Petroleum Profit Tax in Nigeria: Rates, Filing, and Penalties

Petroleum profit tax in Nigeria is the levy on income from upstream oil and gas operations, and since 2021 it comes in two forms that run side by side. Companies still holding unconverted oil mining leases or oil prospecting licenses pay tax under the old Petroleum Profits Tax Act (PPTA) at 85 percent of chargeable profits (65.75 percent during the initial amortization period). Companies that have converted those interests or obtained new licenses under the Petroleum Industry Act (PIA) 2021 pay a lower hydrocarbon tax of 30, 15, or 0 percent depending on terrain and license type, plus companies income tax at 30 percent. Which regime applies to a given operator depends entirely on the status of its license.¹

Who Pays Petroleum Profit Tax

The tax applies to any company actively engaged in petroleum operations in Nigeria. “Petroleum operations” covers the upstream chain: prospecting for and winning or obtaining petroleum, and transporting crude oil or natural gas to the point of export or first delivery.²

Refining, distribution, and retail marketing sit outside the PPTA. Companies in those downstream sectors pay tax under the general Companies Income Tax Act. Under the PIA, midstream and downstream petroleum operations are brought under the Companies Income Tax Act more explicitly, and companies across the whole value chain now owe companies income tax alongside any hydrocarbon tax on upstream profits.¹

Rates Under the Old PPTA

For operators still working under unconverted legacy leases, the PPTA rates continue to apply:

85 percent of chargeable profits for established producers that have fully amortized their pre-production expenditure.
65.75 percent for companies still within their initial amortization period, typically the first five years of production.

Companies operating under production sharing contracts with the Nigerian National Petroleum Company were entitled to an investment tax credit of 50 percent of chargeable profits, which reduced the effective net tax burden on those arrangements.³

Rates Under the PIA 2021

The PIA replaced the PPTA’s steep single rate with a hydrocarbon tax that varies by terrain and by whether the license is a converted petroleum mining lease or a new petroleum prospecting license:

Onshore and shallow water, converted petroleum mining leases: 30 percent of chargeable profits on crude oil and condensates.
Onshore and shallow water, new petroleum prospecting licenses: 15 percent.
Deep offshore: 0 percent hydrocarbon tax, regardless of license type.

Hydrocarbon tax is no longer the only direct tax on upstream profits. Companies also owe companies income tax at the standard 30 percent corporate rate on their petroleum income. A converted onshore operator therefore faces a combined upstream tax rate of roughly 60 percent, still well below the old PPTA’s 85 percent.¹

How Chargeable Profit Is Calculated

Under both regimes, chargeable profit is what remains of gross petroleum income after authorized deductions, capital allowances, and losses brought forward. The general test for deductibility is that an expense must have been incurred wholly, exclusively, and necessarily for the purpose of petroleum operations. The PIA adds “reasonably” to that test, giving tax authorities more room to challenge aggressive deductions.¹

Section 10 of the PPTA lists the main deductible categories:

Rents on land or buildings occupied under an oil prospecting license or mining lease, including compensation for surface rights disturbance.
Royalties on crude oil, natural gas, and casinghead petroleum spirit produced in Nigeria.
Interest on borrowed money where the tax authority is satisfied the capital was employed in petroleum operations, including inter-company loans at market rates.
Repairs and maintenance of premises, plant, machinery, or fixtures used in operations.
Customs duties paid to the federal government on machinery, equipment, and goods used in operations.
Bad debts proven to have become bad or doubtful during the accounting period.
Tangible drilling costs directly connected with drilling and appraising development wells.

The calculation runs in sequence. Gross revenue minus these allowable deductions produces adjusted profit. Capital allowances are then subtracted to reach assessable profit. Losses carried forward from prior periods reduce that further to arrive at chargeable profit, which is what the tax rate applies to.²

Section 270 of the PIA covers largely the same categories and adds deductions for research and development conducted in Nigeria, contributions to the Host Communities Development Trust Fund, education tax payments, and decommissioning and abandonment fund contributions.¹

Capital Allowances

Because upstream operations tie up huge amounts of capital, the PPTA’s Second Schedule provides two allowances. The petroleum investment allowance is a one-time deduction in the year an asset first enters service, at a rate that rises with water depth:

Onshore: 5 percent of qualifying expenditure.
Territorial waters up to 100 meters depth: 10 percent.
Water depth between 100 and 200 meters: 15 percent.
Water depth beyond 200 meters: 20 percent.

The annual allowance then gives 20 percent of qualifying expenditure for the first four years, dropping to 19 percent from the fifth year onward.²

Filing and Payment Schedule

The PPTA imposes a structured timeline. Companies file an estimated tax return within the first two months of the accounting period, which runs from January 1 to December 31. The final return is due within five months after the end of the accounting period, so no later than the end of May the following year.²

Tax itself is paid in monthly installments rather than as a lump sum. The first installment is due by the end of the third month of the accounting period, in an amount equal to one-twelfth of the estimated annual liability. Each subsequent monthly payment is recalculated from the company’s latest revised estimate, less amounts already paid, divided by the number of remaining installments. A final balancing payment is due within 21 days after the official notice of assessment is served.²

Penalties for Non-Compliance

Missing a payment deadline triggers an automatic 5 percent surcharge on the unpaid installment. The Federal Inland Revenue Service then serves a formal demand note. If the company still has not paid within one month of receiving that demand, the tax authority can pursue enforcement, and failure to pay without lawful justification becomes a criminal offense.²

For other PPTA offenses where no specific penalty is listed, the default fine is ₦10,000 plus ₦2,000 for each day the offense continues. Failure to pay the fine can result in up to six months’ imprisonment. Preparing or submitting incorrect accounts, understating profits, or overstating losses carries separate penalties.²

Other Levies That Stack on Top

Petroleum profit tax is not the only fiscal obligation upstream operators face. Several other charges apply alongside the PPT or hydrocarbon tax:

Royalties. Holders of petroleum prospecting licenses and mining leases pay royalties based on production volumes, calculated per hectare on a yearly basis. Royalties are deductible when computing chargeable profit.
Tertiary education tax. Under the PIA, companies owe a 2 percent levy on assessable profits to fund higher education. This education tax is no longer deductible against hydrocarbon tax.
Host Communities Development Trust. The PIA requires petroleum companies to contribute 3 percent of their annual operating expenditure to a trust benefiting communities in the areas where they operate. The contribution is deductible.
Gas flaring penalties. Companies that flare associated gas face penalties set by the Nigerian Midstream and Downstream Petroleum Regulatory Authority.

Once these are combined with hydrocarbon tax and companies income tax, the total fiscal take on Nigerian upstream operations sits well above the headline rate alone.¹

Foreign Tax Credit for U.S.-Linked Operators

Companies paying petroleum profit tax in Nigeria that also have U.S. tax obligations may claim a foreign tax credit to avoid double taxation. Foreign income taxes paid generally qualify, but petroleum income has restrictions: taxes connected with buying or selling oil or gas extracted in a foreign country do not qualify for the credit if the taxpayer lacks an economic interest in the resource, or if the transaction price differs from fair market value.⁴

Where a company is ineligible for the credit on specific petroleum-related foreign taxes, it can still deduct those taxes as a business expense, even if it claims the credit for other eligible foreign taxes in the same year.

1
Petroleum Industry Act. Petroleum Industry Act, 2021
2
Laws of the Federation of Nigeria. Petroleum Profits Tax Act
3
Natural Resource Governance Institute. Taxation of Petroleum Profits in Nigeria
4
Internal Revenue Service. Topic no. 856, Foreign Tax Credit