If you’re involved in oil and gas operations—whether as an operator, investor, or service provider—the rules you’ve known for years have fundamentally changed. Taxes are now simpler to calculate but cover more ground. Moreover, incentives are clearer but come with conditions, and compliance requirements are significantly stricter. Here’s a comprehensive breakdown of how petroleum companies will now pay taxes in Nigeria.
What’s Really Changed?
For decades, petroleum taxation in Nigeria operated like a shifting negotiation rather than a consistent law. The Petroleum Profits Tax (PPT) regime, first introduced in 1959, evolved into a complex web of overlapping assessments, often varying by field, license, or contract type. Under the 2025 reform, the old system has been rationalized into two main instruments:
- The Hydrocarbon Tax (HCT) which targets profits from crude oil production.
- A restructured Petroleum Profits Tax (PPT) that applies mainly to gas monetization and midstream operations.
Together, these form the foundation of the new petroleum fiscal architecture, supported by the Nigeria Tax Act, 2025, which consolidates reporting, accounting, and enforcement procedures.
Understanding the New Hydrocarbon Tax
The Hydrocarbon Tax (HCT), introduced under Part IX, Sections 201–225 of the Nigeria Tax Act, 2025, represents the most transformative element of the reform. It applies to the adjusted profits derived from crude oil production, and excludes gas operations, which the government deliberately separates for strategic reasons.
The calculation is straightforward in theory, if rigorous in execution. Operators begin with gross revenue from crude oil sales, then deduct allowable costs, royalties, and qualifying capital expenditures to arrive at an adjusted profit. The resulting profit is taxed at rates that vary depending on location and risk profile:
- Onshore and shallow water operations face higher rates, as a way of reflecting their maturity and lower operational risk.
- Deepwater and frontier basin operations benefit from reduced rates, also as a way recognizing the higher cost, technological complexity and exploratory uncertainty involved.
The precise rates are expected to be published by the Minister of Finance before the Act’s effective date, that is January 1, 2026. The rules are, however, structured to ensure that the more profitable or established the field, the greater its contribution to public revenue.
How Petroleum Profits Tax Has Changed
The Petroleum Profits Tax hasn’t disappeared, instead, it’s been refined and redirected. Under Sections 226–248, PPT now applies primarily to gas-related operations and other petroleum activities not subject to the Hydrocarbon Tax. In practical terms, this includes gas monetization projects, midstream processing facilities, condensate operations and integrated energy activities that fall outside pure crude extraction.
Crucially, the PPT’s tax base and rates have been standardized. Gone are the multiple sliding scales, contract-by-contract exceptions and opaque allowances that plagued the old system. The Act’s approach mirrors the structure of corporate taxation, introducing uniform rates across categories and simplifying both compliance and enforcement.
Gas Gets Special Treatment
If the Hydrocarbon Tax reflects continuity, the new gas incentive regime represents strategic reinvention. Nigeria, with over 200 trillion cubic feet of proven gas reserves, has reoriented its fiscal framework toward monetization, domestic utilization, and environmental responsibility.
Under Sections 250–265, gas development projects enjoy unprecedented benefits. Capital expenditures can now be amortized more rapidly, to allow investors to recover costs through accelerated depreciation. Projects involving gas processing, pipeline infrastructure, or domestic market delivery qualify for tax credits and investment allowances designed to stimulate investment flow.
Flare gas commercialization, long a national sore point, receives explicit recognition. Under Section 262(3), companies investing in flare capture and utilization projects may claim additional tax credits, effectively turning environmental compliance into a fiscal advantage.
Revenue and Cost Rules Are Now Stricter
One of the most significant operational changes involves how companies account for revenues and costs. Under the old system, companies often structured their operations to fragment revenues and costs across multiple entities or projects. This made it difficult for tax authorities to assess true taxable profits.
The law now mandates that all revenues and costs arising from a single contract area be consolidated for tax purposes. Under Section 273(1), operators can no longer fragment income or expenses across multiple entities to dilute taxable profits. This principle of contract-area consolidation ensures that fiscal outcomes reflect real operational performance rather than internal structuring.
Equally important are the new cost deduction rules. To qualify for deduction, an expense must now be “wholly, exclusively, and necessarily incurred” for petroleum operations, a phrase repeated almost verbatim from Section 275(2). Excessive overheads, management fees and costs unrelated to petroleum activities are now expressly disallowed. For shared or mixed expenses, reasonable allocation must be supported by verifiable documentation. Accordingly, tax authorities now have both the power and digital tools to audit complex cost structures.
Transition, Double Taxation and Joint Ventures
The Act anticipates transition challenges and addresses them directly. Section 290 provides transitional arrangements allowing ongoing projects to elect to remain under the old regime for a defined period, while new projects automatically fall under the 2025 framework. This pragmatic approach allows companies time to restructure contracts and systems while avoiding immediate fiscal shocks.
The law also safeguards against double taxation and incorporates provisions for tax credits or reliefs where income is taxed under both the Hydrocarbon and Petroleum Profits frameworks.
For Joint Venture (JV) operations, the consolidation requirement carries a new administrative challenge. Partners must now align their reporting, accounting and documentation practices to ensure consistent declaration of shared revenues and costs. Under Section 292(4), inconsistencies in partner reporting can trigger audits or disallowances for the entire venture.
The Transparency Mandate
Perhaps the most far-reaching change lies not in the tax rates but in compliance expectations. The 2025 Act and the Nigeria Tax Act, 2025 introduce a comprehensive digital reporting regime for petroleum companies. Operators must now submit standardized, electronically filed returns that details their production volumes, pricing, cost components and tax computations.
Under Section 302(1), failure to comply with reporting deadlines attracts automatic surcharges. Under Section 303, deliberate concealment or false reporting can result in personal liability for senior officers. This measure is aimed squarely at ending the opacity that once defined the sector.
For Investors
For foreign investors, the reforms may seem rigorous, but they also bring predictability. The elimination of discretionary interpretations and the standardization of fiscal terms reduce risk and create a more level playing field. As Section 305 emphasizes, “tax liabilities shall be determined in accordance with published schedules applicable to all operators under similar conditions.” In a country long criticized for fiscal uncertainty, this single clause signals a sea change.
Moreover, the new gas incentives and clarity on deductions align Nigeria’s petroleum taxation with modern global standards. Investors may pay more where profits are higher, but they will do so within a transparent, rule-based system. For many, this is the real incentive.
How Taxpal Can Help
The new Tax Act takes effect on January 1, 2026. This gives companies time to prepare their systems and processes. However, the transition requires significant preparation that should begin immediately. Taxpal provides comprehensive support for oil and gas companies navigating these changes.
Our services include detailed impact assessments to understand how the new rules affect your operations. We also have compliance system design to meet enhanced reporting requirements. Also on offer is ongoing monitoring to ensure continued compliance and strategic planning to maximize benefits from gas incentives.
Whether you’re an established operator or a new investor evaluating opportunities under the updated regime, we can help you navigate the complexities efficiently. Visit our website to explore our consultation options and portal access, and let us help you turn regulatory change into competitive advantage.
