New tax law forces IOCs to keep 30% of decommissioning funds in Nigeria

International Oil Companies (IOCs) can now claim tax deductions on their costly decommissioning and abandonment (D&A) expenses if they deposit a minimum of 30 percent of those funds into an accredited Nigerian bank escrow account, according to the new tax laws in Nigeria.

The provision, explicitly codified in Section 86 of the comprehensive Nigeria Tax Act (NTA) 2025, settles previous ambiguities and directly amends the fiscal framework established by the Petroleum Industry Act (PIA) 2021.

The PIA 2021 had initially mandated the establishment of a dedicated D&A Fund to ensure sufficient resources for dismantling aging infrastructure, a critical issue given the ongoing wave of divestments by International Oil Companies (IOCs). However, the NTA 2025 goes further, making a local deposit a prerequisite for tax relief.

Section 86 of the NTA 2025 states that a provision made for D&A funds shall not be deductible for tax purposes, except where:

The licensee or lessee deposit a minimum of 30 percent of the decommissioning and abandonment fund with a Nigerian Bank, in the form of an escrow account accessible by the Commission or Authority; and (b) the Nigerian bank is accredited in accordance with the criteria for accreditation for participation in the management of the fund, determined by the Central Bank of Nigeria in collaboration with the Service.

Industry experts are clarifying that this requirement is not a new financial burden, but a ring-fencing mechanism.

“The extra cost is just a misconception in my own opinion,” explained Gabriel Ogunjemilusi, former FIRS director. “The new law is to ensure that 30 percent of the fund is kept with a Nigerian bank which can develop our country.”

He clarified that the 30 percent is drawn from existing funds that were historically placed in foreign escrow accounts. The new law simply redirects a portion of these funds into the Nigerian financial system.

The NTA 2025 provision also strengthens the regulatory framework by mandating that the local escrow account must be accessible by the Commission (Nigerian Upstream Petroleum Regulatory Commission – NUPRC) or the Authority (Nigerian Midstream and Downstream Petroleum Regulatory Authority – NMDPRA).

Kehinde Kajesumo, Deputy Director, Head of Treaties & International Tax Policy at the FIRS, highlighted the dual purpose of the legislation.

“The PIA already provided that it should be funded, but by insisting on Nigerian banks, you are able to trace if it’s actually been funded,” Kajesumo said. “The law is to ensure the security of the environment of oil production, and also to ensure that the money will be available when it is needed in the future.”

The requirement for the Nigerian bank to be accredited by the Central Bank of Nigeria (CBN) in collaboration with the FIRS also ensures a layer of financial and operational scrutiny, guaranteeing that only stable, compliant local institutions manage these critical environmental liabilities.

The new requirement is particularly relevant as IOCs accelerate their divestment from onshore and shallow-water assets. The transition to indigenous operators means increased attention is now on securing financial assurance for the inevitable decommissioning of ageing infrastructure.

By tying the tax benefit directly to local fund placement, the NTA 2025 ensures Nigeria mitigates the financial and environmental risks associated with asset transfer and abandonment.(BusinessDay)