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1.1 Background to the Study
Before a country considers how best to administer its tax system it must first
possesses a clear picture of its tax system. The quality and quantity of resources required by
tax administrations are to a large extent determined by the type of tax system which it is
introduced. A nation‟s tax goals are not achieved by designing a tax system which is fair.
Any fair system which is not administered as planned becomes inequitable. Thus, a good tax
system is capable of financing the necessary level of public spending in the most efficient and
equitable way possible. It should also raise enough revenue to finance essential expenditures
without recourses to excessive public sector borrowing, raise the revenue in ways that are
equitable that minimized its disincentive effects on economic activities, to do so in ways that
do not deviate substantially from international norms.
It is common knowledge that one of the problems plaguing taxation in Nigeria has
been the widespread tax evasion and avoidance which in the view of many experts in the tax
field which has led to the loss of revenue which can be blamed on our inefficient and inept
tax administrative machinery1. There‟s no doubt that the administrative machinery in Nigeria
still has a long way to go in terms of delivery and efficiency but it is believed that Nigeria‟s
income tax law could in spite of their low rates and generous allowances, still have yielded
much more revenue, but for the inefficient and defective assessment and collection
machinery.2For no matter how sophisticated and progressive a tax legislation is, it cannot be
effective unless it is properly administered with competence and integrity. This is why in this
paper we will be examining the problems facing the administration of petroleum taxation.
1 A.O.Philips, (1968)‘’Nigeria’s Companies Income Tax’’. The Nigerian Journal of Economics and Social Studies, Vol. 3, at p.333.
2 United States v. Butler,2279 US (1936) at p.61
The Nigerian tax system has undergone several reforms geared at enhancing tax
collection and administration with minimal enforcement cost. The recent reforms include the
Petroleum Industry Bill 2012 which is with the National Assembly, introduction of TIN
(Unique Tax Payers identification number which became effective since February 2008),
automated tax system that facilitates tracking of tax positions and issues by individual tax
payers-payment system which enhances smooth payment procedure and reduces the
incidence of tax touts, enforcement scheme (special purpose tax officers), these are special
tax officers in collaboration with other security agencies to ensure strict compliance in
payment of taxes.
The tax authority now has autonomy to asses, collect and record tax. This enabling
environment which came into being on the basis of (Section 8(q) of FIRS Establishment Act
2007) has led to an improvement in tax administration in the country.
Petroleum is no doubt a predominant source of Nigeria‟s revenue and foreign
exchange. The petroleum industry is divided into two main segments. The upstream and
downstream sectors. The upstream refers to activities such as exploration, production and
delivery to an export terminal of crude oil or gas.
The downstream on the other hand encompasses activities like loading of crude oil at
the terminal and its user especially transportation, supply tradition, refining, distribution and
marketing petroleum. The Petroleum Profit Tax is applicable to upstream operations in the oil
sector. It is particularly related to rents, royalties, margins and profit sharing elements
associating with oil mining, prospering and exploration leases. It is the most important tax in
Nigeria in terms of its share of total revenue, contributing almost 90 percent of foreign
exchange earnings and government revenue. It covered oil and gas sector.3
3 Ayodele (2006) Tax Policy Reforms in Nigeria, Research Paper No. 2004, National centre for Economic Management and Administration, Ibadan, (Nigeria),
The tax system is an opportunity for government to collect additional revenue needed
in discharging its pressing obligations. A tax system offers itself as one of the most effective
means of mobilizing a nation‟s internal resources and it lends itself to creating an
environment conducive to the promotion of economic growth.
Oil is the dominant source of government revenue,accounting for about 90 percent of
total exports, and this approximates to 80 percent of total government revenues. Since the oil
discoveries in the early 1970s,oil has become the dominant factor in Ni
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