The Value Added Tax Act, 2004 as amended (VAT Act) regulates the operation of VAT in Nigeria. VAT is charged at a flat rate of 5%, and is payable on supplies of taxable goods and services, except those specifically exempted from VAT. Under the amendment to the VAT Act (passed in 2007), and an FIRS’ directive issued pursuant to the amendment, companies operating in the oil and gas industry are required to deduct VAT at source from their vendors/suppliers’ invoices and remit it directly to the FIRS.
For service companies, input VAT incurred on overheads and general/administrative cost are to be expensed through their profit and loss account, while VAT incurred on fixed assets is to be capitalised with the cost of the fixed assets. Essentially, the scope for input VAT recovery for these companies is quite limited.
2.2.7 Withholding Tax (WHT) Nigerian tax laws provide that where any payment on which WHT is deductible is due from one person (or company) to another, the person making the payment is required to deduct tax at the applicable rate and remit the tax deducted to the relevant tax authority (RTA) within 21 days after deduction, or when the invoice is credited, whichever is earlier. WHT rate is either 5% or 10%, depending on the nature of the transaction and the beneficiary of the payment.
WHT deducted at source from non-resident companies in respect of interest, rent, dividend and royalty constitutes the final tax liability due from the companies. A lower rate of 7.5% would apply to beneficiaries that are resident in a country that has double tax treaty (DTT) with Nigeria. Nigeria currently has DTTs with United Kingdom, Netherlands, Belgium, Pakistan, Romania, Philippines, Czech Republic, Canada, South Africa, China and France. The DTTs with South Korea, Spain, Sweden and Russia are yet to be completely ratified.
2.2.8 Capital Gains Tax (CGT) :The Capital Gains Tax Act, 2004 as amended (CGTA) regulates payment of CGT in Nigeria. The rate of tax is currently 10% and is levied on capital gains accruing on disposal of chargeable assets, irrespective of whether the asset is situated in Nigeria or not. Capital gains accruing outside Nigeria to a non-resident company or individual are subject to CGT only on the amount received or brought into Nigeria.
2.2.9 Royalties: The Petroleum Act (1969) requires the holder of an OPL or an OML, to pay royalties to the FGN as soon as production starts. This is usually in the form of monthly cash payments3 at an agreed percentage of the quantity of crude oil/gas produced, after making adjustments for treatment, handling and related expenses. The royalty rates currently applicable are as follows:
- on-shore production 20%
- offshore production up to 100meters water depth 18½%
- offshore production between 100 to 200 meters water depth 162/3%
- In areas from 201 to 500 metres water depth 12%
- In areas from 501 to 800 metres water depth 8%