Taxable income is based on financial statements prepared on commercial principles (that is, local generally accepted accounting principles (GAAP) or International Financial Reporting Standards (IFRS). Trading profit is adjusted for deductions not allowed for tax purposes and for profits or gains not subject to tax.

Petroleum Sector

Effective 16 August 2021, the Petroleum Industry Act 2021 (PIA) replaced the Petroleum Profit Tax Act, to establish a separate Upstream Regulatory Commission and a Midstream and Downstream Petroleum Regulatory Authority for better administration of the industry. Under the PIA, revenue from upstream operations is subject to the corporate income tax and the ‘Hydrocarbon Tax’ (HT) (see Sec.5.1.).

Specific rules apply for the determination of the chargeable income of petroleum operations. Most notably:

Penalties incurred for the flare of natural gas are not deductible;
Head office expenses, research and development cost, or any other shared indirect production cost incurred outside Nigeria are not deductible;
Expenditure for the purchase of information relating to the existence and extent of petroleum deposits are not deductible;
Financial or bank charges, arbitration or litigation cost, bad-debts and interest on borrowings are not deductible;
Depreciation of any premises, buildings, structures, works of a permanent nature, plant, machinery or fixtures are not deductible; and
Tax corresponding to a contract or agreement entered into on a net basis and paid by the taxpayer on behalf of the contractor or vendor is not deductible.

In contrast, the following expenditure is deductible to upstream operators:

Royalty costs incurred for crude oil and associated gas and payments made for product sharing, profit sharing, risk service contracts, and others in relation to petroleum mining licenses, are deductible;
Interest expenses are deductible to the extent at arm’s length and due solely on the funds employed in upstream operations;
Decommissioning and abandonment expenditures are deductible (to the extent approved by the relevant authorities) (effective 1 September 2023); and
Contributions to various community and development funds are deductible to the extent approved by the relevant authorities.

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