Mastering Nigerian Tax: A Comprehensive Guide to Capital Recovery, VAT, and Business Structure

Mastering Nigerian Tax: A Comprehensive Guide to Capital Recovery, VAT, and Business Structure

Navigating the complexities of the Nigerian tax landscape requires a precise understanding of the rules governing key economic sectors, compliance obligations, and business structure implications. Bahas Books presents a detailed examination of four critical areas that define financial and tax planning for enterprises operating in Nigeria, from the oil fields to the local marketplace.

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

The Nigeria Tax Act, 2025, specifically Part III, establishes a clear framework for companies subject to Petroleum Profits Tax and those engaged in Deep Offshore and Inland Basin Production Sharing Contracts to recover their substantial capital expenditure through statutory allowances.

Defining Key Terms and Qualifying Expenditure

The law provides explicit definitions for assets and rights within the sector. A "concession" is broadly defined to include an oil exploration license, an oil prospecting license, an oil mining lease, and any right, title, or interest in or over petroleum oil. A "lease" covers agreements for letting or hiring an asset, but it importantly excludes a mortgage. Furthermore, a new lease granted to the same party upon the termination of an old one is treated as a continuation of the first lease.

The central mechanism for cost recovery rests on the concept of "qualifying expenditure," which is capital expenditure incurred in an accounting period and is grouped into four distinct categories: Qualifying Plant Expenditure (on plant, machinery, and fixtures); Qualifying Pipeline and Storage Expenditure (on pipelines and storage tanks); Qualifying Building Expenditure (on permanent buildings not in the first two categories); and Qualifying Drilling Expenditure. The latter is a catch-all for core operational costs, including 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.

Certain expenditures are explicitly excluded from qualifying for these allowances. These include any amount deductible under section 92 of the Act, expenditure already 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.

Timing, Allowance Structure, and Withdrawal Rules

The law addresses the timing of capital costs by treating Pre-commencement expenditure—costs incurred before a company's first accounting period—as if they were incurred on the first day of that first accounting period. If an asset is disposed of before this first period begins, any resultant loss is deemed qualifying petroleum expenditure incurred on that first day, while any profit realized is treated as income in that first accounting period.

Two distinct allowances are available 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 an additional allowance, granted only in the accounting period when the asset is first used. Its rate is tiered 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 rate of 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 is treated as a 100% deductible expense in the year incurred. An asset is deemed "in use" even during a period of temporary disuse. Critically, if an allowance has been granted and the asset is not put to use within five years from the date the expenditure was incurred, the allowance shall be withdrawn and added back to tax. The Residue of an asset is calculated as the total qualifying expenditure less the total capital allowance claimed to date.

Disposal and Apportionment Requirements

The disposal rules govern how assets are treated upon sale or transfer. A disposal of an asset without change of ownership occurs when the owner retains the asset but is deemed to have bought it back immediately for a price equal to the residue at the date of disposal. Disposal of any asset for which an allowance has been claimed requires a Certificate of Disposal issued by 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 subsequently used for the replacement of the lost asset. In cases of Apportionment, where a qualifying asset is disposed of or purchased alongside a non-qualifying asset, the Service must 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 is 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 Nigerian VAT framework mandates detailed compliance rules concerning who collects the tax, how and when supply is deemed to occur, and the specific requirements for documentation.

Responsibility, Collection Mechanisms, and Non-Resident Compliance

The primary responsibility for charging and collecting VAT rests with all taxable persons engaged in taxable supplies, with the specific exemption of small businesses. VAT collection can occur in three 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 directly remits the tax. VAT Payable is the difference between Output VAT (tax charged on sales) and Input VAT (tax paid on purchases).

Non-resident persons making taxable supplies to Nigeria must comply with mandatory registration requirements and must register for tax and charge VAT. If the supplies are made from outside the country, the Nigerian recipient is obligated 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 legally 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 in respect of that supply.

Specific timing rules apply for different scenarios: 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 and to 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.

The location of supply determines taxability: 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 if they are connected with existing immovable property (including the services of agents, engineers, architects, and valuers) 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, irrespective of whether payment has been 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 outlines the statutory basis periods used to calculate assessable profits during the initial three years of a business's operation, as well as the rules governing its final tax obligations upon permanent discontinuation or a change in its accounting date.

Commencement of Business: Basis Periods

The determination of assessable profits for the first three years of assessment follows a specific structure based on the business’s 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 calculated 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. Assessable profits of subsequent years of assessments are then computed on the basis of the newly adopted accounting period.

IV. Tax Avoidance and Business Structure Differentiation

The information addresses the legality of Tax Avoidance and highlights the crucial difference in tax treatment and compliance between an Enterprise and an LLC.

Tax Administration Split and Tax Avoidance

Tax Avoidance is affirmed as the legal use of tax laws to reduce the amount of tax you are to pay. This involves claiming deductions and strategically choosing the right business structure. Tax administration 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 versus Limited Liability Company (LLC)

The choice of legal structure has profound tax implications:

  • Enterprise: Does not pay income tax as a separate entity; the owner is taxed as an individual under PIT. It is subject to VAT and WHT but does not require an audited financial statement. The NRS is only interested in the enterprise's revenue for VAT and not its profit for income tax purposes, generally leading to less tax liability.

  • Limited Liability Company (LLC): Pays Company Income Tax (CIT) (though small companies are often exempted), while owners/directors pay Personal Income Tax (PIT). It is subject to VAT and WHT, but 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 key advisory point is that the LLC structure provides many non-tax benefits (like limited liability) but not necessarily a tax benefit. Businesses should not upgrade if the only reason is tax or if they cannot afford structured accounting, but should upgrade if the business is big or requires the other legal and operational benefits of an LLC.

For detailed tax resources and financial compliance guidance, visit bahasbooks.com

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