June 21, 2022
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;
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.