THE PROBLEM AND PROSPECT OF PETROLEUM PROFIT TAX ADMINISTRATION IN NIGERIA

CHAPTER ONE

INTRODUCTION

1.0      BACKGROUND TO THE STUDY

As Africa’s most populous country, Nigeria boasts of the continent’s second largest oil reserves and has a very promising growth outlook. Poised to eclipse Africa’s largest economy by 2016, Nigeria is becoming a rather worthy recipient of foreign capital, receiving anywhere from $10-$12 billion per year. However, in order to take full advantage of what foreign investment has to offer, Nigeria has been trying to improve its economic and political climate.

Taxation remains a veritable instrument for national development. Apart from being a major source of revenue for the government, taxation provides goods and services needed by citizens. Taxation policies can stimulate economic growth and job creation through its impact on investment and capital formulation in the economy. In this respect reforms in the administration of petroleum tax system that ensure effectiveness, equity and efficiency are conditions for healthy public revenue. The decision to reform the Nigerian tax system is crucial in order to improve the revenue base for national development and attaining socio-economic goals for taxation.

The oil industry is thus the hub of the Nigerian economy, and needs to be sustained if the country is to achieve real economic growth. According to Nwete (2003), the oil glut of the 80’s that greatly impacted on global oil prices and the low OPEC quota, foisted on the country various fiscal regime for petroleum especially the petroleum profit tax of 85% and 20% royalty regime, all in a bid to get more revenue to oil the nation’s economy. Since then Nigeria has had lofty aims for its oil industry, including the desire to increase reserve from 34billion barrels to 40billion barrels by 2010 and subsequently its OPEC quota, optimization of oil revenue, increase in the industry’s local content, and continuous attraction of foreign investment as a way of promoting and sustaining investment in the oil industry.  If we compare it with other economic activities, the petroleum industry has wider attraction because of its special nature, which stems from the fact that till date, it remains the largest and most important industry in the world. It has continuously provided the world’s energy and industrial needs, from transportation to agriculture. It has also been a Monet spinner just for the oil production companies, providing them with the opportunity of economic and social development ,and second for the multinational oil companies engaged in its extraction, and by extension the industrialized market to which the earnings of the multinational oil companies. From exploration to eventual production, the cost of developing and operating an oil field is very high and probably higher than any other industry.

Before independence in 1960, agriculture was the mainstay of Nigeria economy, providing cash crops as well as food to the entire economy. The history of oil production in Nigeria dates back to 1908 when an affiliate of a German Exploration Company, the Nigerian bitumen company came to present day Ondo State to venture for Bitumen (tar sand). By 1971, a year after the Civil War, oil had started becoming more important to the economy4. With the boom in the late seventies of oil, attention shifted completely from the agricultural sector to the oil sector of the economy. The structure of Government’s participation, as well as its impacts on the entire sector of the economy, changed from been a mere ‘supportive’ sector it was in 60s to the predominant source of foreign exchange earnings and development finance as well as a viable access to international development opportunities. The very vital importance of oil to Nigeria dictates government’s involvement in the regulation of the Nigerian oil sector. It is noteworthy that prior to 1971, all of the multinational companies were wholly owned by their foreign parent companies. In that same year, government started acquisition of participation.