Decoding Nigeria's Dual Tax Regime: Capital Allowances and VAT Compliance Essentials

The Nigerian fiscal landscape demands rigorous adherence to complex regulations, particularly within the energy sector and across all commercial transactions subject to consumption tax. This comprehensive guide from Bahas Books breaks down the essential provisions governing Capital Allowances for Petroleum Operations under the Nigeria Tax Act, 2025, alongside critical compliance rules for Value Added Tax (VAT), with a specific focus on the obligations of non-resident suppliers.

Part I: Capital Allowances for Petroleum Operations (Nigeria Tax Act, 2025)

The framework for recovering capital expenditure for companies under the Petroleum Profits Tax and Deep Offshore and Inland Basin Production Sharing Contracts is contained within Part III - Capital Allowance for Petroleum Operations of the Nigeria Tax Act, 2025.

Interpretive Provisions and Defining Qualifying Expenditure

The law establishes a clear foundation through its Interpretation section. A "concession" is defined broadly to include an oil exploration license, an oil prospecting license, an oil mining lease, any right or interest in or to petroleum oil in the ground, and any option to acquire such rights. A "lease" covers agreements for a lease where the term has commenced, any tenancy, and any agreement for letting or hiring an asset, but it explicitly excludes a mortgage. For legal continuity, the lease concept is extended by deeming a lease to continue if the lessee remains in possession after termination without a new grant, and by treating a new lease granted to the same party upon the termination of an old one as a continuation of the first lease.

The core of the allowance system is "qualifying expenditure," which is capital expenditure incurred in an accounting period, categorized into four types: Qualifying Plant Expenditure (on plant, machinery, and fixtures); Qualifying Pipeline and Storage Expenditure (on pipelines and storage tanks); Qualifying Building Expenditure (on permanent buildings, structures, or works not covered in the first two categories); and Qualifying Drilling Expenditure (all other capital expenditure for petroleum operations, covering costs for acquiring deposits/rights, searching for, discovering, or testing deposits, and constructing works or buildings likely to have little or no residual value when operations cease).

Crucially, the Act restricts what can be claimed: any amount deductible under section 92 of the Act is excluded, as is expenditure allowed as a deduction under any other provision of the Act. Furthermore, expenditure on an ocean-going oil tanker plying between Nigeria and any other territory is explicitly excluded from qualifying expenditure.

The Dual System of Allowances and Rates

The Act provides for two distinct mechanisms for capital recovery for expenditure incurred wholly and exclusively for petroleum operations:

Petroleum Investment Allowance (Table I): This is a special allowance, granted in addition to the standard capital allowance, applicable in the accounting period when the asset is first used. The rate is varied based on operational location: 5% for Onshore operations, 10% for operations up to and including 100 metres of water depth, and 15% for operations in water depth between 100 and 200 metres.
Standard Capital Allowance (Table II): This allowance is available from the period the expenditure was incurred. The rate for all four categories of qualifying expenditure is a uniform 20% for each of the 1st, 2nd, 3rd, 4th, and 5th years.

A special provision governs Exploration expenditure: the cost of the first and second appraisal wells in the same field, relating to the pre-production period, is allowed as a 100% deduction in the year incurred. Any remainder is then amortised at the 20% per annum capital allowance rate starting from the commencement of the accounting period. While a notional 1% of the qualifying expenditure must be recorded for statistical purposes, this figure does not affect the claimable amount. It is critical to note that capital allowance for the computation of hydrocarbon tax is not available for cost recovery in production sharing contracts.

Asset Use, Disposal, and Pre-Commencement Rules

The Residue of an asset is defined as the total qualifying expenditure less the total capital allowance made to date. This is key to the rule for Disposal without change of ownership: if an asset is disposed of but the owner retains ownership, the owner is deemed to have bought the asset back immediately for a price equal to the residue at the disposal date. Disposal of an asset requires a Certificate of Disposal issued by the Commission.

An asset is deemed "in use" even during a period of temporary disuse. For assets acquired for petroleum operations but not initially used, they are deemed in use from the date the expenditure was incurred. However, if an allowance has been granted and the asset is not put to use within five years, the previous allowance claimed shall be withdrawn and added back to tax, subject to the Service's approval. If an asset is used partly for petroleum operations and partly for other purposes, the allowance shall be computed as if it were used wholly and exclusively for upstream crude oil operations, and the resulting amount must be treated as just and reasonable by the Service.

The Value of an asset at disposal is its net proceeds of sale or the open market value estimated by the Service, minus selling expenses. Insurance/compensation monies are treated as net proceeds, unless they are used for the replacement of the lost asset. In the case of replacement, the allowance for the new asset is granted based on the replacement cost, considering the residual/scrap value of the old asset.

Disposal events are defined for permanent works (sale, interest expiration, leasehold termination without reversionary possession, demolition/cessation of use) and for plant/machinery/fixtures (sold, discarded, or ceased to be used). Drilling assets are disposed of if sold, cease to be used, or when the company ceases operations and receives compensation.

For Apportionment involving a qualifying asset disposed of or purchased together with a non-qualifying asset, the Service shall attribute a just and reasonable proportion of the value to the qualifying asset. Assets purchased or disposed of in one bargain are deemed to be purchased or disposed of together.

Pre-commencement expenditure incurred before a company's first accounting period is deemed to be incurred on the first day of its first accounting period. If an asset is disposed of before the first accounting period begins, any resulting loss incurred is deemed to be qualifying petroleum expenditure incurred on that first day, while any profit realised is treated as income of the company in its first accounting period.

Part II: Value Added Tax (VAT) Concepts and Compliance

This section outlines essential VAT compliance rules, focusing on non-resident suppliers, the time and valuation of taxable supplies, and mandatory invoice requirements.

VAT Collection and Obligations for Non-Resident Persons

The responsibility for charging and collecting VAT falls upon all taxable persons engaged in taxable supplies, excluding small businesses. Collection occurs either during the supply of taxable goods, by being withheld at source by an appointed tax authority representative, or through a self-account system.

The rules for non-resident persons making taxable supplies to Nigeria are clearly defined: a non-resident person who makes taxable supplies to Nigeria should register for tax and charge VAT. If a non-resident person makes taxable supplies from outside the country, the taxable person who received the supply should withhold the VAT and remit it to the tax authority. A non-resident person who makes taxable supplies in Nigeria may appoint a representative for the purpose of VAT compliance. If a non-resident person fails to collect the tax, the resident person to whom the supply was made is required to withhold and remit the VAT due to the Service in the currency of the transaction.

Time of Supply

The Time of Supply is generally the earlier of when an invoice or receipt is issued, or payment of consideration is due or received by the supplier in respect of that supply. Where it is not practicable to determine the time of supply, the Service may rely on the dates indicated on the relevant invoices, bills, debit notes, goods-received notes, waybills, and journal entries.

For supplies made under an agreement that provides for periodic payments (such as instalment, progressive, or periodic payment of rent, or for construction, improvement, repair, assembly, manufacturing, and similar activities), the time of supply of each successive part shall be the earlier of when payment for that part becomes due, the invoice relating to that part is issued, or when payment for that part is received.

Value of Taxable Supplies and Invoice Requirements

The Value of Taxable Supplies is determined based on the consideration received. For a money consideration, the value is defined as the Price plus VAT, meaning VAT will be charged on the price of the goods. The rules also acknowledge that the valuation of taxable supplies must address non-money consideration, though the specific valuation methodology for this is not detailed.

Compliance requires a taxable person who makes a taxable supply shall maintain a sequential invoice numbering system. A VAT Invoice shall be issued on supply whether or not payment is made at the time of supply. The VAT invoice must contain specific information, including the Supplier's tax ID, an invoice number, the name and address of the supplier, the supplier's incorporation or business registration number as applicable, the date of supply, the name of the purchaser or client, the gross amount of transaction, and the VAT charged and the rate. A non-resident person registered with the FIRS must issue an electronic tax invoice in the format used in their jurisdiction, including the name and TIN of the non-resident supplier, a description and value of the supply, and the VAT charged.

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