Perhaps the most compelling justification for a re-examination of this directive is the spate of losses turned in by NRCs at the immediate aftermath of the application and compliance with this directive

Eighteen (18) months ago today, the price per barrel of crude oil ranged from US$105.15/b to US$111.97/b. At this time:

  • global oil demand growth was forecast at 1.13mb/d
  • world oil demand was anticipated to increase at a faster pace of 1.21mb/d
  • OECD demand was expected to see positive growth from 1.7% to 2.0% in 2015; this was noted as a first time positive growth forecast since 2010
  • Non-OECD consumption was expected to provide the bulk of oil demand growth at 1.18mb/d
  • India was forecast to grow from 5.5% to 5.8% with China to trend at 7.2%
  • Non-OPEC supply was expected to increase by 1.47% mb/d but to grow at a slower pace of 1.3mb/d in 2015

Eighteen (18) months ago, the possibility of the per barrel price per day (pbd) of crude oil to hover at a price lower than thirty (30) US Dollars or approaching twenty (20) US dollars would be sacrilege.

Thus, eighteen (18) months ago, Federal Inland Revenue Service (FIRS) specifically in July 2014, issued a directive that Non-Resident Companies (NRCs) should file their tax returns as required by section 55 of the Companies Income Tax Act (as amended)(CITA) to include audited financial statements, complete with tax and capital allowance computations. These are required in addition to a duly completed self-assessment form and other particulars as specified by CITA.

Prior to this directive, NRCs were filing on deemed profit basis and FIRS was accepting those tax returns under the provisions of section 30 of the CITA. Under that regime, twenty percent (20%) of the turnover of the NRCs was deemed to be taxable profit upon which the statutory rate of thirty per cent (30%) was applied to arrive at the tax payable. The only information/documentation required for the preparation of these returns was the turnover of the NRC on its operations as evidenced by its invoices to the customers in Nigeria. This approach was actually straightforward and extremely convenient. It also guaranteed tax take from the operations of the NRCs no matter what. Under that regime, it was rare to find a NRC that was loss making and thus not entitled to pay some form of tax to FIRS on behalf of the Government.

The first immediate concern was whether NRCs that had filed tax returns for the 2014 year of assessment on deemed income basis prior to the directive by FIRS, needed to refile the 2014 returns on actual income basis. There was no compelling justification for NRCs to refile 2014 tax returns given that in complying with the FIRS directive, NRCs would be required to disclose information relating to a preceding year of assessment (YOA) as prior year comparative/opening figures when computing and filing tax returns and full accounts for 2015 year of assessment and subsequently.

The 'new' regime for NRCs has triggered the following questions around the following items:

  1. Financial Statements: A natural consequence of the FIRS' directive is that NRCs need to prepare carved-out financial statements in respect of their Nigerian operations.

    • what would be the applicable qualifications of persons who may audit such accounts in Nigeria? Are NRCs expected to conform to the provisions of S.358 of Companies and Allied Matters Act as amended (CAMA) and section 77 of Financial Reporting Act (FRA)? CAMA provides that an auditor must be persons who are legally qualified to audit and certify accounts under extant laws in Nigeria while FRA defines an Auditor and Professional Accountant.
    • if there are deviations, is it clear how FIRS intends to handle such?
    • is it safe to assume that FIRS would bear the cost of physical verification of PPE domiciled outside Nigeria?
    • how does FIRS intend to address returns filed based on a qualified audit opinion?
    • would FIRS tax NRCs whether or not the financial statements are qualified on the basis of actual profits where this is less than 20% of deemed profit?
  2. Operating expenses: Whilst the issue of income from the Nigerian operations may be straightforward, the situation with expenses is not that straightforward especially that a number of NRCs operate a system which centralizes strategic services across their respective groups with the resultant direct and administrative costs apportioned as appropriate across several jurisdictions. Consequently:

    • what would be the acceptable basis for apportionment of costs? Or how should the cost attributable to the Nigerian fixed base/PE be determined? Or would this evaluation be on a case by case basis from YOA to YOA?
    • what level of documentation is therefore required for the expenses to pass the deductibility test?
  3. Claim of capital allowance: No doubt, NRCs would be entitled to claim capital allowance on qualifying expenditure under the actual profit regime. However, to be able to claim such capital allowances, they would be required to provide acceptable evidence in relation to ownership, cost and use of any PPE in respect of which capital allowance is claimed. But then, it may be asked:

    • On what basis is the capital allowance to be computed?
    • What guides the claim for capital allowances of old PPE?
    • Are capital allowances deemed to have been claimed on old assets considering the 80% allowances for tax deductible expenses under the deemed profit regime?
    • Should existing assets be treated as new additions for capital allowance purposes?
    • Are the NRCs expected to procure an acceptance certificate as evidence of ownership of the assets, more so where the asset is domiciled outside Nigeria?

Perhaps the most compelling justification for a re-examination of this directive is the spate of losses turned in by NRCs at the immediate aftermath of the application and compliance with this directive. This meant that where FIRS had been certain to recover some taxes based on the turnover of the companies, this may now only be possible (under the actual profit regime) through a proper audit or investigation of the operations; an exercise that ensures that FIRS (ditto the Government) needs to commit time, funds and other resources to recover such taxes within a context of increasing exposure to significant loss in time value of money. Howsoever tempting, this concern is not easily resolved by a refusal to accept the lossmaking returns and issuing a deemed assessment notice as substitute.

It must be recognised that a taxpayer who feels hard done by the tax authorities will not hand over "surprising" tax liability just because FIRS has served on it relevant notices of assessment. Given the impact for the economics of its operations, cash flow, returns to shareholders, lenders and other stakeholders in the business, it will object in writing to the assessment notices and be prepared to explore all available means for resolution within its right under the law. This may increase the specter of significant revenue potentially due to Government that may become trapped in the dispute resolution corridor.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.