Nigeria Tax Appeal Tribunal finds realizable price is appropriate methodology for fiscal value of crude oil

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1 19 February 2016 Global Tax Alert Nigeria Tax Appeal Tribunal finds realizable price is appropriate methodology for fiscal value of crude oil EY Global Tax Alert Library Access both online and pdf versions of all EY Global Tax Alerts. Copy into your web browser: Executive summary The Lagos Division of the Tax Appeal Tribunal (TAT) recently ruled in favor of Chevron Nigeria Limited (Chevron or the Company) in an appeal 1 brought before it by the Company against Nigeria s Federal Inland Revenue Service (FIRS). Chevron had filed its tax returns for the 2007 and 2008 financial years using the realizable price (RP) methodology in determining the fiscal value of crude oil for the respective years. However, the FIRS disagreed with this price methodology claiming that the Company should have applied the official selling price (OSP). Chevron objected to the additional assessment stating that it had complied with the provisions of the Petroleum Profits Tax Act (PPTA) in filing its tax returns, which required it to use the price agreed with the Federal Government of Nigeria. The FIRS refused to amend the notices of assessment on the grounds that the Memorandum of Understanding (MOU) between the Federal Government and Chevron which provided for the application of the RP had terminated as of 2002 and as such the OSP applied thereafter in line with the PPTA. In the appeal filed by Chevron, the TAT ruled that the FIRS notice of assessment was not in accordance with section 9 (2)(a) and section 23 (5) of the PPTA which referred to the agreement between the Nigerian Government and the Oil Company for the determination of the appropriate methodology for determining the fiscal price of crude oil.

2 2 Global Tax Alert The evidence submitted before the TAT revealed that the MOU which Chevron had signed with the Federal Government remained valid until January Furthermore, by virtue of a Department of Petroleum Resources (DPR) letter of January 2013, it was agreed that the RP would apply from January 2008 to June 2010, and the OSP should be used from July 2010 to December Accordingly, the TAT ruled that the appropriate methodology for determining the crude oil price for the years ended 31 December 2007 and 2008 was the RP based on the MOU and the DPR letter of January Detailed discussion The facts Chevron, a company incorporated in Nigeria and engaged in petroleum operations, filed its returns for the years ended 31 December 2007 and 31 December 2008 based on revenue determined using the RP of oil. During an audit, the FIRS assessed Chevron additional tax liabilities for the respective years of assessment on the basis that the Company should have determined the fiscal value of crude oil for those years using the OSP. Chevron objected to the notices of assessment but the FIRS refused to amend its additional assessment notices. Subsequently, Chevron filed an appeal in respect of the matter with the TAT. As part of its arguments for appeal, Chevron stated that it had relied on the provisions of section 9 (2)(a) and section 23 (5) of the PPTA in using the RP as the methodology for determining the fiscal value of crude oil in the respective years of assessment. Section 9 (2)(a) of the PPTA did not specifically provide for the RP or the OSP but instead provides that the value of chargeable oil disposed by a company during a period should be determined in accordance with the provisions of any applicable enactment and any financial agreement or arrangement between the Federal Government of Nigeria and the oil company. Section 23 (5) of the PPTA also referred to an agreement with the Government of Nigeria for the purpose of determining the posted price of crude oil exported from Nigeria by a company. Chevron argued that in applying the RP methodology, it had relied on the MOU executed with the Government in 2000 to determine the appropriate price for the 2007 year of assessment as the MOU did not terminate until January 2008 when a letter was issued by the DPR to that effect. In addition, Chevron also argued that although the notice of termination of MOU in 2008 indicated that the OSP would apply in said year, that letter was subsequently superseded by the DPR letter of 19 June 2013 to the Oil Producers Trade Section (OPTS) of the Lagos Chambers of Commerce and Industry, which indicated that the RP would apply from January 2008 to June The FIRS argued that the MOU was terminated in 2002 and thereafter the provisions of the PPTA applied and that based on the PPTA, the OSP was the applicable pricing methodology. The FIRS based its argument on section 23 (6) which states that the posted price of crude oil must bear a fair and reasonable relationship to the established posted prices of Nigerian crude oil of comparable quality and gravity and if there are no such established posted prices, recourse should be made to the posted prices at main international trading export centers for crude oil of comparable quality and gravity. Thus, the FIRS appeared to have interpreted this provision to mean that the OSP applied although there was no specific reference to the OSP under that section. The judgment The TAT ruled that the RP was the appropriate pricing mechanism in determining the fiscal value of crude oil for the 2007 and 2008 financial years in line with the MOU of 2000 (which was valid until January 2008) and the DPR s letter of 19 June 2013, as these two documents had specified the RP as the applicable methodology for the relevant years. The Tribunal further held that this was in line with the provision of section 9 (2)(a) and section 23 (5) of the PPTA which states that the appropriate price methodology must be that which is agreed between the Government of Nigeria and the oil company. Implications This decision of the TAT aligns with the specific provisions of section 9 (2)(a) and section 23 (5) of the PPTA which clearly gives credence to a subsisting agreement between a company and the Government.

3 Global Tax Alert 3 It is also important to note that pursuant to the DPR letter of 19 June, 2013, companies in the petroleum industry should be required to determine crude oil price using the OSP from July 2010 to December The TAT s decision in this case aligns with its earlier decision in the case of Mobil Producing (Nig) Unlimited V FIRS where it was also decided that the RP is the appropriate pricing methodology for crude oil based on a subsisting agreement between the Government and the Company. One issue however remains as to the appropriate price methodology to be applied in the absence of an agreement. The PPTA does not specify a price methodology although it makes reference to the characteristics that the posted price should possess. It is thought that this remaining uncertainty as to what methodology should be applicable in the absence of an agreement may result in a further appeal to the Federal High Court. Endnote 1. Chevron Nigeria Limited Vs. Federal Inland Revenue Service TAT/LZ/044/2013.

4 4 Global Tax Alert For additional information with respect to this Alert, please contact the following: Ernst & Young Nigeria, Lagos Abass Adeniji Akinbiyi Abudu Chinyere Ike Ogochukwu Isiadinso Funmilola Ajibola Ernst & Young Advisory Services (Pty) Ltd., Johannesburg Justin Liebenberg Ernst & Young LLP (United Kingdom), Pan African Tax Desk, London Leon Steenkamp Gonçalo Dorotea Cevada Ernst & Young LLP, Pan African Tax Desk, New York Dele A. Olaogun

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