2019 Audit Report: FIRS Approved N5.61 billion Capital Allowance to Companies without Certificate of Acceptance, Forfeits N1.68 billion in Revenue

The Federal Inland Revenue Service (FIRS) approved a Capital Allowance of  N5.61 billion for 13 companies and also failed to collect the statutory 30% Company Income Tax (CIT) of the total capital allowance given to these companies. The revenue lost by this failure is N1.68 billion.

In his 2019 report, the Auditor-General observed that these companies did not present a certificate of acceptance and were not to be granted capital allowance but even though the capital allowance was given the CIT of 30% was also not collected. Thus, the CIT for the audit period was short by N1.69 billion (30% of N5.61 billion), uncollected by FIRS. 

Capital allowance allows a company to make claims against taxable profit. This allowance is provided for assets purchased by the company and used to carry out its businesses. These assets include equipment, research costs, and expenses for building renovations.

These assets are classified into full or partial value to ascertain if the value claimed is deductible wholly or in bits. Thus, companies can claim such assets’ allowance in a year or spread over a period based on this classification.

The Nigerian tax law recognizes investments made by companies and makes provisions for capital allowances to be deducted. However, these deductions are made on presenting relevant documents to the FIRS as stated in Section 5 of the Industrial Inspectorate Act, 1970. 

Where, in the exercise of any of the functions conferred by or under any law, any of the bodies mentioned in subsection (2) of this section has to take account of any fact and –

a) there is included in a certificate of acceptance, issued by the Director pursuant to section 3 (3) of this Act, a finding regarding that fact; or

b) there is, following any reference under section 4 of this Act, an arbitration decision in relation to that fact, that finding, or as the case may be, the decision, shall for the purposes of the exercise of those functions be final and binding as between any of those bodies and the parties concerned.

One of such relevant documents is the Certificate of Acceptance issued by the Industrial Inspectorate Department (IID) under the Federal Ministry of Industry, Trade and Investment (FMITI).  The Industrial Inspectorate Act Cap I8, Laws of the Federation of Nigeria (LFN) 2007 (the Act) is the legislation that established the Industrial Inspectorate Division (IID) of the Federal Ministry of Industry, Trade and Investment (FMITI). 

One of the most important roles of IID  is to inspect, value and certify capital expenditure incurred by businesses in Nigeria. In this regard, every business that incurs or intends to incur capital expenditure of N500,000 or more must inform IID. The IID, after satisfactorily making a verification, issues a Certificate of Acceptance of Fixed Assets (CAFA) certifying the value of the capital expenditure.

In reviewing the Taxpayers’ Files at Lagos Large Tax Office, the auditor noted that of the companies that filed for CIT returns, 13 of them didn’t have Certificates of Acceptance. Yet these companies received an accrued amount of N5.614 billion in tax deductions. Of this figure, 30% was expected to be deducted as CIT for the 2018 Assessment Year but again, FIRS failed to deduct this amount.

This action means that the country had a gross under assessment of tax revenue. And, by extension, loss of revenue to the government for the year.

In his report,  the Auditor-General gave the management of FIRS the benefit of the doubt asking them to give explanations for these failures. Specifically,  he asked for the justification of the non-usage of certificate of acceptance in granting tax allowances. And if there exists no such credible explanation, the management of FIRS should reverse the capital allowance granted to these companies.

But the FIRS failed to respond within the time given.

There have been conversations among stakeholders that the bureaucratic drag and tedious processes and procedures involved in getting the certificate of allowance cost companies greatly. If opportunities present to circumvent these processes such as a lack of synergy among agencies taxed with facilitating the process, then unscrupulous organisations will take advantage of these loopholes. 

In this case, until the FIRS provides an explanation for its actions, it appears that it blatantly ignored the laws and cost the government much needed revenue.

The loss of revenue to the government from discrepancies discovered in the audit reports is considerable especially for a country struggling to finance its budget and groaning under the weight of debts.