How the Petroleum Profit Tax Act Works in Nigeria

The Petroleum Profit Tax Act, codified as Cap P13 of the Laws of the Federation of Nigeria 2004, is the statute that taxes companies extracting crude oil and natural gas in Nigeria, with rates running from 50 percent up to 85 percent of chargeable profit depending on the contract. The Petroleum Industry Act of 2021 formally repealed it, but the PPTA continues to govern any company that has not yet converted its licence to the new PIA framework. In 2026, both regimes are live at the same time.

Who the Act Applies To

The PPTA reaches any company engaged in petroleum operations within Nigeria or its territorial waters. The statute defines petroleum operations as the search for, extraction of, and transportation of petroleum or chargeable oil, together with anything incidental to those activities and any sale or disposal of chargeable oil by the company.¹ “Petroleum” covers mineral oil, related hydrocarbons, and natural gas in their natural condition, but excludes liquefied natural gas, coal, and bituminous shales.

Refining crude oil at a refinery is carved out of the definition. Downstream activities — refining, distribution, and marketing of finished products — fall under separate corporate tax rules, not the PPTA.¹ A company winning petroleum through a joint venture or partnership accounts for its share of profits under this framework, and liability begins at the exploration phase rather than when commercial production starts.

The Tax Rates

Three rates apply, and which one a company pays depends on its contract type and how long it has been producing.

85 percent on joint venture and sole risk companies that have been producing for more than five years. This is the headline rate and one of the highest petroleum tax rates anywhere in the world.¹
65.75 percent on joint venture and sole risk companies still in their first five years of production, before pre-production expenditure has been fully written off. The rate steps up to 85 percent after that.²
50 percent flat on companies operating under a Production Sharing Contract with the Nigerian National Petroleum Corporation, for the full duration of the contract.³

The PSC rate is structured as an investment tax credit under Section 22 of the PPTA: assessable tax is first calculated at 85 or 65.75 percent, then a 50 percent credit is subtracted to arrive at the chargeable tax. The Deep Offshore and Inland Basin Production Sharing Contracts Act restates this more simply as a 50 percent rate on chargeable profits.³ The resulting tax is then split between the NNPC and the contractor in the same ratio as their profit-oil split. PSC companies must file and pay their estimated and final tax in U.S. dollars.

How Chargeable Profit Is Built

The rate is only half the story. The number it applies to comes out of a four-step calculation: gross proceeds, adjusted profit, assessable profit, chargeable profit. Each step strips away a defined class of costs and reliefs.

Gross Proceeds

Under Section 9, profits for the period include proceeds from all chargeable oil sold, the value of chargeable oil disposed of without sale (for example, oil delivered to a refinery on the company’s own account), the value of chargeable natural gas, and any income incidental to petroleum operations.¹ Everything flowing in from upstream activity is aggregated here.

Allowable Deductions

Section 10 sets out the expenses that reduce gross proceeds to adjusted profit. To qualify, an expense must have been incurred wholly, exclusively, and necessarily for petroleum operations. The main categories are:

Rents for land or buildings used under an oil prospecting licence or mining lease, including compensation for disturbance of surface rights
Royalties on crude oil and natural gas sold or commercially disposed of
Interest on money borrowed for petroleum operations, provided the authority is satisfied the capital was actually employed in those operations; for inter-company loans, the rate must not exceed LIBOR
Repairs to premises, plant, machinery, or fixtures used in operations
Customs duties on machinery, equipment, and goods used in operations
Bad and doubtful debts directly connected to operations
Tangible drilling costs for development wells, plus tangible and intangible costs for exploration wells and the first two appraisal wells in the same field¹

What Cannot Be Deducted

Section 13 blocks a specific list of items, and this is where filings most often go wrong:

Any expense not laid out wholly and exclusively for petroleum operations
Capital withdrawn from the business or sums employed as capital
Capital improvements, as distinct from repairs
Amounts recoverable under insurance or indemnity contracts
Rent or repair costs for premises not used in operations
Any income tax, profits tax, or similar tax paid in Nigeria or elsewhere
Depreciation of buildings, plant, machinery, or fixtures — relief for these runs through capital allowances instead
Payments to provident or savings funds unless specifically allowed under Section 10
Customs duties on goods imported for resale, for personal employee use, or where equivalent Nigerian-made goods were available at similar prices
Money spent purchasing geological information about petroleum deposits¹

One trap catches companies with group structures: interest on loans between related companies is disallowed entirely if either company holds an interest in the other, or if both are subsidiaries of the same parent.

Capital Allowances

Once allowable deductions bring gross proceeds down to adjusted and then assessable profit, capital allowances under the Second Schedule reduce it further to chargeable profit. There are two.

The Petroleum Investment Allowance is a one-time allowance in the period an asset is first put to use. The rate rises with operational difficulty: 5 percent onshore, 10 percent in water up to 100 metres deep, 15 percent between 100 and 200 metres, and 20 percent beyond 200 metres.¹

The Annual Allowance writes off qualifying capital expenditure over roughly five years: 20 percent in each of the first four years, then 19 percent in the fifth year and beyond, with 1 percent of original cost retained on the books until the asset is disposed of or scrapped.¹ Together the two allowances are what lets operators recover the cost of drilling equipment and offshore infrastructure.

The Accounting Period

The PPTA locks every company to a calendar-year accounting period from January 1 through December 31, regardless of the company’s own fiscal year.¹ A company that begins production mid-year has a shortened first period running from its first sale or bulk disposal of chargeable oil to December 31. A company that ceases operations mid-year closes its final period on the cessation date.

Filing, Payments, and Penalties

Filing is on an actual-year basis, so the tax is based on profits earned during the current period rather than a prior-year estimate. Two returns are required each year. The estimated return is due within the first two months of the accounting period, projecting expected profits and tax. The actual return is due within five months after the accounting period ends, and no later than May 31.¹

Payment runs in monthly installments through the year against the estimated liability. Any shortfall is settled when the actual return is filed; any overpayment sits as a credit against future obligations.

The penalty regime is severe. As amended by successive Finance Acts, late submission of either the estimated or the actual return by an upstream company attracts ₦10,000,000 on the first day of default and ₦2,000,000 for every additional day the failure continues. Fraudulent reporting or persistent non-compliance can also lead to criminal prosecution of responsible officers.

Tertiary Education Tax

A PPTA-paying company also owes Tertiary Education Tax at 2.5 percent of assessable profit. This levy is itself a deductible expense under Section 10, so the computation is circular: the effective rate divides 2.5 by 102.5 and applies that fraction to assessable profit, which stops the tax from inflating its own base. Returns are filed alongside the PPTA returns on the same deadlines, with payment due within 30 days of the assessment notice.

When the PPTA Stops Applying

Section 316 of the Petroleum Industry Act formally repealed the PPTA along with the Deep Offshore and Inland Basin Production Sharing Contracts Act and the NNPC Act. The repeal is not immediate for every operator. Section 316(3)(d) preserves the PPTA for income earned by any company that has not converted its licence to the PIA framework.⁴

Section 92 gave holders of existing Oil Mining Leases and Oil Prospecting Licences an 18-month window from August 2021 to convert voluntarily to new Petroleum Mining Leases or Petroleum Prospecting Licences. That window closed in February 2023. Companies that did not convert continue under their existing lease terms until natural expiry, at which point they must apply for new licences under the PIA. So in 2026, some producers are still taxed under the PPTA while others have migrated across.

What Replaces the PPTA After Conversion

Converted companies pay two separate taxes on upstream operations rather than one: Hydrocarbon Tax and Companies Income Tax at 30 percent. They are computed independently, and Hydrocarbon Tax paid cannot be deducted from the CIT liability.

Hydrocarbon Tax rates vary by licence type and location:⁵

30 percent for converted or renewed onshore and shallow offshore Petroleum Mining Leases
15 percent for onshore and shallow offshore Petroleum Prospecting Licences and marginal fields
0 percent for deep offshore operations, which are fully exempt from Hydrocarbon Tax

Combined with 30 percent CIT, the burden onshore is still meaningful, but it is materially lighter than the 85 percent PPTA rate that applied to joint ventures. Deep offshore operators see the largest reduction, paying CIT only. For companies still holding unconverted licences, the PPTA remains the governing statute in full, and the timing of any conversion decision carries direct tax consequences.

1
Laws of the Federation of Nigeria. Petroleum Profits Tax Act
2
Belt and Road Initiative Tax Administration Cooperation Mechanism. Current Tax System (2024)
3
Laws of the Federation of Nigeria. Deep Offshore and Inland Basin Production Sharing Contracts Act
4
Petroleum Industry Act. Petroleum Industry Act, 2021
5
PwC. Nigeria – Corporate – Taxes on Corporate Income