It is a well-known fact that President Muhammadu Buhari on 4 November 2019 signed into law an amendment to the Deep Offshore and Inland Basin Production Sharing Contract Act Cap D3 LFN 2004 (the “DIBPSA”) with the aim of increasing the revenue of the Federal Government of Nigeria (the “FGN”) from deep offshore, inland basin and frontier operations. It is projected that the FGN will earn an additional income of up to US$1.4bn annually on the back of the amended law.

In what appears to be another bold move in the FGN’s revenue generation drive, the FGN plans to remove the tax exemption granted for dividends received from entities engaged in upstream petroleum operations. This was disclosed in a statement issued by the Special Adviser, Media and Communications of the Minister of Finance in connection with the 2019 Finance Bill that was submitted by President Muhammadu Buhari to the National Assembly.

Generally, withholding tax (“WHT”) of 10% is deducted from dividends paid by companies to their corporate and individual shareholders. For corporate and individual shareholders resident in a country that has a double taxation treaty with Nigeria, the WHT rate is 7.5%. This is however not the case with respect to dividends paid by entities engaged in upstream petroleum operations. Under Section 60 of the Petroleum Profits Tax Act Cap P13 LFN 2004 (the “PPTA”), the dividends paid out of the petroleum profits of entities engaged in upstream petroleum operations are exempted from tax.

Specifically, Section 60 of the PPTA provides as follows: “No tax shall be charged under the provisions of the Personal Income Tax Act or any other Act [which includes the Companies Income Tax Act Cap C21 LFN 2004] in respect of any income or dividends paid out of any profits which are taken into account, under the provisions of this Act [i.e. the PPTA], in the calculation of the amount of any chargeable profits upon which tax is charged, assessed and paid under the provisions of this Act [i.e. the PPTA].”

The 2019 Finance Bill submitted by President Muhammadu Buhari to the National Assembly seeks to remove the above tax exemption, among other tax changes proposed by the FGN. The Finance Bill has 5 (five) strategic objectives, 1 (one) of which is raising revenues for Government by various fiscal measures. In the explanatory memorandum to the Finance Bill, it was explained in connection with petroleum profit tax that the Finance Bill seeks to improve revenue by removing the tax exemption granted for dividends or income received from companies charged under the PPTA.

Depending on which side of the divide you are leaning on, the proposed removal of the tax exemption by the FGN coupled with the amendment of the DIBPSA is either a welcome development that will ensure that Nigeria maximizes its oil wealth for the benefit of Nigerians or a policy decision that will stifle investments in the Nigerian oil and gas industry and further push investors to other African countries (e.g. Mozambique and Angola). In any event, only time will tell which argument is valid. What is however certain is that the FGN is currently unrelenting in its revenue generation drive.

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