As Africa’s most populous country, Nigeria boasts of the continent’s second largest oil reserves and has a very promising growth outlook. Poised to eclipse Africa’s largest economy by 2016, Nigeria is becoming a rather worthy recipient of foreign capital, receiving anywhere from $10-$12 billion per year. However, in order to take full advantage of what foreign investment has to offer, Nigeria has been trying to improve its economic and political climate. 

Taxation remains a veritable instrument for national development. Apart from being a major source of revenue for the government, taxation provides goods and services needed by citizens. Taxation policies can stimulate economic growth and job creation through its impact on investment and capital formulation in the economy. In this respect reforms in the administration of petroleum tax system that ensure effectiveness, equity and efficiency are conditions for healthy public revenue. The decision to reform the Nigerian tax system is crucial in order to improve the revenue base for national development and attaining socio-economic goals for taxation. 

The oil industry is thus the hub of the Nigerian economy, and needs to be sustained if the country is to achieve real economic growth. According to Nwete (2003), the oil glut of the 80’s that greatly impacted on global oil prices and the low OPEC quota, foisted on the country various fiscal regime for petroleum especially the petroleum profit tax of 85% and 20% royalty regime, all in a bid to get more revenue to oil the nation’s economy. Since then Nigeria has had lofty aims for its oil industry, including the desire to increase reserve from 34billion barrels to 40billion barrels by 2010 and subsequently its OPEC quota, optimization of oil revenue, increase in the industry’s local content, and continuous attraction of foreign investment as a way of promoting and sustaining investment in the oil industry.  If we compare it with other economic activities, the petroleum industry has wider attraction because of its special nature, which stems from the fact that till date, it remains the largest and most important industry in the world. It has continuously provided the world’s energy and industrial needs, from transportation to agriculture. It has also been a Monet spinner just for the oil production companies, providing them with the opportunity of economic and social development ,and second for the multinational oil companies engaged in its extraction, and by extension the industrialized market to which the earnings of the multinational oil companies. From exploration to eventual production, the cost of developing and operating an oil field is very high and probably higher than any other industry.

Before independence in 1960, agriculture was the mainstay of Nigeria economy, providing cash crops as well as food to the entire economy. The history of oil production in Nigeria dates back to 1908 when an affiliate of a German Exploration Company, the Nigerian bitumen company came to present day Ondo State to venture for Bitumen (tar sand). By 1971, a year after the Civil War, oil had started becoming more important to the economy4. With the boom in the late seventies of oil, attention shifted completely from the agricultural sector to the oil sector of the economy. The structure of Government’s participation, as well as its impacts on the entire sector of the economy, changed from been a mere ‘supportive’ sector it was in 60s to the predominant source of foreign exchange earnings and development finance as well as a viable access to international development opportunities. The very vital importance of oil to Nigeria dictates government’s involvement in the regulation of the Nigerian oil sector. It is noteworthy that prior to 1971, all of the multinational companies were wholly owned by their foreign parent companies. In that same year, government started acquisition of participating interest in the operation of these companies while citizens also acquired varied shareholding interests in the assets of these companies.

The Petroleum Profit Tax Act 1959(PPTA) provides for the imposition of tax on the chargeable profits of companies that are engaged in petroleum operations in Nigeria. Petroleum operations is defined under the PPTA as “the winning or obtaining oil in Nigeria by or on behalf of a company for its account by any drilling, mining, extracting or other like operations or process, not including refining at a refinery, in the course of a business carried on by the company engaged in such operations, and all operations incidental thereto and any sale of or any disposal of chargeable oil by or on behalf of the company” Nigeria economy is dependent on oil, as it cannot finance social and economic growth in the absence of a large oil revenue base. Oil accounts   for about 90-95% of the export revenue, over 90% of foreign exchange earnings and about 80% of government revenue.

Gelb (1981) averred that oil and gas production had been reveiving favorable tax treatment for many years, although one special provision dealing with percentage depletion was repeated for most oil and gas produces in 1975.The whole of the industry from exploration to production is filled with risks. From the high possibility that a hole in the ground will not yield reserves, the risks that the reserves if discovered will not be in commercial quantity to justify the investment, the technology risk in oil field development, to the failure of operations and vagaries of international oil prices. Thus upstream investment remains very risky and unpredictable. Most times development of new fields involve the sinking of capital before actual production reveals the reservoir characteristics, unlike most other economic activities. The objectives of petroleum taxation according to Nwete (2004) are numerous among which are: taxing in the petroleum industry is a way of achieving government’s objective of exercising right and control over the public asset, Government imposes very high tax as a way of regulating the number of participants in the industry and discouraging its rapid depletion in other to conserve some of it for future generation.


Many researchers have argued the impact of Petroleum profit tax administration on economic growth of any nation. Some are of the opinion that tax administration has great effect on the growth of Nigerian economy while some of the authors are of the opinion that Petroleum profit tax administration has no effect on economic growth of the country rather the level of implementation of the revenue through government expenditure. In 2008, the Federal Government’s retained revenue increased to N3,193.4 billion or 13.3 per cent of GDP, from N2,333.7 billion or 11.2 per cent of GDP in 2007. Analysis of the revenue showed that the share from the Federation Account was N1,847.0 billion (57.8%); VAT Pool Account, N58.3 billion (1.8%); Federal Government Independent Revenue, N114.0 billion (3.6%); Budget Augmentation, N385.7 billion; share of excess crude account, N106.5 billion (15.4%); and “others” accounted for the balance of N682.0 billion (21.4%) (CBN, 2008). In terms of tax efforts, measured as a ratio of Internally Generated Revenue (IGR) to total revenue (TR), overall, the consolidated IGR/TR ratio of the state governments improved from 14.8 per cent in 2007 to 15.0 per cent in 2008, indicating that state governments made appreciable efforts to shore up their internal revenue (CBN, 2008). It is obvious from the statistics above that the potential of taxation as a source of government revenue is not adequately tapped in Nigeria.

Despite all these incentives available for the oil exploration companies, the industry still encounter the following identified problems: on provision of corporate social responsibilities in the communities of oil extraction  where their land has been depredated and unsuitable for agricultural  produce, and the people are living below United Nations standard of living./This has resulted in destruction of production installations and cut down in production level; there is recorded poor tax administration and weak fiscal policies; there is pronounced tax avoidance and tax evasion which have negated the quantum of income expectation from this important sector of the economy.

Nigeria has the potential to build a prosperous economy, reduce poverty significantly, and provide the health, education, and infrastructure services to its population needs. However, available evidence indicates that these resources have not been judiciously used to meet the need of the population in terms of human capital development. Nigeria generated about 23 trillion naira (191 billion US dollars) from oil between 1981 and 2006, which is about 83% of total government revenue. However, tax revenue constitutes a major component of national income in a modern economy. It is the main source of government recurrent revenue in most developed countries.

 Identifying critical petroleum profit tax administration challenges and measures required to meet these challenges is crucial to improved revenue base for national development and attaining socio-economic goals of taxation. In this wise, it is needful to critically examine and document the impact of tax administration reforms under the FIRS (Establishment) Act 2015, even though, looking through the past decade which has witnessed significant developments in petroleum profit tax administration at the  Federal level leading to an unprecedented increase in the revenue generated by the FIRS, yet the Nigerian Tax system still continue to suffer from challenges ranging from poor compliance, inefficient tax administration, corruption and fraud.

Finally, Petroleum Profit Tax is a major source of revenue for the Federal Government of Nigeria to meet its statutory obligations of ensuring the economic development of Nigeria. It assists the government to achieve the country’s macroeconomic objective in the areas of fiscal and monetary policies. However, it has been observed that non-provision of corporate social responsibilities in the communities where there is extraction of crude oil result into constant destruction of production installations, and hindrance to production; tax avoidance and evasion  d poor tax administration, and weak fiscal policy  have been negating the increase in tax income generated.


Nwete (2004:1-23) said Nigeria cannot finance social and economic growth in the absence of a large oil revenue base. Oil in Nigeria accounts for about 90-95per cent of its export revenues, over 90percent of foreign exchange earnings and about 80% of government a result of this the main objectives of this research study is to assess the problem and prospect of petroleum profit tax administration in Nigeria.

Other specific objective includes:

1. Evaluate the relationship of petroleum profit tax and economic development in Nigeria. 

2. Assess the petroleum profit administration with a view to putting in place a good policy of administering the tax system 

3. Assess the negative effect of tax evasion and tax avoidance on income generation.

4. Eliminate the constraint encountered in revenue generation and installing a good tax control system in petroleum tax administration.

5. Determine the impact of the tax reforms under the FIRS(Establishment) Act on petroleum profit tax administration at the Federal level.

6. Suggest recommendation for problems of administering petroleum profit tax in Nigeria.


For the purpose of the research study, the following research questions were asked:

1. Is there any relationship between petroleum profit tax and economic development in Nigeria?

2. What is the effect of the weak and poor administration of petroleum profit tax on Federal Government revenue generation in Nigerian economy? 

3. Are there any negative effect of tax evasion and tax avoidance on income generation?

4. What are the constraints encountered in revenue generation and installing a good tax control system in petroleum tax administration?

5. Impact of the tax reforms under the FIRS(Establishment) Act on petroleum profit tax administration at the Federal level?

6. Recommendation for problems of administering petroleum profit tax in Nigeria?


Two hypotheses stated in null forms were formulated to carry out this work. 

Hypothesis One

There is no significant relationship between petroleum profit tax and economic development of Nigeria.

Hypothesis Two

Tax evasion and avoidance and tax avoidance has no negative impact on revenue generation through petroleum profit tax administration in Nigeria.


There cannot be a better time to work on the critical challenge/reforms in the Petroleum profit tax sector in Nigeria than now. The research work would contribute immensely to the existing literature by focusing on the reform of petroleum profit tax administration in Nigeria with a view to identifying the critical  challenges such as, corruption among tax administration, tax evasion, tax avoidance, non-compliance and weak and unfriendly tax administrative systems and procedures that have been confronting the tax system .

This study will continue to be of interest to majorly the governments, civil servants, government establishment, agencies, parastatals, and other public corporation in the public sectors.

It will also be of great importance to various management of oil and gas companies( both in the upstream and downstream sector), tax administrators, revenue collector, and tax officials and other users of laws and policy; It will also give them general insight on the challenges affecting effective petroleum profit tax administration in Nigeria.

The work will be of immense benefit to students of tax policy, tax administration and taxation generally as it will provide them insight into the various challenges of tax administration.

Finally this study will be of great significance to schools and students, it will serve as a reference point for future researchers who will want to research more on the topic. 


The focus of this paper is to evaluate the challenges and prospect of petroleum profit tax administration on the growth of Nigerian economy, and the enhancement of the economic well being of its citizens. Petroleum profit tax is a major source of the income being generated by the Federal Government of Nigeria. The industry remains the largest and most important industry in Nigerian economy. 

From the foregoing discussion, the research shall focuses on the problems, prospects of petroleum profit tax administration in Nigeria using the Federal Inland Revenue Service (FBIR) Ondo State Office as a case study.


Limitations envisage in this research work are:

1. Information Generation: The work however, has experienced limitations by way of extracting information from some staffs of Federal Inland Revenue Service (FBIR) Ondo State Office, who for some reasons found it difficult to respond to questions.

2. There was insufficient interaction between the researcher on one side and business establishments, government departments and research institutions on the other side. A great deal of primary data of non-confidential nature remain untouched/untreated by the researchers for want of proper contacts.

3. The researchers also encounter the difficulty of adequate and timely secretarial assistance, including computerial assistance. This causes unnecessary delays in the completion of research studies.

4. Library management were not functioning  enough for acquisition of research materials, this is not satisfactory enough and most of the time and energy of researchers are spent in tracing out the books, journals, reports, etc., rather than in tracing out relevant material from them.


1. Tax administration: according to Dale, implies tax policy making and execution. That is, it involves planning, organization, commanding, coordination and control.

2. Tax evasion: refers to any intentional, illegal reduction of tax payments, which usually takes the form of underreporting income, sales or wealth, or overstating deductions (Schneider, Braithwaite & Reinhart 2001), including failure to file appropriate tax returns.

3. Tax Avoidance: refers to the reduction in tax burden by means of practices that take full advantage of the tax code or exploiting the loopholes in the tax laws to reduce tax liabilities by arranging ones tax affairs using tax shelters in the tax law, and avoiding the tax traps in the tax laws.

4. Tax allowance is a form of incentive used to ameliorate the difficulties and high tax burden inherent in a fiscal regime in order to include, promote and sustain investment   in that fiscal regime.

5. Capital Allowance: Capital allowances are granted to companies engaged in petroleum operations in lieu of depreciation in accordance with Petroleum Profit Tax Act (PPTA) 1990 broken into two types.

6. Petroleum Operation is defined as: “The winning or obtaining and transportation of petroleum or chargeable oil in Nigeria by or on behalf of a company for its own account by any drilling, mining, extracting or other like operations or process, not including refining at a refinery, in the course of a business carried on by the company engaged in such operations, and all operations incidental thereto and any sale of or any disposal of chargeable oil or on behalf of the company

7. Joint Venture: This is an arrangement under which the Federal Government through the Nigerian National Petroleum Corporation (NNPC) enters into a joint operating agreement with multinational companies as joint venture partners.

8. Assessable Tax: This refers to the tax arrived at using the appropriate tax rate on the chargeable profit. In other words, it is the amount of assessable tax less certain tax offset.

9. Chargeable Profit: This is the amount of assessable profit of the accounting period less the sum total of capital allowances provided in the Second Schedule to the Act.

10. Economic development can be defined vices as efforts that seek to improve the economic well-being and quality of life for a community by creating jobs and supporting or growing incomes and the tax base.



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