, an essential element of a sub-lease is reversionary interest of the head-lessee, who has become lessor to the sub-lease. The head-lessee maintains his relationship with the head-lessor while at the same time relating with the sub-lessee as his own lessee. But in a sale of interest in an OML, the pre-existing relationship of the original holder of the OML and the Petroleum Minister is severed and obliterated at the point of assignment of the holder’s right in the OML. There is no reversion of the sold interest to the original holder. Rather, the assignee steps into the shoes of the original holder and commences direct dealings with the minister. This does not reflect a sub-lease if Section 68(2) is construed as providing for a sub-lease.
The above uncertainty on the applicability of Section 68(2) in determining the stamp duty rate on assignment of OML then invites the provision of Section 58(1) of the Act for consideration.
Section 58(1) provides:
“Any contract or agreement under seal, or under hand only, for the sale of any equitable estate or interest in any property whatsoever, or for the sale of any estate or interest in any property except property locally situated out of Nigeria, or goods, wares, or merchandise, or stock or marketable securities, or any ship or vessel or part interest, share, or property of or in any ship or vessel, shall be charged with the same ad valorem duty, to be paid by the purchaser, as if it were an actual conveyance on sale of the estate, interest or property contracted or agreed to be sold.”
The above provision relates to any agreement for the “sale of interest in any property whatsoever.” By the wordings of the section, it does not matter the type, nature or extent of the interest in property being sold under the contract or agreement. Neither does it matter whether the interest is being purchased from the original holder. What is momentous is that the agreement transfers an interest in a property. Once this is satisfied, the stamp duty on the agreement would be ad valorem under Section 58(1) of the Stamp Duties Act.
An OML is an interest in a property, which property itself is vested in the Federal Government of Nigeria by virtue of Section 44(3) of the Constitution, and Section 1(1) of the Petroleum Act, Cap P10, LFN, 2004. By the Section 44(3) of the Constitution and Section 1(1) of the Petroleum Act, both reproduced above, there is no individual or private ownership of property in petroleum in Nigeria. The state owns it. What a private entity can acquire in the property in either case is interest in the property through an OML which enables the working, winning and carrying away of petroleum. When the interest in the OML is sold through a sale and purchase agreement, the sale and purchase agreement becomes a contract or agreement for the sale of an interest in a property as contemplated under Section 58 of the Stamp Duties Act, and would thus be liable to the ad valorem rate of stamp duty in Section 58(1).
4.1 Recommendations and Conclusion
Tax law provisions relating to assignment of interest in OML have remained shrouded in uncertainties resulting from statutory ambiguities, even where judicial attempts have been made to solve these uncertainties. Only in the case of VAT, that the Finance Acts, 2019 and 2020 have solved the controversies from shadowy provisions of the VAT Act by clearly subjecting assignment of OML to VAT. But this this has disincentivised petroleum asset investment, with the additional tax burden brought upon acquisition of OML. It shortened the relief from the CNOOC judgment. The adverse consequence can however be mitigated by putting the VAT burden into consideration while negotiating the price of the asset, with this present certainty of the law.
In the other areas of tax where controversies from legislative incertitude still rage on, it is necessary, to make special provisions for taxation of assignment of OML interests in the relevant enabling laws of the applicable taxes. Such provisions should spell the taxability of the assignment; mode of assignment to be so taxable, considering the wide range of OML assignment in Moni Pulo v. Brass; and the tax rate applicable.
Clarifications should be sought on the tax implication of each assignment before the assignment is completed, ideally at the stage of contract negotiation. Verifying applicable taxes would aid agreement on terms that would not later pose unforeseen losses when tax burdens crop up after completion of the transaction. Advance tax rulings can be sought from FIRS, and the tax agency is further called to duty to detect contentious areas in the tax laws, and produce clarifying materials like information circulars and guidelines. Much as such materials would not take the place of legislation, they nonetheless create useful grounds for debates and possible agreements with the taxpayers. They further offer hints on mindset of FIRS on the laws. These, to a large extent, mitigate conflicts with FIRS that often characterize divestments from OMLs.
* Tax, Energy and Litigation lawyer. Managing Partner, Tetralex Legal & Advisory, Lagos, Nigeria. email@example.com.
 “Petroleum operations” is essentially the activities in the upstream petroleum sector, and according to Section 2 of the Petroleum Profits Tax Act, Cap. P13, LFN, 2004, means the winning or obtaining and transportation of petroleum by or for a company through drilling, mining, extracting or other like operations or process, and all operations incidental thereto and any sale of or any disposal of chargeable oil by or for the company. This is expounded in Shell Pet. Dev. Co. Nig. Ltd. v. F.B.I.R (1996) 8 NWLR (Pt.466) 256.
 Varrella, S. 2020. Oil industry in Nigeria – statistics & facts. https://www.statista.com/topics/6914/oil-industry-in-nigeria/
 Folorunso, K. 2018. Opportunities and Challenges of Divested Asset Management – NPDC’s Experience. https://nape.org.ng/wp-content/uploads/2018/12/Opportunities-and-Challenges-of-Divested-Asset-Management_NPDC-Experience.pdf
 See Paragraph 14, 1st Schedule to Petroleum Act, Cap P10, LFN, 2004.
Petroleum Profit Tax Act, 1959, Cap P.13 Laws of the Federation of Nigeria (LFN), 2004.
 See Section 14 of the Petroleum Act.
 Op. Cit. P. 899.
 Wulf v. Shultz (1973) 508 Kansas Sup ct. 896
 Paragraph 1, 1st Schedule to the Petroleum Act. See also Regulations 1 and 2, Petroleum (Drilling and Production) Regulations.
 Paragraph 5, 1st Schedule to the Petroleum Act. This conforms with the definition of “prospect” in Section 15, Petroleum Act.
 Para. 7, 1st Schedule to the Petroleum Act.
 Paragraph 8 of the 1st Schedule to the Petroleum Act.
 Paragraph 10, 1st Schedule to the Petroleum Act.
 Paragraph 13(1), 1st Schedule to the Petroleum Act.
 The Black’s Law Dictionary (9th Ed.), p. 136.
 Burril, A. A Treatise on the Law and Practice of Voluntary Assignments for the Benefit of Creditors. Published at 1 James Avery Webb (6th Ed.) 1894.
(2012) 6 CLRN 153 – 235.
 Executive Order One (EO1) signed in May 2017 by the Presidency.
 Paragraph 1, 2nd Schedule to the PPTA.
 Paragraph 10 of the Second Schedule to the PPTA
 (2001) 12 NWLR (Part 727) 468 at 497.
(2005) 5 NWLR (Part 918) 286 at 327.
 Pursuant to Section 1 of the Tertiary Education Trust Fund Act.
 Federal Inland Revenue Service v. Total E&P Nigeria Limited (FHC/L/29A/2016).
 Cap C1 LFN 2004 (as amended).
 Ibid. P. 1336.
 Section 30 of the CGTA.
 Section 13 of the CGTA.
 7 All NTC 371at 379.
 Section 43.
 Section 44(b).
 Ibid. P. 1562.