Nigeria: The Claim Of Capital Allowance And Regulatory Approval: The Conundrum

Over the years, the provisions of the Companies Income Tax Act (CITA) relating to the right of taxpayers to claim capital allowance on assets have generated controversies between taxpayers and the Federal Inland Revenue Service (FIRS). While the very essence of capital allowance claim is to provide taxpayers some form of relief, taxpayers are sometimes faced with regulatory or administrative restrictions that prevent them from fully enjoying this relief.

An example of such restriction is the recent Public Notice issued by FIRS titled "Submission of Certificate of Acceptance" directing taxpayers with fixed assets worth ₦500,000 and above to provide a Certificate of Acceptance on Fixed Assets (CAFA) on such assets in order to be eligible to claim capital allowances from 2016 to 2021 years of assessment and going forward. The issuance of the Public Notice has fueled varied reactions from taxpayers with a number of stakeholders expressing views on the validity of the powers of FIRS to issue such directive.

In this article, we examine the claim of capital allowance in line with the provisions of CITA, relevant regulatory approvals and the implication of the Public Notice for taxpayers and businesses.

Brief Overview of Capital Allowance in Nigeria

In simple terms, the claim of capital allowances as provided by CITA, allows taxpayers to deduct capital expenditure incurred, before arriving at their taxable profit.

The Second Schedule to CITA sets the legal basis for the claim of capital allowances by companies. It prescribes the conditions and manner in which capital allowances and charges can be made. Specifically, the conditions are;

1. The asset(s) must be owned by the company making the claim
2. The asset(s) must be in use at the end of the period for which the tax is being computed
3. The asset(s) must be used for the purposes of a trade or business carried on by that company.

While CAFA is not listed as a precondition for the claim of capital allowance, the law empowers the FIRS to make the judgment call on the reasonableness of the allowance to be claimed. Specifically, Paragraph 22 of the Second Schedule to the CITA states that "no allowance shall be made to any company for any year of assessment under the provisions of this Schedule unless claimed by it for that year or where the Board is of the opinion that it would be reasonable and just to do so"

Validity of FIRS' Public Notice on the Submission of CAFA and the Practical Difficulties

The FIRS' Public Notice relied on Section 3 of the Industrial Inspectorate Act (IIA) enacted in 1970. The said Section mandates any person proposing to start a new undertaking involving the expenditure of not less than ₦20,000 (subsequently amended to ₦500,000) or additional capital expenditure in respect of an existing undertaking, to notify the Director of the Industrial Inspectorate Division (IID), which shall verify the expenditure and if satisfied, issue and forward to the company, a certificate of acceptance.

The relevance of the certificate is to verify the cost of acquisition of the fixed assets reported in the financial statements of the companies, and by implication, the tax returns. The FIRS, in assessing a company to tax or in granting the claim of capital allowance to Companies, is expected to place reliance on the financial records of the company. In practice, the FIRS has placed reliance on the value certified by the IID on the CAFA and in other instances, accepted third-party invoices as valid proof of purchase and ownership, in lieu of CAFA.

The aforementioned Public Notice generated a lot of debate regarding the powers of the FIRS to request for submission of CAFA as a claim for capital allowance. Although the need for CAFA is a statutory requirement, some have argued that the CITA, as well as the Petroleum Industry Act (PIA), do not contain provisions requiring CAFA as a condition for the claim of capital allowance. Whilst this position is plausible, it is important to note that the FIRS, as the tax authority, is empowered by virtue of Section 26 of the FIRS Establishment Act and Section 60 of CITA to, amongst others, request by way of notice, for submission of any books, documents, and any other information in the exercise of its functions. Relying on these broad powers, the FIRS can request information relating to CAFA from taxpayers as a way of satisfying itself that such taxpayer has incurred Qualifying Capital Expenditure (QCE) in any particular year, in order to entitle it to claim of capital allowance. This is more so given that Section 5 of the IIA mandates the FIRS, Customs, Immigration, Prisons Service, and any department of government (federal and state) to accept without disputing the value stated in the certificate where it is required in the exercise of such agency's functions under any law.

Whilst the FIRS can, in our view, validly request that companies provide CAFA as a condition for a claim of capital allowance, this requirement, where strictly imposed by FIRS can lead to hardship and challenges for taxpayers. First, the threshold for compliance is ₦500,000 and the implication of the above is that if a company buys as little as a laptop (which typically costs above ₦500,000), the Company would be required to apply for CAFA and IID officials are expected to make a trip to the Company's premises to verify the cost (value) of the laptop and issue CAFA for that one laptop. Not only does this sound ridiculous in the Nigeria of today, it also reflects poor utilization of resources both on the part of the government and the taxpayers, in view of the current economic realities.

Secondly, considering the time frame it typically takes to obtain CAFA or other regulatory approvals in Nigeria, the 31 October 2022 timeline for the submission of the CAFA seems impracticable as a lot of applications will be made to the IID and there are only so many verifications that can be done within the window provided by the FIRS in its Public Notice.

The Implication of CAFA Submission for Small Companies and Companies Already Audited by FIRS

Since small companies (with a turnover of less than ₦25 million) are exempt from CIT and capital allowance is deemed as utilized in the assessment years that they enjoy tax exemption, the relevance of any regulatory document relating to claim of capital allowance is questionable and the government needs to re-evaluate this peculiarity and the overall implication on the ease of doing business in Nigeria.

Further, where a company that has been audited by the tax authority for the period in contention, is unable to meet up with the stipulated deadline for submission of its CAFA, the FIRS may be stretching beyond the limit of its powers if it seeks to withdraw the company's capital allowance for the related periods because the assessment raised at the end of the audit exercise is deemed to be final and conclusive and the FIRS typically is not expected to conduct an audit on a company for the same period twice.

While the FIRS can initiate an investigation exercise even for years that are statute-barred or years that have been audited in the past, the CITA limits the basis for a tax investigation to where any form of fraud, wilful default, or neglect has been committed by, or on behalf, of any company. The FIRS cannot merely use the term "investigation" to reopen the period that has been previously audited and the assessment deemed final and conclusive as taxpayers can challenge the FIRS to prove any form of fraud, wilful default, or neglect actually occurred. Taxpayers in this category can leverage the ruling in the case of Polaris Bank PLC vs Abia State Board of Internal Revenue, where the TAT held that simply describing an exercise as a "tax investigation" – presumably to circumvent the 6-year limitation period – would not be sufficient as the whole exercise and related documentation must support this.

Based on the foregoing, it would appear that the FIRS has the powers to request documents in the exercise of its functions and these can include CAFA. However, this request for the provision of CAFA for financial years as far

back as 2016 seems like an afterthought, since the same FIRS has concluded tax audits for a number of companies within the same period and has granted capital allowance as a relief, based on the review of other documents. It is therefore expected that the FIRS will experience pushback from taxpayers who may seek redress in the court of law.

Striking a Balance – Way Forward

The controversies surrounding the FIRS' insistence on the submission of CAFA as a pre-condition for claim of capital allowance has lingered for too long and for clarity, we implore the government to amend the laws (CITA and IIA) in order to clear all ambiguities once and for all. Also, there has to be increased effort on collaboration between agencies of the government in order to pursue the government's interest of ensuring the growth of the economy. The FIRS and IID cannot be verifying the existence and value of the same assets. This is a clear duplication of resources and the law should be amended to clearly restrict the FIRS from conducting additional asset verification exercises where a company already has obtained CAFA from the IID.

Most importantly, the government should look to increase the CAFA threshold to reflect current realities. It is disheartening among other things that the IIA has not been amended in recent times to increase both the threshold for compliance and the penalty of non-compliance.

It is very crucial that the current CAFA threshold be significantly reviewed upwards to adjust for the depreciating value of the Naira and the current realities of doing business in Nigeria. A revised threshold will definitely provide relief to Small and Medium Enterprises (SMEs) who shouldn't need to process CAFA due to the peculiarities of their tax status and the capital allowance implications of SMEs in Nigeria.

Further, the requirement to notify the Director of the IID of intention to incur capital expenditure of above the threshold as provided by Section 3 of the IIA may also be impracticable. It is a fact that business operations have evolved since 1970 when the IIA was enacted. 52 years later, companies incur capital expenditure on a need basis and multiple times within the year, such that notifying the director beforehand is no longer practicable. The IIA should be amended to align with the practice, where companies notify the director and process CAFA only at the end of every financial year after the capital expenditure has been incurred.

The process of obtaining CAFA is usually not seamless even when companies have done all that is required and have submitted valid documents to support the acquisition of fixed assets. There are still long delays at various stages of the process (i.e., pre-inspection, inspection and follow-up). These bottlenecks come at a cost to companies who may then require dedicated personnel to follow up consistently with the IID officials to certify the value of its assets and issue the certificate. Overall, the IID should ensure greater efficiency in its process, effectiveness in service delivery, and improved performance to reduce the processing time for CAFA, such that the certificate is promptly issued upon application.

Conclusion

Since the law promulgating the need to apply for CAFA has not been abolished, the requirement to obtain CAFA in line with the provisions of the IIA remains valid. Until any amendments are made to the extant laws to effect the concerns expressed by taxpayers, vis-à-vis the current business realities, failure to obtain CAFA will continue to constitute non-compliance that attracts the established penalty.

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.