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:

  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:

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:

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.

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.

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