The Finance Act, 2016 has been passed by Parliament and became effective as from 1st July, 2016. Breakthrough Attorneys has noted that this Act has introduced new taxing provisions for both mining and petroleum operations. Part V, Division IV has been added to cater for taxation on mineral operations. Part V, Division V introduces taxing rules for petroleum operations. Since the provisions are similar in principle and hence our Tax department will address them collectively:
Income Tax Rate
Corporate Income from both mining and petroleum operations shall be taxed at the rate of 30%. Section 65B (2) of the Finance Act, 2016 (‘the Act’) provides for a rate chargeable on mining operations. This Section adds paragraph 3(5) to the First Schedule of the Income Tax Act, 2004.
Section 65K (2) of the Act provides for rate chargeable on petroleum operations. It adds paragraph 3(6) to the First Schedule of the Income Tax Act, 2004.
Ring fencing has been introduced for purposes of separation of income and losses arising from different operations from either mining or petroleum operations. Section 65F (1) (a)-(c) of the Act provides for limitations on deductions of losses from separate mineral operations. Income from a separate mining operation may not be reduced by a loss from any other activity or operation. Reduction for losses from a particular operation are limited to 70% of the respective income from such operation (See Section 65F (1) (c) of the Act).
Section 65O (1) (a)-(c) of the Act provides for ring fencing of losses from petroleum operations. Losses from a separate petroleum operation may not be deducted from another operation (See Section 65O (1) (a) of the Act. Similarly, deduction of losses is limited to 70% of the respective income.
Breakthrough Attorneys affirms that ring fencing calculations are popular in other jurisdictions as well, arising from income and gains from oil extraction activities or oil rights, and of which such activities or rights are subject to a higher rate of corporation tax. For example, in the UK and the general UK continental shelf.
All arrangements between separate mining and petroleum operations and other activities should reflect the arm’s length principle. This principle requires associated person’s to transact with each other independently and on equal basis. Our Breakthrough Attorneys’ Tax department has taken note that Section 65B(6) of the Act requires associated persons in mining operations to abide by the arm’s length principle laid down under Section 33 of the Income Tax Act, 2004. The arm’s length principle also applies to petroleum transactions as per Section 65J (6) of the Act.
Realization of income from mineral and petroleum rights
Mineral rights are treated as an asset separate from any other interest in land that constitutes the license area. This is provided for under Section 65H (1) of the Act. Mineral rights are deemed as investment assets when realized before commencement of production. Tax on income realized from disposal of mineral right is to be paid in single installment at the rate of 30%. This is per the amendment of Section 90 of the Income Tax Act done by Section 31(b) of the Act.
Section 65Q of the Act provides for realization of income from petroleum rights. They are also deemed as investment assets. Section 31(b) of the Act provides for tax on income realized from disposal of petroleum rights to be at the rate of 30%.
Allowable deductions on mining and petroleum operations
Section 65E (1) (a)-(d) provides for allowable deductions in calculating the person’s income from a mining operation. These include:
- Annual charges and royalties.
- Depreciation allowances granted with respect to the mining operation and calculated in accordance with paragraph 5 of the Third Schedule.
- Contributions to and other expenses incurred in respect of rehabilitation fund
- Expenses incurred in respect of acquisition of rehabilitation bond.
- Royalties and annual fees.
- Depreciation allowance calculated as per paragraph 6 of the Third Schedule; and
- Amounts deposited in respect of the decommissioning fund for the petroleum operation.
Prior to the amendments enshrined above, taxing regime on mining operations was governed by the repealed Income Tax Act, 1973 in its Second Schedule. Petroleum operations were taxed pursuant to the Petroleum Act, 2015 (See Section 116 of the Petroleum Act, 2015). The introduction of the above amendments into the Income Tax Act, 2004 is expected to bring harmony of the two pieces of legislation and lead to ease of compliance and enforcement to both taxpayers and tax authorities.
This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, Breakthrough Attorneys, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.