The Tax Appeal Tribunal (“TAT”) in Lagos, has held in the case of INT Towers Limited (“INT Towers” or “the Company”) v. Federal Inland Revenue Service (“FIRS”) that network facilities providers are not telecommunication companies and as such, are not liable to pay the National Information Technology Development Agency (NITDA) Levy.
Highlight of the Case INT Towers Limited is a telecommunication infrastructure support service provider. The Company has been filing its annual tax returns since it commenced business as a telecoms support service provider without the NITDA Levy. However, upon filing the 2021 YOA returns via FIRS TaxProMax platform, the Company was charged 1% of its profit before tax as NITDA Levy under the provisions of the NITDA Act, on the basis that the entity is a telecommunications company.
The Company objected to the assessment on the ground that the FIRS has misconceived its nature of business since it is merely an infrastructure service provider and does not render any telecom service whatsoever. Amongst other issues, the Company prayed the TAT to determine whether the Company is a telecoms company and whether it is liable to payment of the Levy computed at 1% of PBT in line with the provisions of the NITDA Act.
On the other hand, FIRS argued that the Company was a licensee of the Nigerian Communications Commission (NCC) and also a beneficiary of the pioneer status incentive under the telecoms industry. According to FIRS, the combined effect of these is that INT Towers qualifies as a telecoms company which is subject to the provisions of the NITDA Act, and by extension liable to pay the NITDA Levy.
In determining the case, the TAT held that the Company’s license is to provide infrastructure sharing and colocation services as a network facilities provider, thus merely a service provider to entities operating in the telecoms sector, and not in itself a telecoms company. Consequently, the assessment raised by FIRS in this regard was discharged.
OUR COMMENTS The crux of the case is determining whether or not the network facilities providers, such as INT Towers in this case, which typically provide collocation services, are to be considered as telecommunications companies liable to pay the NITDA Levy.
Generally, the NITDA Act provides for the payment of a Levy of 1% of PBT of specific companies and enterprises with an annual turnover of ₦100m and above. These companies listed in the Third Schedule to the Act are:
GSM Service Providers and all Telecommunication Companies
Cyber Companies and Internet Providers
Pension Managers and Pension-related Companies
Banks and other Financial Institutions
Insurance Companies
From the above specification, it is clear that FIRS had categorized INT Towers as a telecommunication company which has a responsibility to pay the Levy. This brings us to the question: are network facilities providers the same as network service providers?
The Nigerian Communications Act 2003 defines a ‘network facilities provider’ as ‘a person who is an owner of any network facilities’, while defining ‘network facilities’ as ‘any element or combination of elements of physical infrastructure used principally for or in connection with the provision of services…’. These definitions do not infer the provision of ‘network service’ which was distinctly defined as ‘a service for carrying communications by means of guided or unguided electromagnetic radiation’.
The above-quoted definitions prove that network facilities providers differ from network service providers, and the TAT in the instant case agrees.
This judgement is instructive as we align with the thoughts of the TAT in this regard. Based on the provisions of the relevant extant laws and even the nature of activities carried out by the entity, it is clear that INT Towers as well as other entities carrying out similar services cannot be deemed to be telecommunication companies and as such not required to pay the NITDA Levy.
The main distinction to note here is the fact that a service provider’s clientele portfolio consists entirely of entities within a particular sector, does not by implication qualify the service provider as a company within the sector to which it renders services. This reasoning can be stretched further in comparing “insurance companies” mentioned in the law, to “insurance brokers” not mentioned.
Therefore, following the literal rule of interpretation of statutes, the NITDA Act only imposes the Levy on GSM service providers and telecommunications companies and not network facilities providers such as INT Towers.
We hope that the rationale behind this judgement is adopted and that the provisions of the law are strictly adhered to by the tax authority, to ensure that taxpayers are not exposed to tax liabilities to which they have no obligation. The classification of taxpayers on the Taxpromax has resulted to various disputes arising from wrong imposition of taxes on the entities. In order to avoid unnecessary disputes between the taxpayers and the tax authority, it is important that the Taxpromax platform be reconfigured to ensure that only qualifying companies are charged the NITDA Levy as well as other industry-specific taxes/levies.
Finally, taxpayers are implored to seek professional advice where there is uncertainty with regards to their tax obligations and responsibilities to avoid running afoul of the law.
A business plan is like a roadmap, a few lucky organisations may thrive without having it documented – though one exists within the mind of the driver – but having a documented plan certainly reduces the chance of losing focus and getting distracted anytime a seemingly bright opportunity comes along. Enterprises, whether large or small, cannot hope to significantly compete and expand in today’s global and fiercely competitive marketplace without effective planning. A business plan is a written document that details the company’s concept and all the necessary internal and external factors involved in starting a new firm in line with its business focus. It outlines the nature, context, and strategies for utilising the business’ prospects. The functional plans in finance, marketing, production or operations, information technology, and human resources are typically integrated into the overall business plan. A business plan is also a blueprint that outlines the entrepreneur’s goals and critical factors that will determine the success of a business. It must define where you are, where you want to go and your proposed route to get there. It is a valuable document important to entrepreneurs, investors, and also employees for several reasons, some of which are outlined below:
aids in determining the venture’s viability in a target market;
helps entrepreneurs launch their businesses;
the process of creating a business strategy forces the entrepreneur to consider potential obstacles to the venture’s success, as well as look deeply into its potential competitors;
helps in defining the best capital gearing, and becomes a tool with which to obtain finance by serving as a guide to investors;
primary stakeholders, i.e., the founders are forced to consider every possible facet of the business whilst working to develop the business plan (whether by themselves or in collaboration with a consultant);
it is expected to express the founders’ vision and objectives when well-written;
it assists in identifying the crucial factors that will decide the company’s success or failure;
as an employee who is a part of the process, it helps you assess your alignment with the company’s vision, and helps you better identify where you fit in and potentially what your growth opportunities are.
Given Pedabo’s experience over almost 3 decades, it begs the question – Without a plan, do businesses really stand a chance of success? We daresay that no business actually starts off without some modicum of a plan. Yes, it may not be documented. Yes, it may be in response to a quick opportunity that was spotted and not some innate vision or long-standing passion, or just in response to a need for survival, but inherently, there is some ‘plan’ that guides an entrepreneur into believing that he or she can deliver on a certain idea. Similarly, developing a business plan is generally considered as part of a required stage in the startup process in the majority of recommendations for entrepreneurs. As such, they must be seen to be valuable or at least seen to significantly increase the chances of success if so many individuals and research studies advocate for it!
There has been a lot of debate in recent years about the true value of business plans, particularly if their existence could be directly correlated to the success of a company. Some schools of thought infer that planning in itself has no guaranteed positive impact given that some businesses are able to achieve great success despite not having formal business plans. What, however, are the daily contextual realities of such companies? In our experience, we find that such companies are those where the owners / founders are very actively involved in the daily operations, and in the very early stages, almost every primary activity revolves around them and their daily direction as they are effectively the organisation’s roadmap. How truly sustainable is this? For many owners/founders who fall in this category and are forward-thinking, we have found that they very quickly realise that this comes at a high cost to their sanity and a high risk to the continuity of their businesses, and thus begin to seek out ways to structure – devolve their powers to team heads they can trust – develop systems & processes – document – to ensure their businesses can operate successfully without them. It is important to note also, that according to research, the question is not actually about “developing a plan” or “not developing a plan”, but rather “what kind of plan do you undertake and how much effort are you required to put into it to succeed?”
Planning can speed up a Company’s Growth by up to 30 percent According to a research by the University of Oregon, businesses that plan, grow 30% quicker than those that do not. This study indicated that while many firms can succeed in the short term without a plan, those with a plan grew quicker, and overall, were more successful than those without one.
Another study from the same source indicated that fast-growing companies — those with sales growth of over 92 percent from one year to the next — typically had business plans, which further supports the link between planning and rapid growth. In fact, 71 percent of rapidly expanding businesses have working plans. They develop targets for sales, make budgets, and monitor these plans actively. These businesses frequently use terms like strategic plans, growth plans, and operational plans instead of constantly referring to their plans as “business plans”, and this is because they are agile and constantly evolving with the business environment and competitors’ performance. Whatever their long or short-term plans are called, they are all working together towards the organisation’s focus on planning for its future.
Planning enhanced business success was the conclusion, according to a study by Brinckmann, J., Grichnik, D., & Kapsa, D. (2010) that compiled research on the expansion of 11,046 businesses. Interestingly, this same study discovered that planning helped established businesses much more than it helped startups. The reason for this is probably that established companies are better familiar with their clients’ demands than are startups. Planning for an established business entails fewer guesses or presumptions that must be supported, therefore the strategies they create are better informed given the availability of working data. In Nigeria, 61% of Nigerian startups fail in the first 9 years (BusinessDay, 2020). Similarly, in the US, it is noted that about 543,000 new firms open each month, yet only seven out of ten survive in the first two years, while only five out of ten survive after five years. Surprisingly, 70% of companies that last for five years are said to do so because they have a comprehensive business plan (Nazar, 2013).
Sometimes it seems that only large organisations benefit from having a written (formal) business strategy in place. Obviously, because of the resources required, there are few small enterprises that have formal documented business plans, and even fewer that have some informal owner / founder-managed plans. According to 2015 Barclays data, 23% of small enterprises in the UK do not have a business plan. In the UK, formal (written) business plans are present in around half (47%) of small enterprises, while informal (spoken) plans are present in the remaining 30%. (Talk Business, 2016).
Further, it is said that more than 30% of small enterprises fail within the first three years of operation if they do not have a business strategy (Francis J. Greene & Hopp, 2017). Thus, the success rates for business plans appear to be evident.
In the First Five years, 50% of new Businesses Fail It is said that 50% of newly founded companies fail within five years; why is this? According to several schools of thought, it frequently occurs as a result of businesses ignoring the direction of a set business plan or the nonexistence of a plan to begin with. To emphasize, 25% of enterprises without a business plan fail within the first two years of operations. 10% of businesses fail within the first five years of operations, whereas only 6% fail within the first ten (SBT, 2017). In other words, the longer you stay in business, the more likely you are to learn from the marketplace and establish a set of working patterns (a plan) that could drive your success. If you had however devoted some time and resources to a study of those patterns prior to commencement, chances are that you could have saved your enterprise some deeply struggling years. Similar to major companies, small companies need to have a clear business plan – strategy and roadmap – if they want to succeed (Koulopoulos, 2016).
Summarily, to specifically address the question, what are the odds that a business will succeed without a business plan? A business can succeed without a business plan and there are indeed examples of such large companies– albeit outliers – that are able to succeed, especially, at the onset. However, it is more likely that organisations without a set business plan will make a lot of thoughtless errors and that their rate of growth would be greatly impeded, in comparison.
A strong business plan goes beyond market analysis coupled with vague revenue projections for an investor pitch. Like a professional sports team has a playbook, a strong business plan has one too; action plans about what to do when the business is at the final and critical moment or moments of a tense, important, or desperate situation; including a feature roadmap, a target market strategy, and secondary markets to explore when the primary markets are saturated; action plans in case the intended target market’s response is different from that which was anticipated; techniques for strengthening the team as the business expands, etc. These are invaluable learnings from the process of development of a business’ strategy and associated plans. Most businesses that just move with the flow do not end up getting very far, though they may not join the classification of failed enterprises. They, however, eventually realise that they are wasting their time in an endless cycle of repetitive mistakes.
CONCLUSION Creating a business strategy is an essential step in ensuring the long-term success of any enterprise. The advantages of having a business plan far outweigh the inconvenience or the resources expended, as there is definitely no disadvantage in taking a deeper look into the business area you intend to venture. Business planning helps businesses not only succeed but also have a better chance of surviving any industry disruptions, evolution, or unforeseen occurrences. It has a way of setting an enterprise up for effective continuity.
The good news is it is not all gloom and doom, even if perchance you realise that you did not get off to a great start or the last year has been you potentially playing ‘catch up’, or you are able to identify your enterprise in one of the less exciting growth stages discussed above, it is very possible to retrace your steps, put in the time, effort and resources required, and set your enterprise up for a new beginning, and what better time to look into those possibilities than at the beginning of a new year.
To get you started, below are some key activities to keep in mind when creating a business plan for your startup or a growth plan for your existing business:
set goals – financial goals, brand goals, client goals, and staffing goals (to mention a few). Be clear and explicit about what you want your organisation to attain;
you can decide to forego the 80-page business plan and instead have a business model canvas or 3 sacred strategy slides; concentrate on basic preparation that outlines your objectives and compiles information on your market and your clients’ needs that will facilitate your meeting those objectives;
understand your strengths so you can optimise and leverage them and identify your weaknesses so you can properly align with the market opportunities that perhaps do not require those skills whilst you grow;
know every aspect of your industry/market, so you can adequately identify opportunities and avoid threats where able. You cannot properly position your enterprise to penetrate a market you do not understand;
start early with your planning – plan for the year, for each quarter, to achieve your annual goals, and know what targets you must reach each month, each week. Break down your goals;
as you gain more knowledge about your operations, frequently modify your plan;
more essentially, revisit your strategy, develop and update it as you gain knowledge about your market and clientele;
develop a roadmap, but do not just file it or store it in a drawer. Monitor your performance to see if you are making progress toward your objectives. Your plan will assist you in identifying what is effective and what is not, and these adjustments can continue as you grow your firm.
The management consulting team at Pedabo is equipped to assist you with your corporate strategy review and/or development to get you started on the right path for 2023.
Any enquiries? Send an email to mc@pedabo.com
News
THE NIGERIA STARTUP ACT 2022: GOVERNMENT INTRODUCES NEW TAX REGIME FOR STARTUPS
The Nigeria Startup Act 2022 (“Startup Act” or “the Act”) was recently signed into law by the President of the Federal Republic of Nigeria, with a commencement date of 19 October 2022. The Act provides for the establishment and development of an enabling environment for technology-enabled startups in Nigeria. As a means of creating this enabling environment, Part VII of the Act contains tax and fiscal incentives which qualifying startups may enjoy in a bid to encourage participation and investment in startups in the country.
The Act defines a ‘startup’ as a company in existence for not more than ten (10) years, with its objectives as the creation, innovation, production, development or adoption of a unique digital technology innovative product, service or design. The startup to which the Act will apply must also be a holder or repository of a product or process of digital technology or be the owner/author of a registered software, with at least one-third local shareholding held by one or more Nigerians as founder or co-founder. The Act does not apply to any organization which is a holding company or subsidiary of an existing company not registered as a startup.
Where a company qualifies as a startup in line with the Act, such company is eligible for ‘labelling’ by the issuance of a certificate by the Secretariat of the National Council for Digital Innovation and Entrepreneurship (“the Council”).
Tax & Fiscal Highlights of the Startup Act
Expedited Pioneer Status Incentive (PSI): Labelled startups which fall within qualifying industries under the PSI scheme, may apply through the secretariat to receive expeditious approval from the Nigerian Investment Promotion Commission for the grant of tax reliefs and incentives.
Relaxation of Fiscal Incentives Conditions: The Act provides that the Federal Government through the Ministry of Finance, may ease the requirements necessary for a startup to enjoy existing fiscal incentives, irrespective of the provisions of any other law.
Exemption from Companies Income Tax: A labelled startup may be entitled to exemption from the payment of income tax in line with the provisions of the Industrial Development (Income Tax Relief) Act. The exemption will cover an initial period of three (3) years and an additional two (2) years if the entity still qualifies as a labelled startup. To determine the exemption period, the date of issuance of the startup label will be deemed the commencement of the tax relief.
Unrestricted Tax Deduction of Expenses on Research & Development: Labelled startups are eligible to enjoy full deduction of expenses on research and development provided that these expenses are wholly incurred in Nigeria. As an added incentive, startups are not bound by the restrictions contained in the Companies Income Tax Act in respect of these expenses.
Reduced Withholding Tax (WHT) for Qualifying NRCs: Where a non-resident company provides technical, professional, management and consulting services to a labelled startup, the income derived by such NRC in respect of the services provided is subject to WHT at 5%. The WHT deducted is considered the final tax in respect of such income.
Exemption from Industrial Training Fund (ITF) Contributions: Labelled startups are exempted from payment of the ITF Levy provided they offer periodic trainings to the employees during the period they qualify as a startup.
Exemption from Capital Gains Tax: Chargeable gains accruing to an investor of any kind from the disposal of assets with respect to a labelled startup are exempt from capital gains tax provided that such assets being disposed have been held in Nigeria for at least 24 months.
30% Tax Credit to Investors: An investor in a labelled startup is entitled to a tax credit of 30% of the investment in the startup but such tax credit is to be applied only against any taxable gains from the investment.
Guaranteed Repatriation of Investment Net of Taxes: Foreign investors are guaranteed repatriation of proceeds of their investment in a labelled startup through an authorized dealer net of all taxes, provided that the investors had obtained a Certificate of Capital Importation (CCI) as evidence that the capital injection was through approved channels.
Other Fiscal Obligations: A labelled startup has an obligation to: Comply with extant laws governing businesses in Nigeria Provide information on total assets and annual turnover achieved from the period the startup label was granted Maintain proper books of accounts in line with reporting obligations under extant laws Provide an annual report on incentives received and advancements made by virtue of the incentives.
Our Comments
The enactment of the Startup Act is indeed a laudable initiative by the Federal Government, especially considering the need to encourage young Nigerian entrepreneurs in the field of technology and innovation. The infusion of tax incentives in the Act demonstrates not just the desire of government to attract investments to the sector but also to help see startup businesses beyond their years of formation by lightening their tax burdens during their early years.
Although the Startup Act is targeted at entities which create, develop, or adopt unique digital technology innovative products, services or designs, these entities are still bound by the provisions of other extant tax laws, other than where the Startup Act expressly states otherwise. The implication therefore is that labelled startups must be conversant with the various tax and non-tax laws that impact their businesses, while noting the supremacy of the various positions.
We note that following the passing of the Act, small and medium scale enterprises (SMEs) are expected to have easier access to government grants and other loan facilities administered by the Central Bank of Nigeria and other statutorily empowered bodies. If this is achieved as intended, it will positively impact on the economy as SMEs constitute one of the largest employers of labour in the country, contributing about 48% to the national gross domestic product (GDP) in the last five years. This contribution can only go up in the years following the implementation of the Startup Act.
However, we expect to see effective inter-agency collaborations in order to enable the Act achieve its aims. Of particular interest is the collaboration between the National Council for Digital Innovation and Entrepreneurship, the Federal Inland Revenue Service (FIRS) and the Nigerian Investment Promotion Commission (NIPC), with respect to the implementation of the tax reliefs and incentives granted to startups as well as to investors of various genres.
Finally, we implore founders, investors and other stakeholders of startups to seek professional advice particularly in respect of the possible tax obligations, reliefs and incentives that are available to them under the Act, as this will aid compliance which will in turn help to generate the desired results.
News
ELECTRONIC MONEY TRANSFER LEVY REGULATIONS 2022: WHAT TAXPAYERS NEED TO KNOW
The Electronic Money Transfer Levy Regulations
(“EMT Levy Regulations”) was recently issued by the Honourable Minister of
Finance, Budget and National Planning, pursuant to the powers conferred on her
by virtue of section 89A (3) of the Stamp Duties Act (as amended by the Finance
Act, 2020). The law provides for the
charge of EMT Levy on electronic transfers of money in the sum of ₦10,000 and
above. The EMT Levy Regulations have now been issued to provide clarity and aid
compliance to the provision in the Stamp Duties Act, given the controversial
issues regarding the administration of the levy.
Highlights of the EMT Levy Regulations
The commencement date of the Regulations is set at 15 June 2022.
For the EMT Levy, the Regulations defined banks to include ‘all banks and other financial institutions’ as defined by BOFIA 2020.
The singular and one-off ₦50 charge on qualifying transactions is to be imposed on the account receiving the money.
The receiving bank has the responsibility to collect and remit the EMT Levy.
Transfers of currencies other than the Naira are also subject to the EMT Levy charge at an exchange rate to be determined by the Central Bank of Nigeria.
Only the Federal Inland Revenue Service (FIRS) is authorized to administer the EMT Levy by assessing, collecting, and giving account of the Levy.
In case of walk-in customers who are the beneficiaries of transfers but have no account with the receiving bank, the Levy is to be collected from the amount payable to the receiver and remitted to FIRS.
Banks are now saddled with the responsibility of maintaining a daily detailed list of cancelled and reversed transactions on which EMT Levy had been charged for the purpose of reconciliation and ultimate refund to the customer.
Banks are also now expected to file a monthly report, not later than the 21st day of the month following the month of the qualifying transactions on which EMT Levy had been collected.
All records relating to electronic money transfers including reversals and cancellations are to be kept by the banks for at least seven (7) years from the date the transactions occurred.
The Regulations imposed the following penalties on defaulting banks:
Failure to collect the EMT levy attracts a penalty equal to 150% of the uncollected Levy
Failure to remit within the specified period attracts 100% of the amount collected but not remitted, plus a penalty of 50% of the unremitted levy, and interest at the prevailing rate.
Failure to render returns or rendering incorrect returns attracts a penalty equal to 10% of the amount for which the returns were not rendered or incorrectly rendered.
Our Comments
The issuance of the EMT Levy Regulations is a long-awaited
development because the levy was introduced via Finance Act 2020 which became
operational on 1 January 2021. We commend the Honourable Minister of Finance for
providing the Regulations as they have clarified some lacunae in the phrasing
of Section 89A of the SDA which had hitherto led to subjective interpretations.
A major clarification that the Regulations
have made is with respect to the party responsible for bearing the burden of
the EMT Levy, as well as the compliance obligations of the banks in this
regard.
It is also worthy to note that the
responsibility to collect this Levy is not imposed only on deposit money banks,
which was the initial understanding in certain quarters. Going forward, all financial
institutions, including digital payment platforms, are now agents of collection
on behalf of the FIRS.
While we expect that the penalties specified in the Regulations will not be imposed on any acts of non-compliance (especially by other financial institutions) that predate the issuance of the regulations, we also expect that all financial institutions covered will immediately put in place the systems and logistics required to ensure strict compliance. It is hoped that such organizations will seek professional advice where any doubts still exist as to their obligations under the Regulations.
News
NEW MARGINAL FIELDS EMERGE AS FEDERAL GOVERNMENT ISSUES NEW LICENSES
The Nigerian Government on Tuesday 28th
of June 2022, through the Nigerian Upstream Regulatory Commission (“The
Commission”) awarded forty-one (41) Petroleum Prospecting Licenses (PPL) for
marginal fields out of the fifty-seven oil fields offered in the bid round
launched in 2020. The awardees have
satisfied all conditions contained in the Petroleum Industry Act 2021 (“PIA’ or
“the Act”) with the signature bonus fully paid. This will bring the total
marginal fields to eighty-seven, with seventeen of them not producing.
This development is coming on the heels of uncertainties
on the implementation of the PIA since it’s signing into law in year 2021. This
award of new PPLs under the PIA is indicative that the PIA implementation is now
in top gear as the new licenses will be fully governed by the provisions of the
PIA. Section 94 of the PIA stipulates that any marginal field which is not producing
prior to 1st January 2021 will be transferred to the government and
converted to a PPL. The PPL license will give the awardees exclusive and
non-exclusive rights to carry out petroleum exploration operations, carry away,
win and dispose of crude oil and natural gas. The duration of the license shall
be for an initial period of three years and the option to extend for another
period of three years.
Obligations of the New Licensees
Submission of an Environmental Remediation Plan
The awardees are expected to within six months
of the date of issue of their licenses submit for approval to the Commission an
environmental management plan. The Commission will review the plan and either
request for an amendment to the plan prior to granting approval or if satisfied
with the plan proceed to give its approval. As part of the approval process,
the licensees will pay a prescribed financial contribution to an Environmental
Remediation Fund and the contribution will be determined based on the size and
environmental risks that exist from the Company’s operations.
Submission of a work Program
The licensees are to submit a field
development plan to the Commission within two years after a declaration of
commercial discovery of crude oil. The Commission will review the field
development plan and issue a Petroleum Mining License (PML) or extend the duration
of the PPL. However, the PPL shall
continue to be in use until granting of the PML.
Host Community Trust Fund
The licensees must incorporate the Host
Community Trust Fund prior to the submission of the field development plan
after commercial discovery. This will form part of the criteria for the grant
of the Petroleum Mining Lease or extension of the duration of the PPL.
Licensees are to pay all government fees, royalties, rents and other statutory levies as provided in the Act.
Conditions for the Revocation of the Petroleum Prospecting License
The new licensees should be wary that the
licenses granted can be revoked if certain obligations are not met. Any of the
following events could lead to revocation of Petroleum Prospecting License:
Failure to conduct petroleum operations in accordance with best Industrial practices
Halting production for a period of 180 consecutive days without appropriate justification
Failure to pay government royalties, dues, rent or taxes that fall due
Assignment, novation, or transfer of the interest in the license to another party without consent from the Minister of Petroleum.
Declaration of bankruptcy or insolvency by a competent jurisdiction
Ownership wholly or partly, directly or indirectly by a serving public servant or a member of government
Failure to comply with the host community obligations under the Act
Conclusion
Overall, the conclusion of the bidding process and issue of the licenses is laudable as it is expected to shore up Nigerian’s crude production volumes and increase revenue generation for the country. It is also now more apparent that the implementation of the Petroleum Industry Act has been flagged off and most provisions in the Act are now fully operational. Further to the grant of the Petroleum Prospecting license, other activities that signify full commencement of the PIA include the take-off of NNPC Limited from 1st July 2022 and the unveiling of the Host Community Trust Fund implementation template at the award ceremony of the new licenses.
In view of this, companies in the Upstream and Downstream Petroleum sector are enjoined to begin to make appropriate arrangements for transitioning to the PIA regime, as applicable to their operations to avoid falling short of the law. We also believe that this upturn will hopefully bring about the much-anticipated change in the Petroleum Industry.
News
Certificate of Acceptance of Fixed Assets: Its Significance on Claims of Capital Allowances
Necessity
is said to be the mother of invention.
Necessity sometimes also leads to a rediscovery of previously neglected
resource. Governments in Nigeria and
their various revenue agencies appear to prefer the latter analogy, and they
tend to carry it to the extreme in some instances. We have witnessed quite a few attempts to shore
up internally generated revenue by simply reviving laws that had become archaic,
moribund and abandoned over the years.
Such initiatives have been taken without any effort at aligning the laws
to present day realities or considering the impact the implementation of the
laws will likely have on businesses and by extension the economy.
A
typical example of this scenario is the Stamp Duty Act (SDA), a law made in the
1930s and which has seen little or no modifications over the years, but which
was suddenly being paraded as capable of competing with crude oil for potential
revenue generation. Of course, when this
happens it is the organized private sector that becomes the victim, as series
of unending back duty compliance audits and reviews are initiated, with
spurious claims of liabilities and penalties for non-compliance. This takes a toll on businesses as a lot of
time and financial resources are used up in defending against or defraying the
liabilities.
As
with the SDA, the Federal Ministry of Industry has begun the process of
resuscitating the compliance requirements under the Industrial Inspectorate Act
(IIA) of 1970 by reminding companies of the need to obtain necessary approval
for their capital expenditures. This law
(IIA) was never repealed, but many companies have simply neglected to comply
with its provisions without the sanctions prescribed in the law.
It
therefore comes as no surprise that the Federal Inland Revenue Service (FIRS)
has now issued a Public Notice on the subject titled “Submission of Certificate
of Acceptance”. This Notice states, amongst other things, that in line with
Section 3 of the IIA, any person incurring qualifying capital expenditure (QCE)
of ₦500,000 and above must obtain a Certificate of Acceptance from the relevant
department of the Ministry of Industries, Trade & Investment in respect of
such QCE.
Overview
of Certificate of Acceptance of Fixed Assets and Claim of Capital Allowances
The
IIA established the Industrial Inspectorate Division (IID) in the Federal
Ministry of Industries for the purpose of investigating and following the
undertakings of industries including investments and other related matters.
Section 3 of the Act requires a person proposing to make capital expenditure of
not less than N500,000 on additions to existing assets or acquisition of new
assets respectively to notify the IID, who will carry out investigations into
the proposed, new, and existing undertaking involving the proposed capital
expenditure, and in particular, for the purposes of determining the investment
valuation of the undertaking. This means that companies intending to incur new
or additional capital expenditure must inform the IID of their intention, go
through the necessary verification process and where the IID is satisfied of
the value of the capital expenditure, issue the certificate of acceptance of
fixed assets (CAFA) to the Company.
On
its part, the Companies Income Tax Act (CITA) grants capital allowance to companies
who have incurred Qualifying Capital Expenditures (QCE) to acquire and
maintaining fixed assets such as building, land, equipment, vehicle, plants etc.
used for generating taxable profits. Capital Allowances are a deduction in lieu
of accounting depreciation and are meant to compensate the company (or
business) for the decline in value of non-current assets. This claim is made
over the useful life of the assets.
Para.
22 of the second schedule of CITA provides 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 so to do”. This means that where the company
has incurred a capital expenditure and intends to claim capital allowance, the
tax authority has the power to confirm the reasonability of such claim. This is
usually done by verifying the assets purchased, through appropriate third-party
documentation review and physical confirmations. The purpose for the
verification of these assets by the tax authority is to confirm the existence, ownership,
and value of the asset on which capital allowance will be claimed.
The
Act also identifies specific conditions that must be fulfilled before relief
for capital expenditure or capital allowance can be granted. These include;
A claim must be made by the taxpayer before the allowance can be granted
The company must have incurred the qualifying capital expenditure and the asset must be owned and used by the company on the last day of the period for the purposes of the company’s trade or business.
The ownership and usage of the asset by the company should not be in doubt as at the last day of the basis period.
Usefulness
of CAFA to Claim of Capital Allowances
While
the CAFA is not specifically required in CITA as a prerequisite to claims of capital
allowance on QCE, the law (CITA) however empowers FIRS to confirm the reasonability
of such assets and claims before granting capital allowance. Meanwhile, Section
5 of the IIA mandates FIRS, the Customs, Immigration and Prisons Services
Board; and any department of the Government of the Federation or of a State, to
take account of the CAFA issued by the IID in discharging their functions in
matters relating to confirmation and verification of assets. Therefore, where a
Company has obtained the required CAFA on a capital expenditure, such company
may be deemed to be covered from such additional investigation from FIRS.
Therefore,
the failure to provide the certificate of acceptance of fixed asset for a
qualifying capital expenditure, may lead to such company forfeiting its claim
of capital allowances on the basis that the company has not complied with the
necessary requirements of the laws of Nigeria, except in situations where FIRS
does not dispute the QCE. Similarly,
where a company has obtained CAFA for its investments in capital assets, FIRS
is obligated under Section 5 of IIA to rely on such certificate for the purpose
of verifying the QCE.
Though
FIRS has been granting capital allowances to taxpayers without the request for
CAFA, the House of Representatives Committee on Public Accounts recently chided
FIRS over its failure to request for CAFA before accepting the claim of capital
allowance by companies. This blame, has now prompted FIRS to issue the Public
Notice, the highlights of which are indicated below:
Companies which have enjoyed capital allowances on QCEs of ₦500,000 and above between 2016 & 2021 YOA are to submit the corresponding CAFA in respect of those QCEs to the FIRS
The CAFA is to be submitted to the appropriate tax office not later than 31 October 2022.
Failure by companies to comply will result in withdrawal of the capital allowances enjoyed by the affected companies for the stipulated period, thus leading to additional tax assessments.
Going forward, it has become mandatory for companies to provide a CAFA in respect of its QCEs, exceeding ₦500,000, incurred in each year of assessment.
Process
of Obtaining Approval under IIA
The
processes of obtaining this approval are as highlighted below:
Capital expenditure must not be less than ₦500,000
A notice must be given by the person proposing to start a new undertaking or incurring additional capital expenditure in the format specified in the First Schedule to the Act.
The notice shall be verified by the Director of IID by conducting a physical check on the site of any undertaking, inspection of any building, plant, or machinery and requesting for document relating to the purchase of such assets. In the case of second-hand equipment, additional information relating to the history of the equipment will be demanded for.
Upon satisfaction, the Director shall prepare and forward to the person carrying on the undertaking a certificate of acceptance of fixed asset (CAFA).
Conclusion
Certificate
of Acceptance of Fixed Asset (CAFA) is generally issued to evidence an approval
from IID for the purchase of assets valued at ₦500,000 and above, while capital
allowance is granted to companies that have incurred qualifying capital
expenditure for the purposes of a trade or business to generate taxable income.
It is worthy to note that, FIRS holds the power to verify the reasonability of
the asset, which is historically done in practice by relying on the CAFA issued
by IID.
The
neglect by FIRS to demand for CAFA, relying instead on its own verification of
the QCE of companies has contributed to the neglect by companies to comply with
the IIA, as doing so only leads to a duplication of efforts, and cost. However, with the National Assembly’s chiding
of FIRS for not conditioning capital allowance claims on the provision of CAFA,
and the consequent issuance of the Public Notice by FIRS, taxpayers are now expected
to comply with the IIA going forward. Taxpayers should particularly note FIRS’
stance on withdrawing capital allowances enjoyed between 2016-2021 YOA on QCEs
without the corresponding CAFA. Although this intended withdrawal is tantamount
to a retrospective application with no backing in law, it is recommended that
taxpayers provide the CAFA to avoid the imposition of additional tax
assessments.
It
is hoped that the government will update the IIA in the nearest future to conform
with its current objectives, and to align with current economic realities,
particularly as the threshold of ₦500,000 has become unrealistic. Nonetheless,
companies are advised to reappraise their compliance positions and update their
CAFA positions to avoid additional tax bills resulting from the portended withdrawal
by FIRS of previously claimed capital allowances.
INTRODUCTION Organisational structures have evolved since the 1800s, starting with the industrial revolution, when individuals were organised in groups to add parts to the manufacture of the products moving down the line of integration. Subsequently, the method with which tasks were executed by workers, so as to allow them to perform a single task most proficiently was established by Frederick Taylor’s Scientific Management Theory, and in the 20th century, a radical organisational design in which each major team made its own cars was established by General Motors.
Today, organisational structures are still changing and rather rapidly with newer models like virtual organisations and other flexible hybrid structures. As companies continue to evolve and increase their global presence, future organisations are expected to potentially embody more fluid, free-forming systems with member ownership, and an entrepreneurial approach amongst its members.
As a trellis supports a vine, organisational structures support corporate growth. The right structure provides direction and order to a company’s efforts, allowing goals to come to realization. People, their jobs, and their relationships find their rightful place in the scheme of the whole so that they may coordinate their efforts to achieve the greatest results. Also designing a successful organisational structure for your business involves analyzing the work that needs to be done and setting up a hierarchy that ensures work flows smoothly from one process to the next. An effective structure allows you to control business processes, assign accountability, enable rapid responses to opportunities and threats, deliver on promises, as well as empower employees to make decisions that allow the organisation to outwit the competition.
IMPORTANCE & BENEFITS OF ORGANISATIONAL STRUCTURING Having a structure in place can help with efficiency and provide clarity for everyone at all levels as it defines each employee’s job and how it fits within the overall system. It also ensures that departments can be more productive, as they are likely to be more focused on accuracy and speed, towards maximum performance. Simply put, the structure that an organisation chooses impacts its ability to effectively carry out its strategic objectives.
Upon commencement of operations of a business, it is typical for the owners and business drivers to focus on their core business of driving sales, and quite naturally, structural considerations, business design, and formal strategy development are often relegated to the back burner as they are seen as distractions. However, the 4 key operational business elements on which overall performance relies: People – experience, skills, and competence; Jobs – roles and responsibilities; Organisation – structure, processes, and operations by which the strategy is deployed, and; Leadership – individuals responsible for developing and deploying the strategy and monitoring results – are defined and guided by an organisation’s structure.
An understanding of the interdependencies of these business elements and their ability to adapt to change quickly and strategically is essential for success, particularly in a fast-paced and volatile business environment, and this ability is best prescribed by an effective organisational structure. Other Benefits of an effective organisation structure are as follows:
An organisation can choose to utilize one of the 4 most used structures;
Functional: the most common, often utilized by small-to-medium-sized companies;
Divisional or Multidivisional: aligned to products, services, or subsidiary operations;
Matrix: considered the most confusing and is least used, and;
Flatarchy: considered the structure of millennials, mostly used by startups with a high level of autonomy to employees and with the quickest time for implementation.
Given the apparent importance, the approach to enhance and most effectively structure organisations for increased productivity is a subject matter that has culminated in holistic fields of study. As a result, leaders should not make the choice lightly but rather contemplate a variety of aspects before determining which type of structure is most appropriate for their business, and these would include considerations such as specific business goals, the industry of operations, and the culture of the company and larger environment.
In conclusion, effective organisational structuring is essential for business success, through the identification of roles, clarity on hierarchy, speed of communication, accountability and increased productivity. It is however important to note that there is no one best structure, as it depends on the nature of the company, the industry it operates in, and the culture of the people within the wider operating environment.
Should you have questions on the above or require assistance in designing the optimal organisational structure for your business, please do not hesitate to send an enquiry to mc@pedabo.com.
REFERENCES
American Journal of Industrial and Business Management. “Organisational Structure: Influencing Factors and Impact on a Firm.” Accessed 15 Feb. 2022.
McKinsey. “A New IT Operating Model to Better Serve Employees.” Accessed 18 Feb. 2022.
Understanding Organizational Structure by Sophie Johnson
Organizational Structure by Will Kenton, reviewed by Amy Drury, facts checked by Ariel Courage.
News
FEDERAL HIGH COURT (TAX APPEAL) RULES 2022: WHAT TAXPAYERS MUST KNOW
The new Federal High Court (Tax Appeal) Rules (“the Rules”) have become operational, effective from 10 January 2022. The Rules, which repeal the Federal High Court (Tax Appeal) Rules of 1992, serve as a guide on procedures for an appeal against decisions of the Tax Appeal Tribunal (TAT) at the Federal High Court (“the Court”).
Five Highlights of the Rules
i. Security Deposit of Judgement Sum: Tax debtors are now mandated to deposit the judgement sum in an interest yielding account, failing which the tax appeal shall not be heard at the Court, and may be struck out or dismissed. ii. Leveraging of Technology: The Rules now permit the use of electronic means of serving Court processes and hearing notices. Permitted platforms include WhatsApp, emails, SMS, and others.
iii. Accelerated Hearing: The Rules provide that a judge to whom a tax appeal case is assigned is expected to give same ‘accelerated hearing.’ Although what constitutes accelerated hearing is not defined in the Rules, it infers that such cases are to be expedited and accorded some urgency to ensure that justice is not delayed unduly, given the typical timeline of the Nigerian justice system. iv. Part-Heard Matters not Affected: Provisions of the Rules are not to apply to matters which have been part-heard by the Court. That is, where hearing has commenced in a tax appeal, the matter will be concluded based on the previous guidelines. On the other hand, matters which are currently pending at the Court will be subject to the provisions of the new Rules.
v. Reduction of Timeline for Service of Briefs: The timeline for filing and service of both Appellant’s and Respondent’s Briefs has now been reduced to 15 days each, compared to the previous 30-day timeline. That is, the Appellant has 15 days within the service of the record of appeal, to file his written brief of argument and serve same on the respondent. Similarly, the respondent has 15 days to file and serve his brief on the appellant.
OUR COMMENTS
The issuance of the Rules is indeed commendable following the 30-year reign of the 1992 rules. Notable changes which are expected to ensure that taxpayers can seamlessly and speedily appeal against unfavourable decisions of the TAT include electronic service of processes, reduction in service timelines, and the accelerated hearing status of tax appeal cases. Also laudable is the fact that matters which have been partly heard will not be obstructed by the introduction of new procedures under the Rules. This will guarantee that ongoing causes are not needlessly delayed.
However, despite these creditable provisions, it is worrisome that taxpayers would now be required to deposit the judgement sum, as determined by the TAT, into an account to be maintained by the Chief Registrar of the Court. This is a prerequisite to hearing the appeal as the Rules expressly state that where there is no evidence of such deposit, the matter will not only remain unheard, but be struck out or dismissed.
It will also be recalled that the Federal High Court (Federal Inland Revenue Service) Practice Directions of 2021 had previously provided for the deposit of 50% of the assessed amount by the taxpayer into an interest yielding account of the Court, pending the determination of the application. This provision generated a lot of controversy amidst taxpayers and other stakeholders and put an additional burden on taxpayers whilst impacting on their right to fair hearing.
Provisions of this nature will in no small measure put unwarranted constraints on the taxpayer who is at the appeal court to seek redress from an unfavourable decision of the TAT. The requirement to deposit 100% of the amount, which may turn out to be frivolous, without first considering the merits of the case is not only retrogressive, but punitive.
Therefore, while we commend the Court for endeavouring to make the tax appeal process smoother, we hope that the rigid requirement to deposit the total judgement as a precondition for hearing an appeal is expunged, so as not to produce a counter-productive result and uphold taxpayers’ rights.
News
FEDERAL HIGH COURT DECLARES NIGERIA POLICE TRUST FUND LEVY UNCONSTITUTIONAL
The Federal High Court sitting in Abuja has held in the case of AG Rivers State v. AG Federation & Ors, that contributions from corporate entities and deductions from the Federation Account towards the Nigeria Police Trust Fund are unconstitutional.
The Rivers State Government averred that by the provisions of Sections 214 & 215 of the Constitution of the Federal Republic of Nigeria (CFRN), and Item 45 of the Exclusive Legislative List, the Police is within the purview of the Federal Government (FG) and thus it is the constitutional duty and responsibility of the FG to establish, fund and maintain the Nigerian Police. It was also argued that according to Section 162(3) of the CFRN, amounts standing to the credit of the Federation Account, which consist of revenue collected by the FG, are to be distributed only among the three tiers of government: Federal, State and Local Governments, as direct beneficiaries.
Therefore, Rivers State Government claimed that the collection of levies from corporate entities, and the deduction of funds from the Federation Account for the purpose of funding the Nigeria Police Force (NPF) is inconsistent with the CFRN. It also claimed that Section 4(1)(a)(b) of the Nigeria Police Trust Fund (Establishment) Act 2019 (NPTF Act) which imposes the deduction from the Federation Account and contribution of a percentage of companies’ profits to fund and maintain the NPF is null and void.
Representing the FG, the Attorney General of the Federation in its defence opined that the NPF was created for the Federation as a whole and not just for the FG, and that the deduction to the Police Trust Fund was from the total revenue accruing to the Federation Account and not from the amount standing to the credit of the Federation Account as contained in Section 162(3).
In its judgement, the Court agreed with the submissions of Rivers State and declared Section 4(1) of the NPTF Act unconstitutional and thus null and void, as its provisions are inconsistent with the provisions of the CFRN. The Court held that agencies of the Federal Government are only entitled to receive their allotted revenue out of the allocation due to and distributed to the Federal Government. The court further directed that Rivers State be refunded its share of the sums already deducted from the Federation Account towards funding and maintaining the NPF.
OUR COMMENTS It will be recalled that in 2019, the NPTF Act was enacted, and the Nigeria Police Trust Fund was established to be operational for a six-year period unless extended by the National Assembly. Since the enactment of the NPTF Act, companies operating in Nigeria have been required to contribute 0.005% of their net profits to the Police Trust Fund for the purpose of maintaining the Nigeria Police Force. Similarly, 0.5% of the total revenue accruing to the Federation Account was earmarked as contribution into the Fund. However, modalities for the collection of this Levy were not expressly spelt out, thus leading to sparse compliance from taxpayers.
To appreciate the decision of the Court in the instant case, it is important to review the relevant provisions of the law.
Item 45 of the Exclusive Legislative List, which highlights matters strictly within the purview of the Federal Government provides for: “Police and other government security services established by law”.
On the other hand, Section 162(1) & (3) of the CFRN provide that: “(1) The Federation shall maintain a special account to be called “the Federation Account” into which shall be paid all revenues collected by the Government of the Federation, except the proceeds from the personal income tax of the personnel of the armed forces of the Federation, the Nigeria Police Force, the Ministry or department of government charged with responsibility for Foreign Affairs and the residents of the Federal Capital Territory, Abuja
(3) Any amount standing to the credit of the Federation Account shall be distributed among the Federal and State Governments and the Local Government Councils in each State on such terms and in such manner as may be prescribed by the National Assembly.”
A combined reading of the above-quoted provisions indicates that the NPF is the sole responsibility of the FG and that distributions from the Federation Account can only be for the benefit of the three tiers of government, to the exclusion of others including the NPF.
Therefore, it is clear by unambiguous letters of the law, that it is the sole responsibility of the FG to fund and maintain the NPF and not that of the taxpayers. Furthermore, no agency or organ of government is permitted to be a direct beneficiary of distributions from the Federation Account, rather, part of the FG’s allocation from the Federation Account ought to be channelled towards funding and maintaining the NPF.
This judgement is coming shortly after FIRS has just been named the responsible collection agency for the Police Trust Fund Levy, via Finance Act 2021. However, this judgement introduces new dimensions to the collection of the Police Trust Fund Levy and indeed other earmarked taxes and levies such as the Tertiary Education Tax, National Information Technology Development Agency (NITDA) Levy, the re-awakened National Agency for Science and Engineering Infrastructure (NASENI) Levy, etc.
Based on the judgement, the remittance of these taxes/levies into accounts/funds other than the Federation Account and the deduction of the Federation Account to beneficiaries other than the tiers of government may now be deemed as unconstitutional. For instance, Section 20 of the NASENI Act which provides that 1% of the Federation Account be credited to the NASENI Fund and that companies in specific sectors with a turnover of at least ₦100million should contribute 0.25% of their profit before tax is null and void.
Notwithstanding the unconstitutionality of the main sources of funding the Police Trust Fund, other grants, donations or aid as prescribed under Section 4(1)(c)-(g) remain valid and the NPF may continue to enjoy funding from these sources.
Therefore, FIRS may now be deemed estopped from collecting the Police Trust Fund Levy from companies as same has been declared unconstitutional. Also, taxpayers may, on the basis of this judgement, challenge the constitutionality of other earmarked taxes/levies.
We envisage an influx of actions by other State Governments especially in view of the refund granted to Rivers State Government, while we expect that the Federal Government will appeal the judgement of the Federal High Court in this regard. Taxpayers are therefore advised to seek professional advice on how to proceed in these rather convoluted times and the possible impact of the judgement on their tax obligations.
News
INPUT VAT ON PRODUCTION OVERHEADS ARE RECOVERABLE – TAX APPEAL TRIBUNAL RULES
The Tax Appeal Tribunal sitting in Lagos has held in the case of CHI Ltd (“CHI” or the “Company”) vs. Federal Inland Revenue Service (“FIRS”) that input VAT incurred by the Company on the purchase of gas, short term spares and consumables is recoverable against the output VAT charged on its products.
Background & Arguments The Company instituted the suit following FIRS’ refusal to permit the Company to recover input VAT incurred on the purchase of gas, short-term spares and consumables against the output VAT charged on its final products. CHI claimed that these items qualify as stock-in-trade for the purpose of Section 17 of the VAT Act, and as such, VAT incurred on them should be recoverable. According to the Company, stock-in-trade is not synonymous with inventory as erroneously assumed by FIRS, rather the latter is a subset of the former. Hence, both terms cannot be accorded the same meaning as attempted by FIRS. Furthermore, the Company stated that Section 17(2)(a) only forbids the deduction of overheads which could be expended through the income statement and not all overhead expenses. Therefore, it was the Company’s submission that overheads, services, or general expenses which may not be expended in this manner may be recovered from output VAT charged, as they are used in the direct production processes.
On the other hand, FIRS argued that the items purported to be recovered by CHI do not qualify as raw materials to produce its products. Rather, it was FIRS’ opinion that these items form part of the Company’s production overhead, and VAT incurred on such cannot be deducted against output VAT arising from the sale of products. The argument here was that only VAT on raw materials used directly to produce a new product is recoverable against output VAT.
TAT’s Decision The Tribunal agreed with CHI that stock-in-trade goes beyond raw materials and since the VAT Act provides for ‘stock-in-trade’, same must be construed strictly, as a narrow interpretation to mean ‘raw materials’ will be unduly restrictive and exclusionary.
According to the TAT, the import of Section 17(2)(a) is that there are overheads which are not to be expensed through the income statement, and that by implication, input VAT incurred in respect of these must be allowed as a deduction from output VAT, so far as they constitute stock-in-trade used in the production process of new products on which output VAT is charged.
Therefore, the TAT concluded that the items in question constitute the Company’s stock-in-trade and have a direct link with the production of its products. As a result, CHI is entitled to recover all input VAT incurred thereon from the output VAT charged on the final products.
OUR COMMENTS
The crux of this matter is the interpretation of Section 17 of the VAT Act and the extent to which a taxpayer is permitted to deduct the input VAT incurred on its stock-in-trade from the output VAT charged on its finished products.
An excerpt of Section 17 of the VAT Act is shown below:
(1) …, the input tax to be allowed as a deduction from output tax shall be limited to the tax on goods purchased or imported directly for resale and goods which form the stock-in-trade used for the direct production of any new product on which the output tax is charged.
(2) Input tax-
(a) on any overhead, service, and general administration of any business which otherwise can be expended through the income statement (profit and loss accounts); and
(b) on any capital item and asset which is to be capitalised along with cost of the capital item and asset,
shall not be allowed as a deduction from output tax.
Deducing from the letters of the statute, before a business could recover input VAT from the output VAT charged to its customers, the following conditions must be fulfilled:
i. input VAT must be incurred on goods purchased for resale/goods which form the stock-in-trade of the business;
ii. the goods must be used for the direct production of the new product; and
iii. output VAT must be charged on the product.
Subsection (2) also distinguishes between overheads which can be expended through the income statement and those which cannot. While the latter may be deductible from output VAT charged, the former is not allowed as a deduction from output VAT.
Prior to this judgement, the tax authority has insisted that input VAT on all overhead expenses are irrecoverable from output VAT charged even where the extent to which such overheads relate to the production of finished products can easily be ascertained. This decision now aids in reiterating the intention of the law makers through the use of ‘stock-in-trade’ and not merely ‘raw materials’ in the letters of the law.
The TAT has, via this judgement, further strengthened the core principle of the VAT system which is for manufacturers to recover as much input VAT as possible and for the ultimate VAT burden to be borne by customer. This is especially so where the business’ costs constitute its stock-in-trade.
We believe the TAT’s decision is a step in the right direction to ensure that taxpayers are not unduly disadvantaged due to misinterpretation of the law by the tax administrators.
It is expected that FIRS will appeal this decision at the Federal High Court. Therefore, we advise taxpayers to seek professional advice regarding the impacts of this judgement on their businesses, particularly with regards to the treatment of overhead expenses which may be directly linked to the production of final products.
