Decoding Nigeria’s Financial Landscape: A Comprehensive Guide to Capital Allowances, VAT Compliance, and Business Structures

Decoding Nigeria’s Financial Landscape: A Comprehensive Guide to Capital Allowances, VAT Compliance, and Business Structures

The Nigerian tax framework is built upon specialized regulations that govern key economic sectors and critical compliance obligations for all businesses. Bahas Books offers this extensive analysis of four fundamental pillars of the Nigerian tax system: the specific rules for capital recovery in the petroleum sector, the detailed mandates for Value Added Tax (VAT), the structured assessment periods for business changes, and the crucial distinction between business structures for tax planning.

I. Capital Allowances for Petroleum Operations Under the Nigeria Tax Act, 2025

Part III of the Nigeria Tax Act, 2025, provides the legal foundation for companies subject to Petroleum Profits Tax and those operating under Deep Offshore and Inland Basin Production Sharing Contracts to recover their capital expenditure. This recovery is facilitated through capital allowances applied to "qualifying expenditure."

Defining Qualifying Expenditure and Exclusions

Qualifying expenditure is capital expenditure incurred during an accounting period and is meticulously categorized into four types: Qualifying Plant Expenditure (for plant, machinery, and fixtures); Qualifying Pipeline and Storage Expenditure (for pipelines and storage tanks); Qualifying Building Expenditure (for permanent buildings not covered by the first two categories); and the broad category of Qualifying Drilling Expenditure. The latter includes all other capital outlays for petroleum operations, such as costs for acquiring deposits, searching for and discovering deposits, and constructing works or buildings expected to have little or no residual value when operations cease.

Crucially, the law specifies exclusions: expenditure deductible under section 92 of the Act, expenditure allowed as a deduction under any other provision of the Act, or expenditure on an ocean-going oil tanker plying between Nigeria and any other territory are all disallowed from qualifying for these capital allowances.

The law addresses timing for Pre-commencement expenditure—costs incurred before a company’s first accounting period—by deeming them to be incurred on the first day of that first accounting period. A disposal of an asset before the first accounting period results in a loss being treated as qualifying petroleum expenditure incurred on the first day, while any profit realized is treated as income in that first accounting period.

Allowance Structure and Rates

The law grants two distinct allowances for expenditure incurred wholly and exclusively for petroleum operations: the Petroleum Investment Allowance (Table I) and the Standard Capital Allowance (Table II). The Petroleum Investment Allowance is granted in addition to the standard allowance, but only in the accounting period when the asset is first used. Its rate is graduated based on water depth: 5% for Onshore operations, 10% for operations up to 100 metres, and 15% for operations between 100 and 200 metres of water depth. The Standard Capital Allowance (Table II) is applied at a uniform 20% for each of the 1st, 2nd, 3rd, 4th, and 5th years for all four categories of qualifying expenditure. A notional 1% of the qualifying expenditure must be recorded for statistical purposes but does not impact the actual claimable allowance. For Exploration expenditure, the cost of the first and second appraisal wells in the same field are treated as a 100% deductible expense in the year incurred. An asset is deemed "in use" even during a period of temporary disuse. However, if an allowance has been granted but the asset is not put to use within five years, the previous allowance claimed shall be withdrawn and added back to tax. The Residue of an asset, a key concept for future disposals, is defined as the total qualifying expenditure less the total capital allowance made to date.

Disposal Rules and Apportionment

Disposal of an asset without change of ownership is treated as a deemed transaction where the owner retains ownership but is considered to have immediately bought the asset back for a price equal to its residue. Disposal of any asset in respect of which capital allowance has been claimed requires a Certificate of Disposal from the Commission. The Value of an asset at disposal is its net proceeds of sale or the open market value estimated by the Service, less selling expenses. Insurance or compensation monies are treated as net proceeds, unless they are used for the replacement of the lost asset. For Apportionment, if a qualifying asset is 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. Similarly, if an asset is used partly for petroleum operations and partly for other purposes, the allowance must be computed as if it were used wholly and exclusively for upstream crude oil operations, and the resulting allowance must be treated as just and reasonable by the Service.

II. Detailed Rules for Value Added Tax (VAT) Compliance

The VAT framework dictates precise compliance requirements, focusing on collection, calculation, and the exact determination of a taxable supply's time and place.

Responsibility, Collection Methods, and Non-Resident Mandates

The primary responsibility for charging and collecting VAT rests with all taxable persons engaged in taxable supplies, with the explicit exception of small businesses. VAT collection can occur in three primary ways: during the supply of goods, by being withheld at source by an appointed tax authority representative, or through a self-account system where the recipient remits the tax. Computationally, VAT Payable is determined by subtracting Input VAT (tax paid on purchases) from Output VAT (tax charged on supplies made).

Non-resident persons making taxable supplies to Nigeria face mandatory compliance, requiring them to register for tax and charge VAT. If the supplies originate from outside the country, the Nigerian recipient of the supply is required to withhold the VAT and remit it to the relevant tax authority. The non-resident person retains the option to appoint a representative for VAT compliance in Nigeria.

Time, Value, and Location of Taxable Supplies

A taxable supply is deemed to have taken place at the earliest of: when an invoice or receipt is issued by the supplier; where goods are delivered or made available for use; or when payment is due to or received by the supplier. Specific timing rules apply: for goods sold on credit, supply occurs at the earlier of delivery or payment receipt. For rental or periodic supplies, supply is deemed to take place for each period when payment is due or received, whichever is earlier. This earlier of due, received, or invoiced rule also applies to periodic payments or installments, including payments for a project made in relation to its progressive nature. For supply between connected persons where invoices are not issued: the time of supply for goods to be removed is the moment of removal; if not to be removed, it is when they are available to the recipient; for a service, it is upon commencement; and for incorporeal supplies (intangible assets), it is when the asset becomes available for the recipient's use. The Value of Taxable Supplies for a money consideration is defined as the Price plus VAT, meaning VAT is charged on the price of the goods.

Goods are supplied in Nigeria if: they are physically present, imported into, assembled, or installed in Nigeria at the time of supply. They are also deemed supplied if the beneficial owner of the rights in or over the goods is a taxable person in Nigeria and the goods or right are situated, registered, or exercisable in Nigeria. Services are supplied in Nigeria if: the service is provided to or consumed by someone in Nigeria, regardless of where the service is rendered or the location of the service obligation. Services are also supplied in Nigeria if they are connected with existing immovable property (including the services of agents, engineers, architects, and valuers), where the property is located in Nigeria.

VAT Invoice Requirements

A taxable person who makes a taxable supply must maintain a sequential invoice numbering system and issue a VAT Invoice on supply, regardless of whether payment is made. The mandatory content of a VAT invoice includes: the supplier's tax ID; a unique invoice number; the name and address of the supplier; the supplier's incorporation or business registration number; the date of supply; the name of the purchaser or client; the gross amount of the transaction; and the VAT charged and the rate applied.

III. Detailed Rules for Commencement and Cessation of Business

This section defines the statutory basis periods for calculating assessable profits during the critical initial phase of a business’s operation and outlines the final tax obligations upon permanent discontinuation or a change in the accounting date.

Commencement of Business

The determination of assessable profits for the first three years of a business’s operation follows a specific structure based on the accounting period: the First year of assessment has a basis period running from the date the business commences up to the end of its first Accounting period. The Second year of assessment has a basis period running from the first day immediately after the first accounting period ended up to the end of the second accounting period. The Third year of assessment has a basis period running from the day after the last accounting period ended up to the final day of the Accounting year ended.

Cessation and Change of Accounting Date

When a trade, business, profession, or vocation permanently ceases its operations in Nigeria in a specific accounting period, the assessable profits for the relevant year of assessment are computed as the profits generated from the beginning of the last accounting period up to the actual date of cessation. The tax on these final assessable profits is payable within six months from the date of cessation. If a taxable person changes the date to which it usually computes its assessable profits, the basis period for the relevant year of assessment commences from the first day after the basis period of the immediately preceding year of assessment up to the new date on which the account was made. Subsequent years' assessable profits are then computed on the basis of the newly adopted accounting period.

IV. Tax Avoidance and Business Structure Differentiation

The document clarifies Tax Avoidance as the legal use of tax laws to reduce the amount of tax you are to pay. This involves employing legitimate mechanisms like claiming deductions, choosing the optimal business structure, utilizing reliefs and exemptions, and ensuring proper narration and categorization of expenses.

Tax Administration Split

Tax administration in Nigeria is split between the Nigeria Revenue Service (NRS) and the States Internal Revenue Service. The NRS handles Company Income Tax, Value Added Tax, Withholding Tax (WHT) of companies, and Personal Income Tax (PIT) of specialized persons (such as the armed forces). The States Internal Revenue Service is responsible for Personal Income Tax, Withholding Tax of enterprise, and other state-approved revenue.

Enterprise vs. Limited Liability Company (LLC)

The choice of business structure—Enterprise or Limited Liability Company (LLC)—has significant tax implications. An Enterprise does not pay income tax as a separate entity; the owner is taxed as an individual under Personal Income Tax. It is subject to VAT and WHT but does not require an audited financial statement. The NRS is primarily interested in the enterprise's revenue for VAT rather than its profit, generally resulting in lower overall tax liability.

Conversely, an LLC pays Company Income Tax (CIT), except for small companies, while the owners/directors pay Personal Income Tax. An LLC is subject to VAT and WHT, requires an audited financial statement, is answerable to both FIRS and NRS for both PIT and CIT, and consequently incurs a higher compliance cost. The LLC structure is more formal, requiring the entity to file returns even if exempted from tax. While the LLC structure offers many non-tax benefits (like separate legal personality and limited liability), tax benefits are not a primary driver. It is advised not to upgrade solely for tax reasons or if one cannot afford structured accounting, but to upgrade if the business is big or requires the other robust benefits of an LLC.

For in-depth guidance on navigating these specialized tax matters, visit bahasbooks.com

Comments

Post a Comment

Popular posts from this blog

Understanding Debentures Under CAMA 2020: Sections 191–198 Explained

Understanding Debentures Under CAMA 2020: Sections 191–198 Explained By Baha’s Books Visit bahasbooks.com for expert accounting and corporate law insights. The Companies and Allied Matters Act (CAMA) 2020 provides the foundation for how Nigerian companies operate, borrow money, and secure financing. One of the most detailed and important aspects of this law lies in Sections 191 to 198 , which cover debentures — instruments that enable companies to borrow money from investors while offering structured rights and protections in return. These provisions explain how companies can use their property or uncalled capital to raise funds, the legal form and content of debentures, how they must be documented, what happens when they are lost or misused, and the various types of debentures available. Together, they form the financial and legal backbone for corporate borrowing in Nigeria. Let’s unpack each section carefully and see how they work in practice. Section 191 — Creation of De...
Read more

Capital Allowances Under the Nigeria Tax Act, 2025 (First Schedule): A Practical, End-to-End Guide

Capital Allowances Under the Nigeria Tax Act, 2025 (First Schedule): A Practical, End-to-End Guide By Bahas Books | bahasbooks.com Capital allowances are the bridge between your fixed-asset investments and your corporate tax bill. This portion of the Nigeria Tax Act, 2025—drawn from the First Schedule—spells out when and how a company can claim capital allowances, what happens when assets are sold or destroyed, how leases and partnerships are treated, how to apportion values when assets are bundled, and which expenditures never qualify in the first place. Read this as a life-cycle manual: acquisition → use → temporary disuse → replacement → disposal, with rules for special situations along the way. The rule that unlocks relief (Paragraph 6) If, during a basis period for a year of assessment, your company incurs qualifying capital expenditure wholly and exclusively for the purposes of its trade or business, you are entitled to a capital allowance for each year the asset is used i...
Read more

Understanding Capital Allowance Under the Nigeria Tax Act, 2025: What Every Business Should Know

Understanding Capital Allowance Under the Nigeria Tax Act, 2025: What Every Business Should Know By Baha’s Books | www.bahasbooks.com The First Schedule of the Nigeria Tax Act, 2025 delves into one of the most practical and impactful areas of taxation for businesses — Capital Allowance . This part of the law establishes the framework for how companies can recover the cost of their fixed assets over time, by deducting their value against taxable profits. It is not just an accounting procedure; it’s a fiscal policy tool designed to reward investment, promote productivity, and sustain economic growth through responsible asset management. At its core, capital allowance is the government’s way of recognizing that assets used for generating income—such as machines, buildings, vehicles, and software—wear out or lose value over time. Instead of allowing companies to deduct the entire cost in one year, the law spreads that deduction across several years. This systematic write-off mirrors ...
Read more