Incentives to Gas Industries
In view of the enormous potentials of this sector some fiscal incentives have been put in place. They include:
Gas Production Phase
- Applicable tax rate under Petroleum Profit Tax (PPT) Act to be at the same rate as company tax which is currently 30%.
- Capital allowance at the rate of 20% per annum in the first four years, 19% in the fifth year and the remaining 1% in the books.
- Investment tax credit of the current rate of 5%.
- Royalty at the rate of 7% on-shore and 5% off-shore.
Gas Transmission and Distribution
- Capital allowance as in production phase above;
- Tax rate as in production phase;
- Tax holiday under pioneering status; LNG Project
- Applicable tax rate under PPT is 45%.
- Capital allowance is 33% per year on straight line basis in the first 3 years with 1% remaining in the books.
- Investment tax credit of 10%.
- Royalty of 7% on-shore, 5% off-shore tax deductible.
Gas Exploitation (Upstream Operations)
This involves all operations necessary to separate gas from the reservoir into usable form at utilization or designated custody transfer points, either through pipelines or tankers. This operation is to help reduce or completely eliminate gas flaring.
Fiscal Arrangement are to be reviewed as follows:
(a) all investment necessary to separate oil and gas from the reservoir into usable products is considered part of the oil field development;
(b) capital investment facilities to deliver associated gas in usable form at utilization or designated custody transfer points, will be treated for fiscal purposes as part of the capital investment for oil development;
(c) the capital allowances, operating expenses and basis of assessment will be subjected to the provisions of Petroleum Profit Tax (“PPT Act”) and fiscal incentives under the revised Memorandum of Understanding (MOU).
Gas Utilization (Downstream Operations)
Gas utilization involves the marketing and distribution of gas for domestic and industrial uses. This would include power generation, Liquefied Natural Gas (LNG), household and factory consumption. The incentives applicable for this purpose include:
(a) companies engaged in gas utilization as explained above, are to be subject to the provisions of Companies Income Tax Act;
(b) an initial tax holiday for three years, renewable for an additional two years, will be granted to such enterprises subject to satisfactory performance of the enterprises. The tax relief period of the company is to commence on the first production day of the company;
(c) accelerated capital allowances after a tax holiday are available as follows:
(i) investment in plant and machinery; 90% annual allowance with 1% retention;
(ii) Additional Investment Allowance of 15% which will not reduce the value of the asset;
(d) the dividends distributed during tax holiday to investors in respect of investments in foreign currency or introduction of plant and machinery of not less than 30% of the equity of the company, shall be tax free.
Fully appreciating that the use of associated gas will prevent environmental hazards of air pollution caused by gas flaring, Government has decided to give additional incentives in 1998 to support the gas industry in the following areas:
(a) All gas development projects, including those engaged in power generation, liquid plants, fertilizer plants, gas transmission and distribution pipelines, are to be taxed under the provision of Companies Income Tax Act (“CITA”) and not the Petroleum Profit Tax Act. For the avoidance of doubt, where there is an integrated oil and gas project, the oil operation which is to be taxable under the PPT is to be separated from the gas operation project for the latter to enjoy the concession of being taxed under CITA. All expenditure pertaining to the integrated oil and gas project would be chargeable under the PPT.
(b) All fiscal incentives under the gas utilization downstream operations in 1997 are to be extended to industrial projects that use gas, i.e. power plant, gas to liquid plant, fertilizer plant, gas distribution and transmission pipeline.
(c) The initial tax holiday period is to be extended from 3 to 5 years.
(d) Gas is transferred at 0% PPT and 0% Royalty.
(e) The “Investment Capital Allowance” is increased from 5% to 15%.
(f) Interest on loan for gas project is to be tax deductible provided that prior approval is obtained from the Federal Ministry of Finance before taking the loan.
(g) All dividends distributed during the tax holiday shall be tax free.
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