Revenue Allocation

Federation Revenue Management

Nigeria is a federation with three federating units made up of the federal, state, and local governments. Federation revenue is therefore owned by the three federating units. Section 162 of the 1999 Constitution of the Federal Republic of Nigeria defines â€œrevenueâ€ as any income or returns accruing to or derived by the Government of the Federation from any sourceincluding:

Any receipt, however described, arising from the operation of any law
Any return, however described, arising from or in respect of any property held by the Government of the Federation
Any return by way of interest on loans and dividends in respect of shares or interest held by the government of the federation in any company or statutory body

Chapter 162 Section (1) of the 1999 constitution states that â€œThe Federation shall maintain a special account to be called "The Federation Account" into which shall be paid all revenues collected by the government of the Federation, except the proceeds from the Personal Income Tax of the personnel of the armed forces of the Federation, the Nigeria Police Force, the Ministry or Department of Government charged with responsibility for Foreign Affairs and the residents of the Federal Capital Territory, Abujaâ€. Section (3) of the same chapter further states, â€œAny amount standing to the credit of the Federation Account shall be distributed among the Federal and State Governments and the Local Government Councils in each State on such terms and in such manner as may be prescribed by the National Assemblyâ€.

The Office of the Accountant General of the Federation (OAGF) is responsible for the overall management of all receipt and payments of the Federal Republic of Nigeria. It has responsibility for providing comprehensive accounting systems and controls in the ministries, extra ministerial departments, and agencies.

The Accountant General of the Federation is the Chief Accounting Officer charged with the constitutional role of preparing the nationâ€™s financial statements arising from collection and receipts of income, fees, rentals and taxes and payment out of the Federation Account. Accordingly, Sec. 85 S.5 of the Constitution provides further that, â€œthe Auditor-General shall, within ninety days of the receipts of the Accountant-Generalâ€™s Financial Statement, submit his reports under this section to each House of the National Assembly responsible for public accountsâ€.

The OAGF classifies revenue receipts into the Federation Account into mineral and non-mineral revenue. Mineral revenues are the oil and gas specific flows which include royalty, PPT, EDT and proceeds from crude and gas sales. Non-mineral revenues are non-sector specific flows which include VAT, WHT and custom/excise duties etc. Deductions of joint venture cash calls are made from proceeds of sales of crude oil and gas before payments are made to the Federation Account.

Sub-National Transfers

The Revenue Mobilization Allocation and Fiscal Commission (RMAFC) is a body established under the constitution and charged with the responsibility, among others, of monitoring the accruals to and disbursement of revenue from the Federation Account. Every month, representatives of the Federal and State Governments hold a Federation Account Allocation Committee (FAAC) meeting. At this meeting, revenue generated in the month prior, is distributed among the three tiers of government. The committee is chaired by the Minister of Finance, Budget, and National Planning.

Revenue is shared in accordance with the vertical formula, as determined by RMAFC and approved by the National Assembly. The formula allocates 52.68%, 26.72% and 20.60% to the Federal, State and Local Governments, respectively. The 26.72% and 20.60% accruing to the States and Local Governments is further shared by applying factors such as equality, population, land mass, IGR, and social development. In line with the Commissionâ€™s mandate to â€œreview from time to time, the revenue allocation formula and principles in operation to ensure conformity with changing realitiesâ€ the RMAFC began a process of reviewing the vertical formula in October 2021 with consultations around the country.

Table 1: Revenue Allocation Formula

S/N	Tier of Government	Applicable Rate
1	Federal Government	52.68%
2	State Government	26.72%
3	Local Government Councils	20.60%

Section 162(2) of the constitution further provides for the distribution of an amount not less than 13% of revenue accruing to the Federation Account from any natural resources to the State where the said mineral is mined. The sharing formula for mineral revenue is presented below.

Table 2: Sharing Formula for Mineral Revenue

S/N	Tier of Government	Applicable Rate
1	Federal Government	45.83%
2	State Government	23.25%
3	Local Government	17.92%
4	Derivation	13%

This deduction is made from mineral revenue before the vertical formula discussed above is applied. The 13% deducted is further shared among the oil producing States.

The agencies charged with the assessment, collection, and remittance of Federation Revenue from the oil and gas sector are:

Nigeria National Petroleum Commission (NNPC)
Department of Petroleum Resources (DPR)
Federal Inland Revenue Service (FIRS)

For more details on the vertical and horizontal sharing models, see the methodology section of the FAAC Disbursement Series 2020.

The Nigeria Extractive Industries Transparency Initiative (NEITI) has the responsibility of monitoring and ensuring that all payments due to the Government from all extractive industry companies, including taxes, royalties, dividends, bonuses, penalties, levies and such other income streams from the industry, are duly made. NEITI is also charged with ensuring that all fiscal allocations and statutory disbursements of revenue from Extractive Industry (EI) sources due from the Federation Account to statutory recipients are made and properly accounted for.

Revenue Shared by FAAC in 2020

The OAGF accounts for all remittances after a credit advice for each vote head has been sent to it by the relevant agency. This advice indicates a successful transfer of collections to the Federation Account. Details of revenue shared in the year is published monthly on the National Bureau for Statistics (NBS) website. A report on full year distribution is published here and here .

Mineral Revenue - 13% Derivation

At the end of every month, the Department of Petroleum Resources provides production figures for crude oil and gas per state to the RMAFC.

Computing indices is carried out monthly per commodity and takes into consideration the following:

The allocation of revenue (abolition of dichotomy in the application of derivation) Act, 2004
Report on familiarization/verification to oil-producing states, 2006
Report of inter-agency meeting on the attribution of offshore oil wells/fields to littoral states (kano retreat), 2008
The 86-number oil well granted to Rivers state by the Supreme Court judgment of 18th March 2011 in the case of AG of Rivers state vs. the AG of Akwa Ibom state and the AG of the federation
The Supreme Court judgment of 10th July 2012 in the case of AG of Cross Rivers state vs. the Ag of Akwa Ibom state and the AG of the federation
The report of the inter-agency technical committee on the determination of the location of Aje oil wells

In addition, only crude oil and gas production within 200m isobaths water depth is used for the generation of indices and production data are received in arrears, meaning January data is used for April disbursement and so on. When the Commission computes indices for any given month, it must be approved by all 36 Commissioners (representatives of the 36 states) before it forwards the same to the OAGF for disbursement.

The 13% derivation fund is deducted from net mineral revenue first before the rest is shared among all states. The oil and gas producing states are paid their 13% derivation allocation based on the actual level of production for each of the producing states. 13% derivation disbursement to States in the year was N388.979Billion. Analysis of actual disbursements shows that indices that were generated by the RMAFC in the period was the same as those used for actual disbursements by OAGF. Officers of the Commission have assured those indices are scrutinized monthly by representatives from States both at the Commission and at the OAGF (through the FAAC committee which includes the Accountant Generals from all the States) who rely heavily on allocations. Consequently, we confirm that there was no non-trivial deviation in the allocation of mineral revenue during the year.

See 13% Derivation disbursements for payments made to states in respect of oil and gas for the years including comparison with indices used for actual disbursement by the OAGF.

Revenues from the Oil & Gas Sector

There are several revenue streams to government from the oil and gas sector. While some revenues are paid to the Federal Government through its agencies, others are paid directly to sub-national entities. Revenues paid directly to the Federal Government include:

Proceeds from the sale of Government Crude Oil and Gas
Petroleum Profits Tax (PPT)
Royalty (Oil & Gas)
Signature Bonuses
Licenses and Concession Rental
Gas Flared Penalties
Companies Income Tax (CIT)
Education Tax (EDT)

All revenues accruing to the Federal Government (after deductions) end up in the Federation Account and forms part of revenue that is utilized in funding the national budget. This also includes revenues received in-kind. All in-kind revenues (profit oil, royalty oil and tax oil) are lifted by the NNPC on behalf of the relevant agencies or the Federation, with proceeds deposited in the relevant accounts.

Other revenue flows to sub-national entities are:

Niger Delta Development Commission (NDDC) Levy
Nigerian Content Development and Monitoring Board (NCDMB) payments
Nigerian Export Supervision Scheme (NESS) fees

These revenues from the sector do not flow into the Federation Account. The NDDC levy, NCDMB 1% levy and NESS fess are paid directly to the NDDC, NCDMB and NESS respectively.

Financial Flows

The financial flows received by the Government from the covered entities are illustrated below:

Figure 1.0 - Financial flows

The payment flows are received from various agencies (FIRS â€“ taxes, DPR â€“ royalty oil and gas, signature bonuses, concession rentals, gas flare penalty, miscellaneous) and IOCâ€™s. A further description of the figure is stated below:

Income from domestic crude oil
The income is realized from the sale of unrefined crude allocated for domestic refining. NNPC pays for domestic crude allocated in Naira at a converted export crude price using CBN exchange rate on the day of invoicing. Unrefined crude in excess capacity is sold and proceeds received into NNPC Account.
Federation crude oil income
The revenue proceeds are from the sale of crude oil and gas by the NNPC to the international oil market. Proceeds are received in United States dollars. This flow is reported by the Central Bank of Nigeria which is the receiving entity since payments are made to it on the instruction of the foreign customer.
Taxes
- Petroleum profit tax
  Petroleum Profit Tax is tax paid on profit generated by companies in the Upstream Sector of the oil industry. Petroleum Profit Tax is regulated by the PPT Acts of 2007. Petroleum producing operators like Joint Venture Companies, Production Sharing Companies and other oil producers are first two statutorily required to prepare an estimate of their income within the first two months and to forward the same to the Federal Inland Revenue Service. The agreed estimate of tax is payable in twelve equal monthly installments.
- Company income tax
  Company Income Tax is tax paid on the profit arising from oil and gas operations of companies. Oil and Gas companies pay Company Income Tax in United States dollars, on the profit arising from gas operations.
- Value-added tax
  This consumption tax is placed on a product whenever a value is added at a stage of production and at the point of sales. The rate of Value Added Tax is currently five percent (5%). Value Added Tax is paid by all covered entities in local and foreign currencies to the Federation Account with J.P. Morgan Chase Bank Domiciliary account in the Central Bank of Nigeria.
- Withholding tax
  Withholding Tax is a government requirement for the payer for an item of income to withhold or deduct tax from the payment, and pay the tax to the relevant government authority, the Federal Inland Revenue Services. Withholding tax is paid by all covered entities in Naira to the State Government and in the USD to the Federation Account with the Central Bank of Nigeria.
- Pay as you earn (PAYE)
  A Pay as You Earn Tax (PAYE) is a tax on Income of employees on a monthly basis. The relevant deductions are paid by all covered entities in Naira or Dollar to the State Government in which they operate, as required by the specific State Personal Income Tax Act 2011 as amended.
- Tertiary Education Tax
  Education Tax Fund was created by an Act in the year 1993 for the funding of Tertiary Institutions in the Country. The fund is provided through Tertiary Education Tax collected by the Federal Inland Revenue Services (FIRS) in accordance with the Tertiary Education Trust Fund (Establishment, etc.) Act 2011. Tertiary Education Tax is chargeable on the assessable profit of petroleum companies at a rate of two percent (2%). The tax is an allowable deduction in computing an Exploration and Production (E&P) company adjusted profit.
Royalties
This is a regular payment from the oil companies in the Upstream to the Federal Government in return for the right of access to the crude oil. Royalty is a sum of money paid by a holder of a concession to the Federation based on the value of the quantity of oil extracted at the fixed percentage from time to time by the government. Department of Petroleum Resources (DPR) is the government agency that receives royalty payments.
Signature bonus
This revenue is received at the time Oil Prospecting License is given to an oil company. Payments are made to the Department of Petroleum Resources (DPR) designated account at the Central Bank of Nigeria for the allocation of oil blocks.
Licenses and Concession Rentals
Oil and Gas companies pay concession rentals as rent on oil blocks for which they have been granted concession. There are two categories of rentals, namely:
- Oil Prospecting Licenses (OPL)
- Oil Mining Lease (OML)

Funding Niger Delta Development Commission

The Niger Delta Development Commission (NDDC) is a Federal Government Agency established in the year 2000. The sole mandate of NDDC is to develop the oil-rich Niger Delta region of Southern Nigeria. In September 2008, the Niger Delta Ministry was created and the NDDC became a parastatal under it. Presently, there is a three percent (3%) Statutory contribution required from upstream companies to the NDDC based on their Annual Budget. The Act establishing the NDDC provides that in addition to monies from the Federal Government, it has to be funded by annual contributions of the total budget of any oil-producing company, operating on-shore and off-shore in the Niger Delta area of the country. Contributions are made in both foreign and local currencies to the commission.

Funding of Nigerian Content Development and Monitoring Board (NCDMB)

The Nigerian Content Development and Monitoring Board is the Regulatory Agency vested with the responsibility of regulating local content in the oil and gas industry in Nigeria. The Nigeria Oil and Gas Development Act, which applies to all operators in Nigeriaâ€™s Oil and Gas Industry, including Exploration, Production and Services Companies, established the Board. The Board is funded by the Federal Government of Nigeria and by statutory contributions of Upstream Companies through remittance of one percent (1%) deductions from any contract awarded to an operator, contractor, sub-contractor, alliance partner or any other entity in any project, operation, and activity in any transactions in the upstream sector of the Industry.

Revenue management and expenditures

The Federal Government of Nigeria (FGN) operates a Zero-Based Budgeting System (ZBB). A ZBB system is one where all provisions for a project are justified for each new budget period regardless of prior year provisions. This system emphasizes on actual needs considering Government objectives and available resources.

The budgeting process of the FGN

The budgeting process of the FGN is initiated by the Ministry of Budget and National Planning (after consultation with the key revenue-generating agencies and key economic agencies) vide a budget call circular to all Ministries, Departments and Agencies of the Federal Government. The call circular is issued and sets out the requirements that must be satisfied in the preparation of the FGN budget proposal. All submissions by the MDAs are then evaluated and consolidated as a draft budget proposal by the Budget Office of the Federation under the supervision of the Ministry of Finance, Budget, and National Planning. The draft budget proposal along with all supporting documents is then submitted to the President for approval. The President then makes a formal presentation to a joint session of the National Assembly for consideration and appropriation. The two arms of the legislature separately consider and harmonize the draft budget and thereafter approves separately, after which it is presented as the Appropriation Bill to the President for assent. Once the President assents to the Appropriation Bill, it becomes an Act of parliament passed into law. The budgeting circle is shown in the flow diagram in figure 2.0 below:

Revenue Allocation

Revenue Allocation

Federation Revenue Management

Sub-National Transfers

Table 1: Revenue Allocation Formula

Table 2: Sharing Formula for Mineral Revenue

Revenue Shared by FAAC in 2020

Mineral Revenue - 13% Derivation

Revenues from the Oil & Gas Sector

Financial Flows

Figure 1.0 - Financial flows

Funding Niger Delta Development Commission

Funding of Nigerian Content Development and Monitoring Board (NCDMB)

Revenue management and expenditures

The budgeting process of the FGN

Figure 2.0 - Simplified Budget Circle

For more on the Budget process, a copy of the 2018 Budget Call Circular and other related details, visit www.budgetoffice.gov.ng

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