One of the important operating decisions a company makes is the establishment of a model for setting the prices of its products and services. The ability of a company to meet its daily financial obligations and profitability largely depends on the pricing model. Given that companies (asides non-profit organizations) operate to maximize profits in the long run, the cost-plus pricing model is usually adopted by companies in certain industries as it guarantees recovery of cost and profitability.

The idea behind cost-plus model involves adding a markup percentage to the cost of a product or service, in the determination of its selling price. The mark-up percentage could either be stipulated by the customer (as it is usually the case in a contract agreement) or by the company (as it is the case with representative offices and retail companies). Despite the apparent seamlessness of this model, when a company's products or service offerings are priced on the basis of cost-plus, there is an implicit assumption that the total amount received (cost plus mark-up) represents the company's revenue.

In order to improve comparability across industries and companies using different business models, the International Accounting Standards Board (IASB) issued a new accounting standard: International Financial Reporting Standard (IFRS) 15 which establishes the principles for revenue recognition. Although, IFRS 15 does not specifically address cost-plus arrangement, it requires a company to assess whether it is a principal or an agent for each specified service promised to the customer. The ascertainment of a company's role as a principal or as an agent requires judgement in some circumstances, and different conclusions can significantly affect the amount and timing of revenue recognized.

This article seeks to consider the definition of gross turnover as stipulated by the Finance Acts, 2019 & 2020, the diverse interpretations by taxpayers and the tax authority and the corresponding tax implications for companies operating a cost-plus model.

Definition of Gross Turnover per Finance Acts, 2019 & 2020

Prior to the enactment of the Finance Act (FA) 2019, there was no explicit definition of "gross turnover" in the provisions of the tax laws. In 2020 however, the Companies Income Tax Act (CITA) was amended by the FA 2019, and it defined gross turnover as "the gross inflow of economic benefits (cash, revenues, receivables, other assets) arising from the operating activities of a company, including sales of goods, supply of services, receipt of interest, rents, royalties or dividends".

The FA 2020 further amended the CITA and now defines gross turnover to mean "the gross inflow of economic benefit during the period arising in the course of the operating activities of an entity when those inflow results in increase in equity, other than increases relating to contributions from equity participant, including sale of goods, supply of service, receipt of interest, rent, royalties or dividends".

Based on the above definitions, the meaning of gross turnover introduced by the FAs was aimed at addressing seeming ambiguities that have until then, subsisted in the provisions of the tax laws. The definition of turnover for tax purposes is important in determining the minimum tax payable by companies and the threshold for exemption from companies income tax, amongst other tax considerations.

Companies Operating Cost-Plus Model

There are a number of entities adopting the cost-plus model in Nigeria based on the structure of their business operations. This is particularly a common model adopted by representative offices of non-resident companies where the representative provides business support in form of logistics and management of operations in Nigeria. The mark-up on the reimbursed cost may be determined by the company's targeted internal rate of return on investment as agreed by the parties, subject to Transfer Pricing considerations.

Given the above, it is possible to assume that only the mark-up portion constitutes "payment" received for the services rendered and represents the economic benefit to the company. However, the reimbursed cost does not constitute "income" in the hands of the company, since it is cost incurred on behalf of another party. Other proponents are of the view that the entire amount received i.e. the mark-up and the reimbursed costs, constitute "payment" received for the services rendered, which in turn is the economic benefit to the companies operating this model. Therefore, this ambiguity has been subjected to several interpretations by all stakeholders, since what should be classified as turnover for tax purposes remains unclear for companies operating a cost-plus model.

Tax Implications of the Definition of Gross Turnover

Based on the recent amendments to the provisions of the tax laws, the interpretation adopted to the definition of gross turnover would largely impact the tax base for two major tax types as enumerated below:

A Companies Income Tax (CIT)

i Determination of Income Tax Rate for CIT Purposes

In order to compute the CIT payable by any company, the FA 2019 provides the income tax rate applicable for companies, based on the size of each company, as determined by its turnover. A small company is defined as a company which has an annual gross turnover of ₦25 million and below and such is assessed to CIT at 0%. A medium-sized company is one with annual gross turnover of over ₦25 million but below ₦100 million, and such a company is assessed to CIT at 20%, while a large company is defined as a company with gross turnover of ₦100 million and above, and liable to CIT at a rate of 30%.

Consequently, the definition of gross turnover (based on the FA 2020) plays a vital role in the determination of the appropriate income tax band (small, medium or large) that a company should be placed for CIT purposes. This definition emphasizes on the gross inflow of economic benefits during the period, arising in the course of the operating activities of an entity. This implies that a company operating a cost-plus model could be wrongly categorized and thus over-taxed, where the reimbursed costs are erroneously included in determining its gross turnover, rather than just the mark-up (its economic benefit). This is especially important, as the reimbursed costs are mere pass-through payments and do not represent inflows of economic benefits which result in increase in equity of the recipient.

Undoubtedly, this could result in a faux outlook or artificial reporting whereby a company which ordinarily is a small company by virtue of the definition of gross turnover, is categorized and taxed as a medium-sized/ large company, which is generally an economic loss to the company.

Taxpayers operating this model are encouraged to properly delineate their mark-up, which constitutes economic benefit to the company, in their books of account, in order to aid proper review and tax band categorization as and when required.

ii. Determination of Minimum Tax Applicability

The Finance Act 2019, which amended Section 33(2) of CITA, provided that minimum tax be computed as a percentage of gross turnover. In determining the applicability of minimum tax, the Federal Inland Revenue Service (FIRS) in its Information Circular 2020/04 - Clarification on Sundry Provisions of the Finance Act 2019 opined that for the purposes of minimum tax, gross turnover includes all operating incomes or revenues anywhere embedded. While the FIRS' position on turnover per its circular appears to be consistent with the definition in FA 2019, the FIRS' position does not consider the peculiarities associated with entities that operate a cost-plus model. Specifically, the inclusion of reimbursed costs as part of gross turnover and possible misconception that payment of reimbursed costs represent "inflows" to the recipient, are chief among the risks associated with the FIRS' view.

Based on the definition of gross turnover per FA 2020, the reimbursed expenses would not result in increase in equity for the recipient which operates as an agent of its parent, as it would only net off the expenses incurred on behalf of the parent company.

Further, in line with IFRS 15, when a company that is an agent satisfies a performance obligation, it recognizes revenue in the amount of any fee or commission to which it expects to be entitled, in exchange for arranging for other third parties to provide services. On the contrary, when a company that is a principal satisfies a performance obligation, it recognizes revenue in the gross amount of consideration to which it expects to be entitled in exchange for those services transferred.

The FIRS' position has also been incorporated into FIRS' online platform for filing tax returns (TaxProMax) which has been built to automatically adopt the entire amount reported as the gross turnover (including reimbursed costs) per the financial statements, in the case of companies operating a cost-plus model. Sadly, the consideration of the entire revenue (including reimbursed costs) and not the mark-up or service fee portion only is not in line with the provisions of FA 2020.

B. Value Added Tax (VAT)

i. Threshold for charging VAT and filing monthly VAT returns

Section 15 of the Value Added Tax Act (VATA) (as amended) by the FA 2019 provides that "a taxable person who, in the course of a business, has made taxable supplies or expects to make taxable supplies, the value of which, either singularly or cumulatively in any calendar year is ₦25million or more, shall render to the service, on or before 21st day of every month in which this threshold is achieved..." VATA further defines taxable supplies to mean any transaction for sale of goods or performance of a service, for a consideration in money or money's worth.

In line with IFRS 15, consideration is a payment made by one party to another in exchange for the transfer of something of value. In addition, transaction price is defined as the amount of consideration to which an entity expects to be entitled in exchange for transferring promised services to a customer, excluding amounts collected on behalf of third parties.

This implies that companies with annual turnover of not more than ₦25million are exempted from charging VAT. Given that a company operating a cost-plus model has both a mark-up and a reimbursable portion in its selling price, it could be erroneously assumed that the entire inflow (including reimbursed expenses) is its turnover for VAT purposes. For example, where a company has an overall contract value of ₦30 million, with a margin/fee portion of ₦15 million inclusive, the overall contract sum could be assumed to be its taxable supply (i.e. turnover). As a result, such company could also be assumed to have surpassed the ₦25 million threshold given the overall contract amount, and thus required by the laws to charge and file VAT. The implication is that a company that should ordinarily be exempt from the administrative obligations of VAT, based on the turnover threshold stipulated by the Finance Act, will be required to charge and remit VAT.

Further, based on the provisions of the law, a company should only be assessable to VAT on the mark-up portion, as reimbursable costs are not liable to VAT. This position is reinforced by the ruling of the Tax Appeal Tribunal (TAT) in the case of Brasoil Oil Services Company v. FIRS delivered on 2 June 2016. In the judgement, the TAT delivered that WHT and VAT are not applicable on reimbursable costs and that only the markup portion of a contract should be assessed to WHT and VAT, provided that what constitute reimbursable expenses are stated in clear terms in the relevant contract.

In our view, only the mark-up portion constitutes "consideration" received by a seller or provider of service. In the case of companies operating a cost-plus model, it can be concluded that the filing obligation for VAT purpose would only be triggered when the mark-up/ service fee earned by the company, meets the ₦25 million threshold.


Although the Nigerian tax and regulatory space has witnessed significant changes in terms of amendments to its laws in recent times, it is apparent that some additional clarifications are still required, in order to align with one of the major canons of taxation - clarity. Based on the provisions of the Finance Acts, it appears that only the mark-up or service fee portion of turnover in the financial statements should form the basis for determining "turnover" for companies operating a cost-plus model for tax purposes. Companies operating a cost-plus model may adopt a method that permits express disclosure of the mark-up or service fee portion of turnover in their financial statements, while complying with the requirements of relevant accounting standards. Taxpayers are advised to engage their tax advisers for further guidance.

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.