The promulgation of the Finance Act, 2019 has resuscitated familiar tax issues that were previously settled. One of such issues is the applicability of value added tax (“VAT”) to the assignment of a participating interest (“PI”) in an oil prospecting licence (“OPL”) or oil mining lease (“OML”).
Prior to the introduction of the Finance Act, the Federal High Court in the case of CNOOC v. AG Federation & 2 Ors (2011) 4 TLRN held that contractors’ rights in a production sharing contract (“PSC”) do not constitute either goods or services as contemplated by the then provisions of the Value Added Tax Act Cap VI Laws of the Federation of Nigeria, 2004 (“VAT Act”), but are ‘incorporeal property’ (a legal right in property having no physical existence), and therefore the assignment of contractors’ rights in a PSC is the assignment of a ‘chose in action’ (a personal right in property which can only be claimed or enforced by action, and not by taking physical possession).
Based on the decision in the CNOOC case, the predominant analysis has been that the assignment of a PI in an OPL or OML does not attract VAT on the basis that a PI is incorporeal property and accordingly a chose in action. However, the introduction of the Finance Act 2019 definitely changes the landscape with the introduction of a new definition of “goods”.
Pursuant to the Finance Act 2019, “goods” under the VAT Act is now defined 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”. With the foregoing definition of “goods”, the argument that a PI in an OPL or OML constitutes incorporeal property and accordingly a chose in action and as such not subject to VAT may no longer be tenable.
Interestingly, the exclusion of “interest in land” from the definition of “goods” appears to have provided a new veritable argument against the applicability of VAT to the assignment of a PI in an OPL or OML. This is because from an analysis of the provisions of the Petroleum Act Cap P10 Laws of the Federation of Nigeria, 2004 (the “Petroleum Act”) and the Petroleum (Drilling and Production) Regulations, 1969 (as amended) (the “PDPR”), the nature of the legal right derived from holding a PI in an OPL or OML is connected to the land covered under the licence or lease. See for example, Section 1 of the Petroleum Act and Regulation 8 of the PDPR.
However, it remains unclear what the attitude of the Federal Inland Revenue Service and the courts will be in respect of the application of the Finance Act 2019 as it relates to VAT and to assignments of PIs in OPLs and OMLs. It is therefore important for transaction parties to consider this issue in analysing the cost implications of their transaction.
 Section 1 of the Petroleum Act makes it clear that the entire ownership and control of all petroleum in, under or upon any lands shall be vested in the Federal Government of Nigeria. Therefore, rights in an OML or OPL attach to the land in which the petroleum is situated. On its part, Regulation 8 of the PDPR provides for the registration of an OPL or OML at the lands registry office of the State where the relevant area of the OPL or OML is situated.
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