Navigating the Dual Compliance Imperative: Capital Allowances and VAT Rules in Nigeria

Navigating the Dual Compliance Imperative: Capital Allowances and VAT Rules in Nigeria

Bahas Books presents a detailed examination of two crucial pillars of Nigeria's fiscal regime: the intricate rules governing Capital Allowances for Petroleum Operations under the Nigeria Tax Act, 2025, and essential compliance principles for Value Added Tax (VAT), particularly regarding non-resident entities and supply valuation. Understanding these rules is fundamental for sound financial management and regulatory compliance within the Nigerian market.

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

The provisions for Capital Allowances, contained in Part III - Capital Allowance for Petroleum Operations, lay out the legal mechanism for capital expenditure recovery for companies subject to the Petroleum Profits Tax and those engaged in Deep Offshore and Inland Basin Production Sharing Contracts.

Foundational Definitions and Qualifying Expenditure

The legislation is anchored in clear definitions. A "concession" is broadly defined to include an oil exploration license, an oil prospecting license, an oil mining lease, any right or interest in petroleum oil in the ground, and any option to acquire such rights. A "lease" covers tenancy, agreements for a lease where the term has commenced, and agreements for letting or hiring an asset, but it explicitly excludes a mortgage. For continuity, a new lease granted to the same party upon the termination of an old one is treated as a continuation of the first lease, and possession after termination without a new grant is deemed to be a continuation of the lease for tax purposes.

The core concept is "qualifying expenditure," defined as capital expenditure incurred in an accounting period, categorized into four types:

  • Qualifying Plant Expenditure: Spending on plant, machinery, and fixtures.

  • Qualifying Pipeline and Storage Expenditure: Spending on pipelines and storage tanks.

  • Qualifying Building Expenditure: Spending on permanent buildings, structures, or works not covered in the first two categories.

  • 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.

A vital proviso stipulates that any amount deductible under section 92 of the Act cannot also be treated as qualifying expenditure. Furthermore, expenditure allowed as a deduction under any other provision of the Act is excluded from qualifying expenditure, as is expenditure on an ocean-going oil tanker plying between Nigeria and any other territory.

The Dual System of Allowances and Rates

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

  1. Petroleum Investment Allowance (Table I): This is a special allowance, in addition to the standard capital allowance, granted to a company in the accounting period when the asset is first used. The rate depends on the operational location:

    • 5% for Onshore operations.

    • 10% for operations up to and including 100 metres of water depth.

    • 15% for operations in water depth between 100 and 200 metres.

  2. Standard Capital Allowance (Table II): A company is due this allowance 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 rule for Exploration expenditure treats the cost of the first and second appraisal wells in the same field, relating to the pre-production period, as a 100% deduction in the year incurred. Any remainder is 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. Critically, capital allowance for the computation of hydrocarbon tax is not available for cost recovery in production sharing contracts.

Asset Status, Disposal, and Apportionment Rules

The Residue of an asset is defined as the total qualifying expenditure less the total capital allowance made to date. This value is used in 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.

Disposal occurs for permanent works when the interest is sold, expires, the leasehold terminates without the reversionary interest holder acquiring possession, or the asset is demolished/ceases to be used. Plant/machinery/fixtures are disposed of if sold, discarded, or cease to be used. Drilling assets are disposed of if sold, cease to be used, or when the company ceases operations and receives compensation.

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. If an asset is used partly for petroleum operations and partly for other purposes, the allowance that would be due if it were used wholly and exclusively for upstream crude oil operations shall be computed and treated as just and reasonable by the Service.

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: Core Value Added Tax (VAT) Concepts

This segment addresses the principles of VAT compliance, specifically focusing on the obligations of non-resident persons and the rules for valuing taxable supplies.

VAT Collection and Non-Resident Obligations

The responsibility for charging and collecting VAT falls upon all taxable persons engaged in taxable supplies, excluding small businesses. Collection can occur 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.

Valuation of Taxable Supplies and Invoice Requirements

The text clarifies how the Value of Taxable Supplies is determined, particularly concerning the consideration received:

  • The supply of goods and services can be valued for a money consideration.

  • The value for a money consideration 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 details are not provided.

Finally, compliance mandates specific requirements for the VAT Invoice:

  • 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.

For in-depth analysis and compliance resources covering both corporate and consumption tax, visit bahasbooks.com.

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