Petroleum Profit Tax And Capital Expenditure Of The Nigerian Economy (A Case Study Of Lagos State)

Petroleum Profit Tax And Capital Expenditure Of The Nigerian Economy (A Case Study Of Lagos State)
Abstract
Petroleum Profit Tax is a major source of revenue for the Federal Government of Nigeria to meet its statutory obligations of ensuring the economic development of Nigeria. It assists the government to achieve the country’s macroeconomic objective in the areas of fiscal and monetary policies. However, it has been observed that non-provision of corporate social responsibilities in the communities where there is extraction of crude oil result into constant destruction of production installations, and hindrance to production; tax avoidance and evasion of poor tax administration, and weak fiscal policy have been negating the increase in tax income generated. The main objective of this paper is to assess the relationship between petroleum profit tax and economic development of Nigeria for the enhancement of the welfare of the citizens. Primary and secondary data were used to collect the research data, while chi-square and multiple regression statistical models were used to analyze the results of the field work. The findings reveal that there is a very strong relationship between petroleum profit tax and economic development of Nigeria, tax avoidance and evasion are major hindrance to income growth in this sector, poor tax administration is a problem to effectiveness and efficiency of this source of income, and lack of corporate social responsibilities is causing unrest in the crude oil production zone. The paper recommends the need for the government to make judicious use income generated for the benefits of Nigerians, and among others the need for tax reforms to address the issue of tax evasion and avoidance.
Chapter One
Introduction
1.1 Background of Study
For the development and growth of any economy, the provision of basic infrastructure is quite necessary. Among these are the provisions of schools, hospitals, construction of roads, bridges, railway lines, airports and seaports. Generally, government is saddled with the responsibility of providing some basic infrastructures for her citizens. In lieu of this, the government of any society seeks sources of fund to maintain the development, and meet the needs of its society. Meeting the needs of the economy call for huge funds which an individual or society can’t contribute alone. There are two ways of financing government expenditure in Nigeria; these are, through oil revenue and through non-oil revenue. The Nigerian government sources a large proportion of its total revenue from oil since Nigeria has been seen as a country rich with this natural resources. The petroleum industry generated about 82 per cent income for Federal Government while 18 per cent came from non-oil revenue. The Petroleum Industry constitutes a major source of income and occupies a strategic position in the economic development of Nigeria. For the past decades, the industry has been playing vital and dominant role to the economic growth of Nigeria, both in foreign exchange earnings and domestic income generation. One of the sources of petroleum income is the Petroleum Profit Tax, this is just among others, as royalties, rents, oil pipeline and license fees, signature bonuses penalty from gas flared, NNPC earnings from direct sales, proceeds from local sales of crude oil to NNPC, proceeds from export sales of crude oil and gas etc. are sources of petroleum income. But for the purpose of this research, the researcher will be focusing on an aspect of the sources of petroleum income, which is, petroleum profit tax (PPT).Petroleum refers to crude oil and natural gas or simply put, oil and gas. Petroleum, or oil and gas, production and export play a dominant role in the economy of Nigeria and account for about 70 per cent of the nation’s GDP and over 90 per cent of her foreign earnings. Nigeria has been seen to be the largest oil producing country in Africa and the eleventh in the world. Petroleum industry is the leading sector in the Nigerian economy. Oil being the mainstay of N-igerian economy plays a vital role in shaping the economic and political destiny of the country. The contributions of the petroleum industry to public expenditure has been phenomenal. Taxation is the system of collecting money by taxes i.e. the system by which taxes are imposed or the process or system of raising income through the levying of various types of taxes. Taxes are levies imposed by government against the income, profit or wealth of an individual, partnership and corporate organization. From the definitions given it can be said that the main purpose of tax is to provide government with money to provide public services to citizens and it is necessary that all citizens, whether individuals or artificial bodies, pay taxes. The Petroleum Profit Tax Act (PPTA) is the tax law responsible for the governing of the taxation of companies engaged in petroleum operations
and, the Act defines petroleum operations as “the winning or obtaining and transportation of petroleum or chargeable oil in Nigeria by or on behalf of a company for its own account by any drilling, mining, extracting or other like operations or process, not including refining at a refinery, in the course of a business carried by the company engaged in such operations, and all operations incidental there to and sale of or any disposal of chargeable oil by or on behalf of the company”
The definition is applicable to the upstream sector of the petroleum industry; hence, only companies in the upstream sector are charged with petroleum profit tax (PPT).The importance of taxation on petroleum profits cannot be overemphasized as tax revenue derived from tax in petroleum profits contributes, largely, to the total tax revenue available to the Nigerian government. Petroleum profit tax generate about 42% income for federal government.
1.2 Statement of Research Problem
Reiterating the fact that taxation of petroleum profit is a source of revenue to the Nigerian economy in funding her government expenditure, but in Nigeria today the infrastructures, education, and health care services and other amenities are not showing the effective use of tax contributed by oil companies in the upstream sector. In Nigeria the citizens and companies avoid and evade tax because they do not know how revenue generated through tax is being spent by the government. Nigeria is one of the few countries in the world where it is fashionable to evade tax. The various structures which are required to work together to make tax evasion difficult are not properly coordinated. Tax evasion is one of the major social problems inhibiting development in developing countries and eroding the existing welfare state in developed economies in the world. It has been observed that high profile companies in Nigeria do evade tax. And oil companies are included in this class of high profile companies. This observation says a lot about tax administration system in Nigeria both in its design and in the disposition of some oil companies towards taxation. This presupposes that there are legal framework put in place to punish tax evaders it perhaps raises a poser on the efficiency and effectiveness of tax laws and tax administration in Nigeria. The Nigerian government in an effort towards solving this problem had even gone to the extent of engaging the services of tax consultants. Despite the effort of government, tax evasion still persists, revenue derived from taxation of petroleum profits amounts to a great portion of total tax collections of the Nigeria government. The evasion of tax by oil companies could have a drastic effect on the development of the economy of Nigeria. Oil companies in Nigeria have, over the years, devised means of getting away with every breach of the law. Oil companies justify their actions due to the corrupt nature of the government; they perceive the tax officials and government as a whole embezzle the revenue derived from petroleum profit tax. Tax evasion in Nigeria is becoming uncontrollable; yet, the Nigerian government has failed to pay attention to the analysis of the major causes of tax evasion in its economy, especially the evasion of tax on petroleum profit since this is said to have a significant addition to the total collections of total tax collections. The petroleum profit tax structure, in Nigeria, has been characterized with tax evasion, tax avoidance, corruption and poor tax administration filled with loopholes. Hence, this research work is set out to provide answers and possible solutions to the problems already identified.
1.3 Aim and Objectives of the Study
The following are the aim and objectives, which this study sets to achieve:
- To identify if a significant relationship exists between petroleum profit tax and the capital expenditure of the Nigerian economy.
- To identify if there are major differences in the perception of respondent groups on the major causes for avoiding petroleum profit tax.
- To determine if the tax authorities are effective in the collection of petroleum profit tax (PPT).
1.4 Research Questions
Based on the aforementioned problems, the researcher is constrained to ask the following questions:
- How significant is the relationship between petroleum profit tax (PPT) and the capital expenditure of the Nigerian economy?
- To what extent are there significant differences in the perceptions of respondent groups on the major causes for avoiding petroleum profit tax?
- To what extent are the tax authorities of Nigeria effective in the collection of petroleum profit tax (PPT).
1.5 Research Hypotheses
- There is no significant relationship between petroleum profit tax and economic development of Nigeria.
- Tax evasion and avoidance and tax avoidance has no negative impact on revenue generation through petroleum profit tax.
1.6 Scope of Study Sample Size
This study shall cover a selected government agency, which is, Federal Inland Revenue Service (FIRS) in Lagos State, Central Bank of Nigeria (CBN), KPMG accounting firm, Chevron Nigeria Limited.
1.7 Geographical Coverage
The south western part of Nigeria is selected for this research. Primary data necessary for the research work will be gathered from Lagos state. While secondary data necessary for the research work will be gotten federal inland revenue service(FIRS) and central bank of Nigeria(CBN)
1.8 Time Horizon
Data for this research work will be obtained between the years 2002 to 2011.
1.9 Site
The project will be carried out in University of Lagos, akoka, Lagos State, Nigeria.
1.10 Delimitation of Study
This study will only cover capital expenditures as an economic growth. FIRS, ExxonMobil and KPMG will be the companies that will be visited for this study
1.9 Significance of Study
The outcome generated from this research work will be of great significance to key players engaged in the shaping of the economy. Some of these key players include;
Government:
This research will enable the government to cherish the importance of petroleum profit tax in the shaping of government expenditure in the economy. More attention will be given to the area of taxation as a result of this research work.
Society:
It helps the society know the role petroleum profit tax plays in shaping of government expenditure in the economy. It also affects their thoughts towards government about the utilization of revenue gotten from petroleum profit tax.
Researchers:
The research work can serve as a foundation or basis for other researchers who are willing to research along the same line. Future researchers can continue from where this research work stops.
Petroleum Companies:
It helps petroleum companies know how they play a vital role in shaping the destiny of the government expenditure of Nigeria’s economy and understand how remitting their taxes can be of great importance to the economy of the nation at large.
Tax Authorities:
This research will enable tax authorities give attention to contentious areas in the taxation of petroleum profit and will enable them understand how these areas affect the standing of the Nigerian economy.
Students:
It gives students a better understanding about petroleum profit tax and how It affects the government expenditure of the economy.
1.11 Definition of Terms
Taxation:
This is the process or system of raising revenue through the levying of various forms of tax.
Tax:
This could be defined as a compulsory levy by the government of any country, through an appropriate agency, on incomes, goods, services and properties of an individual, partnership, executor, trustee and corporate body.
Petroleum:
Any mineral oil relative hydrocarbon and natural gas existing in its natural condition, but does not include liquefied natural gas, coal, bituminous shale or other stratified deposits from which oil can be extracted by destructive distillation.
Petroleum Operation:
Is the winning or obtaining and transportation of petroleum or chargeable oil in Nigeria by or on behalf of a company for its own account by any drilling, mining, extracting or other like operations or process, not including refining at a refinery, in the course of a business carried on by the company engaged in such operations, and all operations incidental thereto and any sale of or any disposal of chargeable oil or on behalf of the company.
Government Expenditure:
It is a term used to describe money that a government spends. Expenditure occurs on every level of government from local city councils to federal organisation. Includes all government consumption and investment but exclude transfer payment made by the state.
Tax Evasion:
Illegal practice where a person, organization, or corporation intentionally avoids paying his/her/its true tax liability. It is a deliberate act on the part of the tax payer not to pay tax due
Chapter Five
Conclusion and Recommendation
5.1 Conclusion
From the results obtained, there is no doubt that petroleum profit tax is a key indicator to consider when discussing the economic development of Nigeria. It is a major source of revenue for the Federal Government to meet their statutory obligations for the wellbeing of the citizens. However, non-provision of corporate social responsibilities in the oil producing region has met with stiff opposition from the various oil- rich communities.With the extraction of crude from these regions, their means of livelihood have been degraded and land depleted. The restive youths and members of the communities disrupt production installations and in effect this has been affecting the level of production of oil, the quantum of revenue generated and the amount realized from petroleum profit tax. There is poor tax administration in the entire system which has given encouragement to tax evasion and avoidance. The effect of this is reduced revenue for the Federal Government, and their inability to meet their budgetary level. Tax evasion and tax avoidance are unnecessary evils being practiced by the oil exploring and extraction companies. They do these to their own benefits, but to the detriment of the development of the economy of Nigeria. There is the urgent need to implement tax reforms in the system, because there is a significant relationship between petroleum profit tax and economic development of Nigerian economy.
5.2 Recommendations
To achieve the economic goals and objectives of the development of Nigerian nation, to continue to become relevant in the global economy and enhance the welfare of Nigerian population the following recommendations become imperative.
- Provision of corporate social responsibilities by the oil exploring and extraction companies in their areas of operations to cater for the wellbeing of the citizens. Corporate social responsibility can also be called corporate social investment, because it is an investment to encourage more investment. Corporate social investment is a concept whereby organizations consider the interest of society by taking responsibility for the impact of their activities on customers, suppliers, employees, shareholders, communities and other stakeholders, as well as the environment. This obligation is seen to extend beyond the statutory obligations to comply with legislation and sees organization voluntarily taking further steps to improve the quality of life for employee and their families as well as for the local community and society at large. Corporate social investment can be employed by an organization as a competitive strategy over its competitors. Corporate social investment if properly managed will yield profits like every other investment, either in the long-run or in the short-run. Like other kinds of investment organizations must know which social investment activity they are to invest in at a point in time.
- Professional training for the tax inspectors and officials to improve the tax administration system. Many tax officials are corrupt, ineffective and inefficient because of poor professional training. There is the for off-shore training for the tax officials and inspectors in countries where there tax structures are perfect and effective like United Kingdom, United States of America,Canada,Japan etc. Lack of professional training gives room to poor assessment of tax payers; inability to carry out back-duty audit effectively makes the system to lose income tax generation; the attitude to help the tax payers reduce their tax liability has given room to corruption. Good professional training and good remuneration will encourage good and effective tax administration which will enhance tax income generation.
- Review of tax laws and regulations for effectiveness and effectiveness. The present tax laws have loopholes which the review will block and discourage tax avoidance. There should be review of the law to give special treatment to the problem of tax evasion, as this is an evil that had been negating the income tax generated. Stiffer penalty should be introduced in the law to discourage tax evasion. Economic and Financial Crime Commission should be incorporated into tax recovery mechanism that will discourage tax avoidance and evasion. Eradication of tax avoidance and evasion will enhance the revenue generated through petroleum profit tax.
- With the integration of technology in the global economy, the assessment and payment of tax liability should be fully computerized. All the petroleum exploring companies should be link to wide area network of Federal Board of Inland Revenue and Federal Inland Revenue Service for assessment, tax payment monitoring and back-duty audit. This will bring efficiency to our tax system, improve tax administration and eradicate tax evasion and reduce tax avoidance.
The implementation of all these recommendations and commitment of the operation companies and Federal Government tax agencies will improve and enhance the contribution of petroleum tax to Nigerian economic development.


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