Nigeria: Can Littoral States Lay Claim To Personal Income Taxes On Income Earned By Employees Working On Offshore Oil Platforms?

The COVID-19 Pandemic and its disruptive effect on Nigeria's economy has put a strain on revenue generation at all levels of government. Despite the current economic recession in the country, government agencies are taking aggressive measures to improve revenue generation so as to meet budgetary obligations. Expectedly, an area of renewed focus for some of the littoral states in Nigeria is the drive to generate more taxes and levies from oil companies with offshore shallow/deep water operations, with emphasis on exercising the taxing right over the income earned by workers operating on offshore oil platforms and installations.

Based on the Nigerian Oil and Gas Industry Report published by the Department of Petroleum Resources in 2019, deep offshore wells are those located in areas of water depth beyond 200 metres and extending up to 200 nautical miles seaward from the coasts of Nigeria. By inference therefore, shallow water operations are those below 201 metres of water depth. These shallow/deep water oil blocks account for over 40% of crude oil produced in Nigeria and the volume of crude oil produced by these wells would not have been achievable without the presence of employees of the companies operating these oilfields.

In line with the Personal Income Tax (PIT) Act, these employees are required to pay their personal income taxes to the relevant tax authority, which usually is the State Board of Internal Revenue (SBIR), of their state of residence. Given that these employees primarily ‘reside' and work on these offshore oil platforms, the pertinent question to ask is whether the SBIR can construe these offshore locations as part of the territory of a State, and therefore exercise taxing rights on the income earned by employees deemed resident on the offshore oil platforms.

In this article, we will examine the role residency plays in the taxation of employees working on offshore platforms, assess what determines the boundary of a littoral state and make recommendations on how clarity can be provided with respect to the revenue agency with taxing rights on income of employees working on offshore installations.

Are Employees Working on Offshore Platforms Tax Resident in Nigeria?

The PIT Act provides that the tax of an individual other than an itinerant worker and persons covered under paragraph (b) of Section 2(1) of the Act shall be imposed by only the state in which the individual is deemed resident for that year. The First Schedule of the PIT Act defines place of residence as “a place available for his domestic use in Nigeria on a relevant day, and does not include any hotel, rest-house or other place at which he is temporarily lodging unless no permanent place is available for his use on that day.” Consequently, the offshore platforms can be construed as the “place of residence” for most expatriate employees given that they live and work on these oil platforms, and there is no evidence that they have another permanent place of residence in Nigeria.

Furthermore, Section 2(2) of the PIT Act provides that the tax due on salaries of some set of individuals listed in Paragraph (b) of Section 2(1) of the Act should be payable to the Federal Inland Revenue Service (FIRS). One of these set of individuals are “persons resident outside Nigeria who derive income or profit from Nigeria”. Therefore, the concept of residency is fundamental in determining the relevant tax authority with the taxing rights on the income earned by employees' resident on offshore oil platforms. Given the connection between residency and the territorial boundaries of a state in deciding the relevant tax authority for personal income tax purposes, it is imperative to determine the extent of the boundaries of a littoral state.

What Determines the Boundary of a Littoral State?

What constitute the boundaries of a littoral state has been the subject of previous judicial interpretation.

In the landmark case of Attorney General of the Federation v. Attorney General of Abia State & 35 Ors brought before the Supreme Court in 2001, the eight littoral states (Akwa-Ibom, Bayelsa, Cross-River, Delta, Lagos, Ogun, Ondo and Rivers State) contended that their territory extends beyond the low-water mark and is inclusive of adjoining territorial waters, continental shelf and exclusive economic zones.

In delivering its judgment on the case in 2002, the Supreme Court dismissed the position of the States and held that “the seaward boundary of a littoral state within the Federal Republic of Nigeria for the purpose of calculating the amount of revenue accruing to the Federation Account directly from any natural resources derived from that state pursuant to section 162(2) of the Constitution of the Federal Republic of Nigeria 1999 is the low-water mark of the land surface thereof or the seaward limits of inland waters within the state”. The Supreme Court further affirmed that the low water mark forms the boundary of the land territory of the eight littoral states and that of Nigeria. The practical import of the Supreme Court judgment is that the territory of a littoral state is limited to the boundary of its land territory and does not extend beyond the limits of its inland waters. Consequently, an inference can be made that certain offshore locations within Nigeria fall outside the territory of the littoral states.

Nonetheless, the Federal Government enacted the Allocation of Revenue (Abolition of Dichotomy in the Application of the Principle of Derivation) Act, 2004 (The Act). Section 1(1) of the Act provides that “As from the commencement of this Act, the two hundred metre water depth Isobath contiguous to a State of the Federation shall be deemed to be a part of that State for the purposes of computing the revenue accruing to the Federation Account from the State pursuant to the provisions of the Constitution of the Federal Republic of Nigeria, 1999 or any other enactment.” 

Though the abolition of the onshore and offshore dichotomy may have resolved the issue of allocation of revenue generated from offshore petroleum activities, it is still not clear whether the location of an offshore well is outside the territory of a littoral state for other purposes not related to computation of revenue accruing to the Federation Account. Therefore, the determination of the boundary of a littoral state appears subject to some degree of uncertainty, given that the SBIRs would prefer the adoption of the territorial delineation established in the Allocation of Revenue (Abolition of Dichotomy in the Application of the Principle of Derivation) Act, for the purpose of exercising taxing rights over the income of employees working offshore, while the affected oil companies may take the view that clarity be provided with regards to the boundary of a state for other purposes, to ascertain the relevant tax authority with the power to impose taxes on the income and to avoid imposition of taxes by several tax authorities.

Conclusion

The current sustained attempt by the SBIRs in some of the littoral states to enforce taxing rights on the income earned by employees resident on offshore oil platforms, has resulted in tax disputes with oil companies.

These tax disputes have been exacerbated by the ambiguous nature of what constitutes the extent of the boundaries of a littoral state for personal income tax purposes. Furthermore, the contiguous nature of these offshore wells and oil installations may result in the territorial overlap for two or more littoral states. In certain instances, this has resulted in multiple SBIRs laying claim to the taxing rights on the income earned by the same employees deemed resident on a particular offshore platform.

Where these oil companies with offshore operations are constantly subjected to multiple tax scrutiny by the SBIRs, the net effect of these actions could make the Nigerian oil and gas sector uncompetitive, deter local and foreign investments and may limit the future economic growth and development of sector.

Government at all levels should focus on creating an enabling environment for oil and gas activities to thrive, and eliminate all forms of uncertainties in the tax administrative system, to aid the ease of doing business in the country and to make the Nigerian oil and gas sector very competitive for foreign direct investments.

Consequently, the government may need to tweak the appropriate tax and relevant legislation to delineate littoral states territory for personal income tax purposes and to provide clarity on the specific revenue agencies with tax rights over the income of employees' resident on offshore oil installations.

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