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Nigeria's Federal High Court rules that Minister's approval is required for tax deductibility of payments made on gas flare

Executive summary

The Federal High Court of Nigeria (FHC or the Court) recently disregarded the judgment of the Lagos division of the Tax Appeal Tribunal (TAT or the Tribunal), in the case of Federal Inland Revenue Service (FIRS or the Appellant) vs Mobil Producing Nigeria Unlimited (Mobil or the Respondent) on the tax deductibility of payments made for gas flaring without the approval of the Minister of Petroleum Resources (the Minister).1

The Tribunal had, on 17 March 2015, held among others, that the Petroleum Profits Tax Act (PPTA) and the Associated Gas Re-injection Act (AGRA) do not expressly require that a company must obtain Gas Flare Certificate before the expense incurred can be tax deductible. Based on the Court’s ruling, payments made in respect of gas flaring without a certificate or a written form of approval from the Minister, are not deductible for Petroleum Profits Tax (PPT) purposes.

Accordingly, unless the case is further appealed to the Court of Appeals or Supreme Court, taxpayers are required to obtain an approval and certificate from the Minister prior to claiming a tax deduction for the expenses incurred on gas flaring.

Detailed discussion

Between the years 2006 and 2008, Mobil made payments to the Department of Petroleum Resources (DPR) for gas flaring activities describing the payments as ”gas flaring fees.” Mobil treated the expense as allowable deductions for tax purposes, which was disallowed by the FIRS. The position of the FIRS was challenged at the TAT. The TAT ruled in favor of Mobil, setting aside the additional liabilities imposed by the FIRS.

Following the TAT judgment, an appeal was made by the FIRS to the Court which sought the order of the Court to set aside the Tribunal’s judgment in its entirety.

The FIRS in its appeal requested the Court to determine, in setting aside the Tribunal’s judgment, whether:

  • The TAT was correct in holding that the PPTA and the AGRA did not expressly require a company to obtain a gas flare certificate before expenses incurred may be deductible and thereby allowing penalties for gas flaring to be deductible despite the strict application of the tax laws especially when they are clear and unambiguous.
  • Section 3(2) of the Associated Gas Re-injection Act permits the Respondent to flare gas without the written permission of the Minister in charge of Petroleum.
  • The TAT was correct in holding that the gas flare penalized by the Respondent qualified for tax deductibility for the sole reason that the Respondent was not sanctioned by the Minister of Petroleum.

Mobil responded to the appeal by raising a sole issue for determination on whether the Tribunal was correct in holding that the sums paid by the respondent to the Federal Government for gas flared was wholly, exclusively and necessarily incurred for the purpose of petroleum operations and should be treated as deductible expenses in calculating the respondent’s PPT liability for the relevant accounting periods.

The Court’s judgment

The Court ruled in favor of the FIRS and disregarded the judgment of the TAT, thus allowing the appeal by the FIRS to stand. In delivering the judgment, the Court stated that the issues for determination are as follows:

  • Whether the respondent complied with the provision of Section 3(1) of the AGRA, which provides that no company shall engage in the production of Oil or Gas without the permission of the Minister and subsection (2), which also provides that the Minister shall issue a certificate to a company engaged in petroleum production where he is satisfied that utilization or re-injection of the produced gas is not appropriate or feasible in a particular field(s) and such certificate shall specify such terms and conditions for the continued flaring of gas and the payment of the sum prescribed by the Minister.
  • Whether the payments made by the Respondent in respect of the flared gas without the required certificate can be considered as tax deductible.

On the first issue, the Court held that the texts of the above sections are clear and unambiguous, making it mandatory for every Oil and Gas company to apply for and obtain the written consent of the Minister. Where the Minister determines a field to be unsuitable for gas flaring, the company must procure the certificate from the Minister stating the conditions and fees payable for the continued gas flaring in that field.

The Court further stated that the power of the Minister to grant or issue written permission or a certificate is discretionary and not automatic upon application. Therefore, the non-response of the Minister to the application for permit by the Respondent and the non-issuance of the certificate cannot be presumed to be an approval.

On the second issue, the Court stated that the failure of the Respondent to obtain a certificate or permission makes the act of gas flaring invalid and such act cannot benefit from the provisions of Section 10 (1)(L) PPTA, which provides that all sums incurred by an oil production company in an accounting year by way of tax, rates, fees or any charges shall be tax deductible for the purpose of computing the adjusted profits of the company and assessing the tax payable for that year.

It also held that the fees paid were prohibited as the company failed to comply with Section 1(a-e) of the AGRA, which provides the conditions precedent to the issuance of a certificate by the Minister.


While it is unclear whether the case will be appealed in a higher court, the FHC’s judgment should prevail over the earlier ruling of the TAT which favored taxpayers. In practice, some upstream companies in the Oil and Gas industry simply apply to the Minister and pay the relevant gas flare fees without necessarily obtaining the approval of the Minister to flare the gas. Consequently, the judgment places taxpayers in an unfavorable position requiring that the Minister’s approval needs to be obtained prior to any claim of tax deduction on the expenses incurred on gas flaring.

Therefore, it is important that taxpayers obtain approval and the gas flare certificate from the Minister prior to claiming a tax deduction for this expense. This should be the practice unless the Court’s judgment is appealed and reversed by the Court of Appeals or the Supreme Court.


1. The Decision was issued on 26 March 2018 and publicly released in May 2018.

EYG no. 010023-18Gbl

Download this Tax Alert as a PDF file.

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