Certificates Of Acceptance Of Fastened Property Is Not Statutorily Required For Grant Of Capital Allowance – Earnings Tax

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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:

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.

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.

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.

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.

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?

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:

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.

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:

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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