Global Tax Alert | 6 June 2013
Nigerian tax authorities issue guidance on tax implications of adoption of International Financial Reporting Standards
The adoption of the International Financial Reporting Standards (IFRS) by Nigeria's Federal Inland Revenue Service (FIRS) has resulted in consequent treatment of various tax transactions in Nigeria. This has necessitated calls for authoritative guidance from the FIRS on how to proceed in the light of this development. Consequently, the FIRS issued an Information Circular (the Circular) on 23 April 2013 on the tax implications of the adoption of IFRS as a guide to all stakeholders.
As background, the Nigerian government formally adopted the IFRS in 2010. Consequently, the Financial Reporting Council of Nigeria Act was enacted in 2011 to give legal effect to the adoption of the standards. Listed and significant public Entities were required to adopt the IFRS for the preparation of their financial statements for year 2012. Other public interest entities and small and medium-sized entities are to convert for the first time in 2013 and 2014 respectively.
This Alert covers the key provisions of the FIRS Circular.
The FIRS will not adopt the new net asset on the accounting balance sheet resulting from IFRS adoption for minimum tax computation in the year of transition.
Extension of time for filing of returns and documentation
First time adopters of IFRS will be granted a three-month extension upon application for filing of their first set of IFRS financial statements and related returns to allow sufficient time to overcome initial conversion problems.
Other documents to be filed with the returns, include a statement comparing the tax effect of IFRS adoption with Nigerian Generally Accepted Accounting Principles (GAAP), a statement of reconciliations from Nigerian GAAP to IFRS, deferred tax computation, and a statement of Financial Position as at the beginning of the earliest comparative period when a taxpayer applies an accounting policy retrospectively or makes a retrospective restatement of items in its financial statement.
Excess dividend tax
Where the retained earnings of a taxpayer who previously paid tax based on dividend increases as a result of IFRS adoption, and the additional dividend is paid from the increased retained earnings, the taxpayer would be subject to additional tax at 30% based on the dividend where it exceeds the taxable profit for the year.
Inventory (e.g., returnable packaging materials) reclassified as non-current asset in line with IFRS will continue to be treated as inventory in line with the existing laws. Estimates, provisions and any write down on stock based on estimated cost of completion will be disallowed.
Change in accounting policy
Although IFRS provides for retrospective application of a change in accounting policy, retrospective adjustments for tax purposes will not be effected for first time adopters.
Exchange of assets
Where there is an exchange of dissimilar assets, the old asset will be treated as a disposal with the sales proceeds being the market value (arm's length price) of the asset. Balancing charge/allowance, value added tax and capital gains tax will be computed accordingly.
Where an operating lease becomes a finance lease as a result of IFRS adoption, further capital allowance will be granted to the lessee based on the tax written down value (TWDV) of the asset. Initial and investment allowance will not be granted to the lessee.
Allowable and non-allowable deductions
Some of the items specifically mentioned as deductible or non-deductible are as follows:
Assets classified as held for sale
Assets classified as held for sale, will be regarded as not in use and capital allowance on it will be suspended. However, if the asset is subsequently put to use, capital allowance will be granted on the TWDV.
Provisions in respect of long-term employee benefits (other than post employment benefits and termination benefits) that are not due to be settled within twelve months after rendition of the related
services by an employee will not be allowed for tax purposes until actual payment is made.
For borrowing cost incurred on qualifying capital expenditure, interest on the loan while the asset is still under construction should be capitalized, while that incurred after completion should be expensed.
Where capitalization of borrowing cost is not possible due to suspension of development activities, such borrowing costs charged to income statement will be disallowed for tax purposes.
Goodwill impairment charged to statement of comprehensive income or income statement will be disallowed for tax purposes. Likewise, provision made in respect of incomplete business combination charged to income statement will be disallowed for tax purposes.
Goodwill acquired from business combination will not form part of qualifying capital expenditure on which capital allowance can be claimed.
Gains or losses made from the disposal of cash generating unit or subsidiary with goodwill component will be subject to capital gains tax.
Impairment losses, like depreciation, will not be allowed as a deduction in the income tax computation.
In the case of revalued assets, the excess of the impairment loss over revaluation surplus transferred to income statement will not be allowed for tax purposes. Capital allowance to be claimed will be based on the historical cost of the asset and not its revalued amount. Likewise, the reversal of an impairment loss is not taxable.
Provision/estimate of the cost of abandonment, dismantling, removing the item of property, plant and equipment (PPE) and site restoration will not be allowed for capitalization together with the PPE. The cost will only be allowable for tax purposes when it has been incurred, or if it is set aside in a funded Sinking Fund.
Share based payments
Capital allowance is claimable on assets acquired through a share based payment if the asset is a qualifying capital expenditure. The cost of the asset, purchases or expenses is the invoice price for VAT purposes. Any related expenses incurred however in issuance of shares under a share based will be disallowed for income tax purposes.
Goods and services exchanged under share based payment will be recognized at the current market value and the impact on shareholders fund (Share premium) must be clearly shown.
Gains and losses arising from disposal of investments in Associates and Joint Ventures upon disposal are neither chargeable nor deductible for income tax purposes.
The intangible assets which meet the requirements of qualifying capital expenditure should be capitalized.
Computer software that forms the integral part of a computer will be treated as qualifying Plant expenditure while stand-alone Software will be treated as intangible asset and amortized over the useful life of the asset.
Customer list acquired as an intangible asset by a taxpayer to the extent that it is for the purpose of generating taxable profit is tax deductible via amortization over the useful life. Where the intangible assets have indefinite life, no tax deduction will be allowed.
Franchise is to be expensed over the useful life of the franchise.
Website cost that meet the condition of capitalization will be amortized over its useful life. However, where the website cost is expensed, it will be subject to deductibility test.
Fair value measurement
Gains and losses that may arise from fair value measurement shall be disregarded for tax purposes.
Financial instruments classified as “fair valued through the profit or loss” (FVTPL) are regarded as revenue in nature and therefore will be liable to tax to the extent that they are not specifically exempt from tax. Transaction cost relating to instruments of this class should be expensed.
Financial instruments classified as “held to maturity” or “available for sale” are regarded as capital instruments and capital gains tax will apply to gains derived from the disposal of such instruments except to the extent that they are exempt from the tax.
Initial costs of various classes of Financial Instruments except FVTPL are to be capitalized as part of the cost of the investment. The transaction cost relating to FVTPL is to be expensed while cost relating to held-to-maturity should be capitalized. All gains and losses on FVTPL will only be allowable for tax purposes when they are realized.
It is important to note that while the Circular provides useful information, it is not the law. Thus, where it contradicts any provisions of a relevant tax law, the provisions of the law will prevail. Where as a result of the adoption of the IFRS, a different tax treatment is required other than the stipulations in the law, there would be need to amend the relevant provisions in order to give full effect to IFRS adoption and provide certainty to the taxpayers.
For additional information with respect to this Alert, please contact the following:
EY Nigeria, Lagos, Nigeria
- • Abass Adeniji
+234 1 844 9962
- • Edem Andah
+234 1 844 9962
- • Akinbiyi Abudu
+234 1 844 9962
- • Chinyere Ike+234 1 844 9962
EY (China) Advisory Services Limited, Pan African Tax Desk, Beijing
- • Rendani Neluvhalani
+86 10 5815 2831
Ernst & Young LLP, Pan African Tax Desk, New York
- • Dele Olaogun
+1 212 773 2546
Ernst & Young LLP (United Kingdom), Pan African Tax Desk, London
- • Leon Steenkamp
+44 20 7951 1976
EYG no. CM3509