Quite separate from the discuss on the recent amendment bill on royalty, there is the issue of sole cost which has been a subject of litigation as to whether it should be included in the allowable expense of the Oil and Gas companies or not. The Federal Inland Revenue Service (FIRS) posited that the Deep Offshore and Inland Basin Production Sharing Contract Act did not make provision for the allowance of sole cost as deductible expense, but the Tax Appeal Tribunal (TAT) took the view that sole cost is deductible expense so long as it meets the Wholly, Exclusively and Necessarily tests.
In May 2016, the TAT sitting in Lagos ruled that parties in PSCS with the Nigerian National Petroleum Corporation (NNPC), can take tax deduction for sole costs, where the deduction of such expenses is permissible under the Petroleum Profits Tax Act (PPTA), regardless of the provisions of any contractual agreement.
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Although, sole cost in the context of petroleum operations refers to any cost incurred that is not directly towards petroleum operations. But that “Subject to the express provisions of this Act, for the purpose of ascertaining the adjusted profit of any company of any accounting period from its petroleum operations, no deduction shall be allowed in respect of disbursements or expenses not been money wholly and exclusively laid out or expended, or any liability not being a liability wholly or exclusively incurred for the purpose of those operations” which implies that cost incurred for the purpose of petroleum operations is deductible.
What this means for the oil companies is that if the companies can give sufficient evidence that the cost incurred was for the purpose of facilitating their operations, then they have the backing of the law but in the situation where the companies cannot prove to the FIRS that the cost incurred is for the purpose of the operations, then they will either disallow it or take the matter to the court.
It is a well-known fact that the FIRS is mandated by the law to collect taxes for the government but the drive towards collecting of the taxes should not be to shut down the companies in the Oil and Gas industry the unnecessary disallowance of sole costs, which are wholly and exclusively incurred for the purpose of the companies operations.
Also, Companies in the Sector should render true and relevant returns to the tax authorities.
To avoid future litigation and create more certainty in the administration of taxation in this Sector, the National Assembly should define in the context of PPTA and DOIBPSCA what constitutes deductible sole cost since it is not expressly stated in the law. This will make it easy for the FIRS to collect the taxes effectively as well as help oil companies to comply accordingly.
