Certificate of Acceptance of Fixed Assets and the Capital Allowance Entanglement - written by Olufemi Idowu and Aisha Mundi

Introduction

The Nigerian business community, on Monday 9th May 2022, received with great surprise a directive from the Federal Inland Revenue Service (FIRS). The FIRS, through the public notice, requested all Companies that have enjoyed capital allowances on their qualifying capital expenditure (QCE) of N500,000 and above, between 2016 and 2021 years of assessment to submit the Certificate(s) of Acceptance issued by the Industrial Inspectorate Division of the Federal Ministry of Industries, Trade, and Investment. The Service further opined that any taxpayer that fails to comply with its directive may forfeit capital allowances already claimed for the relevant years of assessment and be exposed to additional income tax assessment for the period. A deadline of 31st October 2022 was given by the FIRS to Companies to ensure full compliance.

Basis of FIRS Circular

The FIRS public notice titled “submission of certificate of acceptance” was premised on the provisions of Sections 3 and 5(1)(a) of the Industrial Inspectorate Act, Cap. 18, LFN 2004 (as amended). The public notice also referenced the provisions of Section 26 of the Federal Inland Revenue Service (Establishment) Act, 2007 (as amended) and Section 60 of the Companies Income Tax Act (CITA).

Matters Arising

The Industrial Inspectorate Act (“the Act” or “IIA”) was enacted in 1970 to establish the Industrial Inspectorate Division (IID) in the Federal Ministry of Industries. Under the provisions of Section 2 of the IIA, the IID is expected to investigate any proposed, new, and existing trade or business that requires industrial machinery and other equipment, plants, buildings and other permanent or temporary fixtures on land for production of goods and services for sale. In addition, the Act expects the IID to obtain relevant information on economic trends in Nigeria and other countries, thus providing government with strong basis for many valid investment and economic decisions.

Section 3 of the Act (as amended) provides a threshold of not less than N500,000 for both new and additional capital expenditure that requires IID’s certification. Upon the IID’s satisfaction, a certificate of acceptance shall be issued to the applicant. However, it is important to note the following:

1. Section 3(4) of the Act imposes a fine of N1,000, upon conviction, on any person who fails to notify the Director of his intention to incur capital expenditure. It is pertinent to note that only a court of competent jurisdiction can convict a person and not any agency of government such as the FIRS.
2. Section 3(4) of the IIA also suggest that a person does not necessarily need to comply with the provisions of Section 3 of the Act where it can be proven that there is a reasonable excuse for non-compliance. Where this is the case, will the FIRS deny a taxpayer the claim of capital allowance on the ground that the certificate of acceptance cannot be provided or will FIRS explore other legal means to verify the beneficial ownership of the taxpayers’ qualifying capital expenditure?
3. According to the World Bank data indicator, $1 was worth N0.71 in 1970. The threshold of assets that the Act requires certification at that time amounted to N20,000. Even with subsequent amendment to the threshold of the assets from N20,000 to N500,000 and with the constant depreciation of the Naira over time, there is no doubt that the existing minimal asset value of N500,000 still requires a review in order to reflect current economic realities.
4. Based on precedence, the FIRS has requested copies of asset purchase receipts even where affected taxpayers had provided their certificates of acceptance.

In accordance with the provisions of Section 5(1)(a) of the Act (as amended), the FIRS and other relevant agencies of government are mandated “to take account of any fact” in the certificate of acceptance for the purpose of carrying out their work. This implies that whenever the certificate is presented by the holder to the FIRS, there will be no basis for rejecting the facts therein as they are deemed to have been certified by the Director of the IID.

There is no doubt that the FIRS is empowered by law to recognize the claim of capital allowance by taxpayers on their qualifying capital expenditure, where such taxpayers have proven to the satisfaction of the FIRS that they have duly incurred the qualifying capital expenditure. However, where a taxpayer is unable to provide a certificate of acceptance for its qualifying capital expenditure, this should not be a sufficient ground to deny such taxpayer the right to claim capital allowance if it can be confirmed through other third-party evidence that such expenditures are wholly, reasonably, exclusively, and necessarily incurred for the purpose of the business.

Without a doubt, the Second Schedule to the Companies Income Tax Act lists the conditions for the claim of capital allowance to include the taxpayer being the beneficial owner of the assets and the assets being in use at the end of the basis period for the purpose of trade or businesses carried on by that Company. Clearly, the procurement of a certificate of acceptance is alien to the CITA which regulates the grant of capital allowance in Nigeria. Thus, the FIRS cannot introduce such requirements into tax administration by an administrative fiat.

The above therefore raises the question as to whether the FIRS assumes that there are no other acceptable means of verifying the validity of a qualifying capital expenditure?”

Conclusion

According to the most recent World Bank annual ratings, Nigeria currently ranks 131 among 190 economies in the ease of doing business. This has been the best rating for the country over the past six years, especially coming from a 170th position in 2014. Apart from the poor state of infrastructure and fragile security architecture bedeviling the nation, it is important to understand that bad economic policies and moribund tax laws that do not reflect current economic realities, but only put pressure on expenditure profile of Companies, could affect the ease of doing business as well as foreign direct investment into the country.

Therefore, a legislative intervention is required urgently to repeal or amend Section 3 of the IIA to reflect current economic realities. It is expected that necessary amendment(s) to the Act will be passed through the Finance Act 2022. Until then, taxpayers are advised to immediately carry out a cost-benefit analysis of obtaining the certificate of acceptance in view of the fiat issued by the FIRS and its threat to withdraw capital allowances already enjoyed between 2016 and 2021 years of assessment.

This Article is Co-Authored by Olufemi Idowu and Aisha Mundi