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 machinery . 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. For 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.
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.
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 Nigeria‟s economy. The problem of low economic performanceof Nigeria cannot be attributed solely to instability of earnings from the oil sector, but as a result of failure by the government to utilize productively the financial windfall from the export of crude oil from the mid-1970s to develop other sectors of the economy.
The Nigerian petroleum industry has been described as the largest among all industries in the country. This is probably due to the belief that petroleum is one of the major sources of energy worldwide.The size,international characteristics, androle assumed by the petroleum industry were noted to have originated from the notion that petroleum is versatile as it currently satisfies a wide variety of energy and related needs.
Petroleum is the most vital source of energy,providing over 50 percent of all commercial energy consumption in the world. The revenues obtained from crude oil in Nigeria are of absolute advantage to expenditure commitments on various projects at the local,state, and federal levels. The Nigerian economy relies heavily on the revenue derived from petroleum products,they provide 70 percent of government revenue and about 95 percentof foreign exchange earnings.Apart from this, the contribution of petroleum to national development is many and varied,employment generation,foreign exchange earnings,income generation, industrialization, and improvements in other economic variables.
While the major investors in the petroleum industry are the international oil companies (IOCs), the principal legislation governing petroleum operations in Nigerian is the Petroleum Profit Tax(PPT).under the PPT, the tax rate was set at 67.5 percent for the first five years of operations by the oil company and 85percent thereafter.
The petroleum industry is the largest and main generator of Gross Domestic Product (GDP) in Nigeria which is the most populous in African nations. Since the British discovered oil in the Niger Delta in the late 1950s;the oil industry has become the main stay of the
Nigerian economy. Agriculture was the mainstay of the country‟s economy. However, the regulatory regime, since its enthronement in the industry has not been without challenges.

1.2 Statement of the Research Problem
It is obvious that petroleum income be it revenue from the sale of crude oil, petroleum profit tax, royalties etc. can cause an increase or a decrease in economic growth and development of a nation, depending on the type of policy and practical implementation the government in power adopts. Nigeria with all its oil wealth has performed poorly, with GDP per capita today.
The problems with Nigerian economy have been traced to failure of successive governments to utilize oil revenue and excess crude oil income in the development of other sectors of the economy effectively and efficiently. overall, there has been poor performance of national institutions such as power, energy, road, transportation, politics, financial systems and investments environment have been deteriorating and inefficient.
There are problems affecting the Petroleum Profit Tax (PPT) in general. These include the problems relating to the PPT administration, the complexity of PPT/MOU calculation, and the problems of PPT avoidance and evasion.
The Corporate Tax Act has provided various offences and penalties, and the reason for these penalties are to discourage companies from evading or avoiding the payment of taxes as and when due.
Therefore even if tax avoidance strategies are legal, the question is whether they are 1947 in the United States of America, a Federal Judge, Learned Hand answered this question in the following way:
Over and over again courts have said that there is nothing sinister in so arranging one‟s affairs as to keep taxes as low as possible. Everybody does so, rich or poor; and all do right, for nobody owes any public duty to pay more than the law demands: taxes are enforced exactions, not voluntary demand more in the name of morals is mere cant.

There is no doubt that about the significance of strong, able and effective administration in any system. It is widely agreed that one of the main aims of taxation is to raise revenue for the government to meet its needs of providing necessary services to the public. It is also agreed that tax evasion/avoidance cause government to loose huge amount of money. Consequently, there is the opinion that the loss of revenue as the result of widespread tax evasion/avoidance in Nigeria is due to the weak, inept and inefficient system of tax administration.
In the oil sub-sector, the Federal Board of Inland Revenue (FBIR) is vested with the power to administer the petroleum Profit tax. It is also responsible for carrying out all acts deemed necessary and expedient for inter-alia the assessment of petroleum profits tax.6
Another problem that may affect petroleum Profit Tax as well as its assessment is the tax evasion/avoidance.An oil company can evade tax by deliberately delivering false returns, refusal to pay the tax at the right time or refusal to pay the tax at all. It can also avoid tax by manipulating some provisions from the petroleum Profit Tax Act. In other words, some oil companies may look for any lacuna in the PPT provisions so that they will make use of it to avoid tax. This also a serious matter that may render a significant amount of revenue coming from this sector to reduce. Subsequently, the government may not have enough money to use for public services; it is also a critical problem that has to be tackled.
Also, theft and illegal oil bunkering of oil by supposed criminal syndicates also reduces the country‟s revenue, possibly by several billion dollars every year. In March 2003 for example, political turmoil resulted in force majeure declarations by Chevron, Texaco and Shell, the major oil producers in the country.
There is also the problem of the crises in Niger Delta area gives negative effect on the petroleum Profit Tax and subsequently affects its assessment. For example, on January 19, 2006, a group called the Movement for the Emancipation of the Niger Delta (MEND) grabbed four oil workers and also attacked pipelines and platforms of Royal Dutch Shell Company(which was the biggest oil producing company in the Niger Delta).the MEND was always behind the bombing of pipelines and kidnapping of oil workers. The group has also warned that it will drive oil companies like Shell, Chevron and Exxon-Mobil out of the area,
Presently, Nigerian has been hit by growing unrest in the country‟s oil producing south by a new militant group calling itself the Niger Delta Avengers, this group attack on
Shell‟s Forcados underwater flow line in February used divers, showing they have the skills and knowledge of oil infrastructure to target areas that will significantly halt production.
Other attacks include the sabotage of Chevron‟s offshore okan gas valve platform, and bombings of Eni‟s infrastructure and Nigerian National Petroleum Corporation (NNPC)
pipelines, which provide gas to Lagos for power generation.
Nigeria has budgeted for production of 2.2 million barrels per day this year but the attacks have cut output to 1.4 million barrels per day according to the petroleum minister Emmanuel Kachikwu. The sabotage couldn‟t have come at a worse time, with Nigeria, which normally depends on oil export sales for 70 percent of government revenue, on the brink of a recession. The daily production output of the oil companies in the Niger Delta drops and so Nigeria loses revenue. Indeed, this is a tremendous problem of which an urgent solution should be provided.