On 9th May 2022, the FIRS issued a public notice to the effect that it may (emphasis mine) only grant capital allowance to companies that are able to provide evidence of Certificate of Acceptance of Fixed Assets (CAFA) in respect of qualifying capital expenditure between 2016 and 2021 years of assessment. FIRS intends to implement this directive from 31st October 2022. 

This directive is, however, at variance with the provisions of the Companies Income Tax Act (CITA). It is also practically impossible for all companies to process the certificate within the stated time. Moreover, the implementation of the dated legislation will not only increase the cost of doing business in Nigeria, but there are ample reasons to note that the additional stress that it will create for taxpayers will eventually have a negative impact on tax revenue. The bases for this position are as follows:

  1. Non-compliance with the provisions of the Companies Income Tax Act (CITA) – CITA is the legal basis for imposition and determination of income tax payable by limited liability companies that are deriving taxable income from Nigeria. Section 31 of CITA provides the basis for determination of taxable profits as follows:

"The total profits of any company for any year of assessment, shall be the amount of its total assessable profits from all sources for that year together with any additions thereto to be made in accordance with the provisions of the Second Schedule to this Act, less any deductions to be made or allowed in accordance with the provisions of this section, section 32 and of the said Schedule."

The Second Schedule referred to above provides that initial and annual capital allowances shall be granted to a company in respect of qualifying expenditure. "Qualifying expenditure", according to CITA, means, 'subject to the express provisions of this Schedule', expenditure incurred in a basis period which is, for instance, "Capital expenditure (hereinafter called "qualifying plant expenditure") incurred on plant, machinery or fixtures."

The implication of the phrase 'express provisions of this Schedule' makes the direction provided in the Act sacrosanct, inviolable, untouchable and invariable. In this regard, the Second Schedule to the Act only requires companies to demonstrate (with appropriate relevant and incontrovertible documentary evidence) the amount incurred in respect of any qualifying expenditure. CITA, directly or indirectly, does not require any agency of government to play any form of role in confirming the amount incurred in this regard. There is, therefore, no statutory provision where it is required for any company to present evidence of valuation by any agency of the government as a pre-condition for claiming capital allowance. 

In addition, CITA does not set any form of standard for acceptability of such expenditure. In other words, there is no basis to accept or reject any qualifying expenditure incurred to acquire an asset that is used in a business, whether or not such expenditure is 'reasonable'. Thus, it is possible for the same asset to be acquired at different prices by different companies from the same vendor on the same date. FIRS is not statutorily empowered to disallow any portion of such expenditure.

In this regard, the Industrial Inspectorate Division (IID) of the Federal Ministry of Industry, Trade & Investment (FMITI) also realizes the limitation of its power and only vouches receipts for such expenditure during inspection. It neither rejects nor amends such expenses once the company can demonstrate the amount it appropriately incurred to acquire such asset. 

  1. CAFA not statutorily required for claim of capital allowances – IID was set up by the Industrial Inspectorate Act of 1970

'...for the purpose of investigating and following the undertakings of industries including investments and other related matters". 

Section 2(1) of the Act provides that

'...it shall be the duty of the division generally to carry out investigations into any proposed, new and existing undertaking involving any proposed capital expenditure, and in particular, for the purposes of determining the investment valuation of the undertaking."

Section 10(a) defines "undertaking" to mean

"...any undertaking carried on by way of trade or business for the production of goods or services for sale and requiring the use of industrial machinery and other equipment, plants, buildings and other permanent or temporary fixtures on land" (emphasis mine).

One then wonders that an Act designed for valuation of investments of '...permanent or temporary fixtures on land' for the industrial sector can now be stretched to ALL the sectors of the Nigeria economy. The manufacturing sector is less than 15% of the Gross Domestic Product (GDP) while services contribute more than 50%. This appears to be a case of tail wagging the dog if the policy designed for less than one-fifth of the economy is stretched to others? 

In any event, the combined reading of both CITA and IIA shows that the two have nothing in common. This is similar to our erstwhile experience in respect of Financial Reporting Council's (FRC) position on the need for National Office of Technology Acquisition and Promotion (NOTAP) pre-approval for tax deductibility of certain expenses, such as management and technical service fees. The Court of Appeal held otherwise in the case between Stanbic IBTC vs. the Financial Regulatory Council and limited the use of NOTAP's pre-approval to foreign exchange remittances. The FIRS has since influenced a change in the tax law. It may, therefore, cause a similar thing to happen in this regard to put the issue to rest once and for all.

  1. Industrial Inspectorate Act (IIA) is dated – If we assume, without conceding, that IIA applies to all companies, including foreign incorporated ones to the extent that they are liable to income tax in Nigeria, the cost of compliance outweighs the benefit. It, therefore, breaches one of the canons of taxation that requires a sound tax system to be economical. Cost of collection must be a reasonable fraction of the tax revenue. Section 3(1) of IIA provides that:

"As from the commencement of this Act, any person proposing (a) to start a new undertaking involving the expenditure of not less than twenty (now five hundred) thousand naira; or (b) to incur additional capital expenditure of not less than twenty (now five hundred) thousand naira in respect of an existing undertaking..."

In Nigeria, today, the cost of mobile handsets used by some personnel exceed this threshold (N500,000). The same amount may also not purchase the four tyres of a Sports Utility Van. As at 20 May 2022, Naira exchanged at average N605 per dollar in open market. How plausible is it for companies to apply for CAFA simply because it purchased a mobile handset worth N500,001 for just one of its personnel in a year, if we assume it is the only addition to fixed asset for that year? The cost of processing CAFA far exceeds the threshold. 

We should note that once a policy or law is in place, government officials are known to stretch such provisions of the law to coerce hapless citizen to an end, which is usually at variance with the intention of the law. An author in https://punchng.com/firs-stop-promoting-outdated-laws-on-fixed-assets/ succinctly summarizes the feelings of every forward-looking tax practitioner in Nigeria on this issue. This is irrespective of the fact that tax practitioners will benefit economically from this wrong-headed policy. However, expectation of a more forward-looking tax system should outweigh economic benefit for every professional. Professionals should pride themselves to earn fees for services that add value not only to their clients, but the government and society at large.

  1. Avenue for corruption – IID lacks the capacity to process CAFA for all affected companies in Nigeria even if the FIRS shifts the deadline for the next few years. The process requires IID officials to physically visit each company to inspect each asset. Whilst some companies have assets spread across the 36 States of the Federation, there are numerous other companies spread across the country with some possibly operating in terrains that are difficult to access. IID is a division within the FMI operating under one Director. The number of its staff with requisite qualification to carry out the exercise is far below a thousand. It also has only one major operational office in Abuja where all the certificates are issued. With a deadline of 31 October 2022, how will all applicants, including those operating in security-challenged regions of the country, be able to obtain their CAFA before then? It is obvious that this is a tall order and there is enough problem in the country that there is no basis for adding this avoidable one.
  1. Contradicts tax exemption status granted to small companies – Companies with turnover not exceeding N25m are exempted from tax. However, such companies are deemed to have utilized the capital allowance due to them during the tax holiday. The directive from FIRS does not however exempt these companies who may need to carry forward and offset unutilized capital allowances from post-tax holiday period. Definitely, we expect most of these companies to incur qualifying capital expenditure annually with values in excess of the threshold. It, therefore, implies that FIRS officials will expect such companies to present CAFA once they start to pay income tax. Based on experience, the cost of processing CAFA may exceed the tax payable by some of these companies. Once the costs are charged in the books, the tax payable may be significantly reduced. The simple question is to whose advantage is CAFA as a precondition for grant of capital allowances if qualifying expenditure has been validly incurred?
  1. Unnecessary bottleneck for tax collection – In a paper titled "Tax complexity indices and their relation with tax noncompliance: Empirical evidence from the Portuguese tax professionals", A.C. Borrego, C.M.M. Lopes and C.M.S. Ferreira wrote:

"... tax complexity created to serve as a barrier against tax fraud, tax evasion and other ways of reducing or entirely avoiding one's commitment to pay taxes, ultimately often becomes a springboard (emphasis mine) for the realization of these same schemes of tax noncompliance, by exploiting the ambiguities and loopholes that tax complexity provides. This is a vicious circle, in which tax noncompliance and tax complexity nowadays frequently emerge as cause and effect of one other." ( https://www.elsevier.es/en-revista-tekhne-review-applied-management-350-articulo-tax-complexity-indices-their-relation-S1645991116300111 )

In essence, the more complex a tax system is, the higher the propensity for non-compliance. CAFA is another unnecessary administrative bottleneck which will most likely discourage some taxpayers from full compliance with the law. How does one convince a businessperson that there is need to process CAFA because they purchase fixed assets with inconsequential value of N500,001? The FIRS should deploy its resources elsewhere rather dissipate its energies to implement the provisions of a law that has little or no relevance to tax collection.

  1. Increase in cost of doing business – In March 2022, President Muhammadu Buhari charged Nigeria graduates to create jobs for themselves through self-employment when he said:

"There must be a paradigm shift in the focus and orientation of our graduates towards employment opportunities. The realization of this objective lies with our universities to develop new curricula that will lay emphasis on self-employment." ( https://www.regenttimes.com/2022/03/26/buhari-urges-universities-to-develop-new-curriculum-on-self-employment/?utm_source=rss&utm_medium=rss&utm_campaign=buhari-urges-universities-to-develop-new-curriculum-on-self-employment)

In Nigeria, major businesses are done through incorporated entities. Can one then imagine how a newly incorporated company possibly by a group of fresh graduates will now be required to set money aside to process CAFA? This will simply increase their cost of doing business and, ultimately, impede efforts at job creation, and economic growth and development. 

Concluding remarks – Urgent need for paradigm shift

Nigeria is currently passing through a highly precarious and unwarranted situation. It is currently at its lowest ebb in fiscal matter. The country is at the mercy of its creditors when it is projected to spend more than 92% of federal budgeted revenue to service debt ( https://guardian.ng/news/nigeria-to-spend-92-of-2022-revenue-on-debt-servicing-imf-projects/). There is therefore urgent need for paradigm shift in the way fiscal matters are handled in Nigeria. The prognosis shows that if this is handled differently in line with international best practices, there is bound to be a different result. There are ample examples to buttress this position.

In 2001, more than 80 years after the country has expended scarce resource on telecommunication service, it threw open the door of the industry to the private sector. The country not only earned unexpected whopping sum of $1.0billion from auctioning the GSM licences, by 2021 (about 20 years after), just one of the operators accounted for 13.5% of the total taxes collected by the Federal Government. The company, directly and indirectly, paid N757.6bn out of N6.4trn tax revenue in that year (https://punchng.com/mtn-nigeria-paid-n757bn-tax-in-2021/). With appropriate sector reforms and improvement in the business environment, the number of such successful businesses can be multiplied with the attendant tax revenue growth acceleration for the government. This should be a top priority for the government as its revenue collection drive can only be successful when businesses thrive.

The major paradigm shift that is expected of FIRS is institutional reform to position it for effective service delivery in a digitalized era. This will entail total organizational transformation encompassing a robust digital technology deployment, process efficiency and human resource capacity building. It must have the courage to activate its compliance enforcement machinery and prosecute tax offenders in accordance with the provisions of the law. To the best of my knowledge, there is not a single tax defaulter that has been successfully prosecuted and jailed as provided in the law. It is difficult for anyone who is not personally determined to protect its name to take tax matter serious in Nigeria. The FIRS should therefore take the bull by the horn and lead us out of the wood by taking appropriate forward-looking initiatives that will promote the culture of voluntary tax compliance in the country. Until then, asking the already fully or partially compliant companies to produce CAFA is not the solution.

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