Exploration and production (E&P) companies often encounter challenges with the Tax Authority on tax deductibility of gas flaring expenses incurred in the process of their oil and gas production activities.
The deductibility of gas flaring expenses has been controversial, although the controversy around its deductibility is not out of place.
Gas flaring entails burning off natural gas associated with production of crude oil and it has innumerable adverse effects, ranging from environmental to health impact including climate change, acid rain, pollution and haematological risks. Its negative economic effects cannot also be overemphasised as potentially valuable source of energy and revenue is wasted on a regular basis.
Nigeria is 6th in the global gas flaring ranking, with about 800 million standard cubic feet (MMSCF) of gas flared daily based on the World Bank Global Gas Flaring Reduction Partnership Report, 2017. This may suggest that the issue of gas flaring in Nigeria should be approached differently from an economic development perspective if countries like UAE and Vietnam that consume more significant volume of gas domestically are ahead of Nigeria in the World Bank ranking.
Aside other economic factors like regulated pricing, the capital intensive nature of infrastructure required for harnessing gas is the main bane for E&P companies, thereby making gas flaring the easiest and most rampant practice due to its affordability.
In its bid to address the environmental challenges associated with gas flaring, the Federal Government (FG) enacted the Associated Gas Re-injection Act (AGRA). The provision of AGRA directed E&P companies to stop flaring of associated gas (AG) produced in the course of their oil production activities. Instead of flaring the AG, AGRA mandates E&P companies to either find valuable alternative uses or re-inject it into oil production. Flaring is only allowed in certain circumstances as may be decided by the Minister of Petroleum Resources (The Minister) who may issue a certificate in that respect (Section 3(1) – (2a)) of AGRA.
Thus, a company can only flare gas after obtaining approval/certificate from the Minister. The Minister is also empowered to permit a company to continue to flare gas in the particular field or fields if the company pays such sum as the Minister may from time to time prescribe for every 28.317 Standard cubic metre (SCM) of gas flared (Section 3(2)(b) of AGRA).
In this regard, it is arguable that gas flaring charge paid by E&P companies, as determined by the Minister in the process of obtaining approval to flare gas, qualifies as a tax deductible expense because it was incurred for the purposes of their petroleum operations. This is in line with Section 10(1) of the Petroleum Profits Tax Act (PPTA), which provides that “there shall be deducted all outgoings and expenses wholly, exclusively and necessarily (WEN) incurred, whether within, or without Nigeria, during that period by such company for the purpose of those operations.
Furthermore, flaring charge is an example of the “other like charges” paid to governments as provided in section 10(1) (l) PPTA, which is considered deductible. Reinforcing the argument for deductibility, Section 11(2) (b) PPTA specifically recognises the payment of the charge as a condition for granting inherent incentives. Also, PPTA did not provide for flaring charge under Section 13 – Deduction not allowed for PPTA purposes.
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