March 5, 2019

The Federal Inland Revenue Service (FIRS) has disclosed that a total of N12.62 trillion was generated as revenue from  2016 to 2018. This was revealed in a document made available to newsmen by the Head of Communications and Servicom Department of the agency, Wahab Gbadamosi. N3.3 trillion was generated in 2016, N4.02 trillion in 2017 and N5.32 trillion was realised in 2018, making it the highest revenue generated in the last three years. The document stated that this was made possible as a result of several initiatives designed by the agency to ensure a robust tax administration that is beneficial to all stakeholders. It explained that non-oil tax revenue increased to N2.149 trillion in 2016, N2.5 trillion in 2017 and N2.852 trillion in 2018. The document quoted the Executive Chairman of the agency, Babatunde Fowler saying the achievement was a reflection of the diversification of the Nigerian economy by the Federal Government.  “This does not mean that we have left behind the oil tax revenues. It grew from N1.15 trillion in 2016 to N1.52 trillion in 2017 and N2.52trillion in 2018. Non-oil tax revenue is still over in excess of the oil tax revenue. “We also do collect four per cent in terms of cost of collection but only for non-oil revenue collected. On oil revenue collection, we do not get any commission and we have been able to make sure that our services are more efficient and convenient to taxpayers. “This has brought about a considerable reduction in the cost of collection of actual taxes. “In 2016, it was 2.6 per cent, 2017, 2.49 per cent and 2018, 2.14 per cent, meaning that our actual cost of collection is heading downwards based on the efficiency and technology that we are deploying to tax collection. “Some of the ICT initiatives that we have continued to build on are the e-payment channels which make it convenient and easy to pay taxes anywhere in the world and to also download receipts of payment from any point one so desires,” he said.   Source: RipplesNigeria

On 13 January, 2016, the International Accounting Standard Board (IASB) announced the issuance of a new accounting standard: International Financial Reporting Standard (IFRS) 16, on leases, which took effect on 1 January 2019. The new standard has changed the basis of accounting for leases which was in force for more than thirty years. While IFRS 16 completely replaces the old rule under International Accounting Standard (IAS) 17, the major impact is on the recognition, measurement and disclosure requirements for lessees. The new standard eliminates the classification of leases as either operating or finance for lessees and, instead, introduces a single lessee accounting model. According to an IASB survey conducted in 2016, listed companies around the world had around US$3.3 trillion worth of leases. Based on IAS 17 requirements, over 85% of the leases are labelled as operating leases and are not recorded on the balance sheet of these companies. This amounts to about $2.8 trillion worth of leases off the balance sheet of such entities. Given the effective date of 1 January 2019 for the adoption of the new standard, most companies had about three years to evaluate the legal, commercial and financial reporting impact of the new standard on their financial positions and transactions. In this article, we have discussed the extent to which the new rule disrupts the Nigerian tax space, and the options available to companies and businesses moving forward. The Old Wine Explained In line with the Federal Inland Revenue Service (FIRS) information Circular No.2010/01 on Guidelines on the tax implication of Leases , a lease can be broadly defined as a contractual agreement between an owner (the lessor) and another party (the lessee) which conveys to the lessee the right to use the leased-asset for consideration usually periodic payments called rents. With the adoption of International Financial Reporting Standards (IFRS) in 2012, recognition of leases have been based on IAS 17 (the old rule). Under the old rule, a lease arrangement is classified as either an operating lease or a finance lease. Finance leases are arrangements that transfer risk and rewards relating to the use of an asset from the lessor to the lessee. This means that in a finance lease arrangement, the lessee is deemed the economic owner of the asset since he is able to apply the asset to generate economic benefits from continuous usage. All other types of lease arrangements are classified as operating lease. Accounting by Lessee and Lessor under the Old Rule – Finance Lease Under the old rule, lessees were required to recognize a finance lease arrangement as both an asset and a liability at an amount equal to the fair value (sale price agreed upon by a willing buyer and seller, assuming both parties enter the transaction freely and knowledgeably) of leased asset. Where this value is lower than the fair value, recognition should be based on the present value of the minimum lease payments to be made by the lessee. Finance (interest) charge is also accrued on the liability over the term of the lease. Subsequently, the annual lease payment made by the lessee is applied towards settling the liability and finance charge that has accrued in relation to the arrangement. Thus, by the end of the lease term, the lessee would have paid for the fair value of the asset plus the finance charge on the leased assets. The lessee depreciates (it may fair value or revalue alternatively) the leased assets annually and charges the annual finance (interest) cost to its income statement. Since risk and rewards are transferred in a finance lease, lessors are not allowed to recognize the leased asset in their books. Rather, they recognize a receivable (from the lessee) equal to the fair value of the leased asset. Additionally, lessors recognize annual finance income receivable from lessee over the term of the lease. Accounting by Lessee and Lessor under the Old Rule – Operating Lease Under operating lease, lessors retain the risk and rewards. Hence, lessees are not allowed to recognize any asset. Lessees recognize operating lease payment as periodic expense on a straight-line basis over the term of the lease. Lessors however continue to carry the asset in its books, depreciating them on annual basis. Additionally, they recognize the operating lease rental receivable from lessee over the term of the lease from lessees as periodic income in the income statements. Tax Implications of the Old Rule The Companies Income Tax Act provides for the tax treatments of leases. The tax treatments are also explained in the Federal Inland Revenue Service (FIRS) Circular on the Tax Implication of the Adoption of the IFRS. It should be noted that the prescribed tax treatment aligns with the old rule under IAS 17. Under a finance lease arrangement, lessees have the responsibility to deduct withholding tax on the annual finance/interest charge while they claim capital allowance on the leased asset. The interest charge constitutes a deductible expense when computing their income tax liability. For lessors, the finance income constitutes a taxable income and they are not allowed to claim capital allowance on the leased assets. For operating lease arrangement, the lessee deducts withholding tax on the annual operating lease rental while the lessor accounts for the VAT on the amount. The lease rental constitute deductible expense and taxable income in the books of the lessee and lessor respectively. Additionally, the lessor continues to claim capital allowance on the asset. What has Changed? The new rule retains the two categories of leases, operating and finance, for the lessor, as well as the recognition under the old rule. However, it prescribes a single accounting treatment for lessees. The new rule requires lessees to recognize a “right-of-use asset” and a lease liability at the inception of the lease. The lease liability is measured at the present value of outstanding lease payment. The recognized liability accrues finance (interest) charges over the term of the lease and any payment made by the lessee is used to settle the original

The year 2018 was not the best of years for the stock market but the economy grew at its fastest pace since the recession in 2016 after real gross domestic product in 2018 expanded at 1.9 percent. Companies like Zenith Bank and Dangote who have released their 2018 results have seen strong profit growth in the past year, however, BusinessDay has identified 3 companies who despite having a better business performance in 2018 than in 2017 are on course to still deliver lower profits when their full year results are released, and you will never guess why. In 2017, companies like Seplat, Forte Oil and Presco had Uncle Sam to thank for their big profit after tax (PAT) figures. These three companies received combined tax credits from the government totaling around N83.7 billion, which helped boost their bottom-line figures significantly. The highest tax credit was enjoyed by Seplat who received about N67.6 billion, which helped the company report full year PAT of N81.1 billion in 2017 after the oil exploration company had earned only N13.4 billion in profit before tax (PBT). Based on projections using the 2018 Q3 report, analysts now expect that excluding any tax credit, the full year profit of the oil company will be around N36 billion, representing a profit decline of around 56 percent. Don’t be fooled by the bottom-line numbers though, Seplat had one of its best years in 2018. Although net profit could decline, the company will deliver revenue growth of around 67 percent while PBT will jump around 444 percent, capping a fantastic year for the company after the oil price rebound has helped boost revenue and allowed the company pay down some of its debt. Analysts told BusinessDay that they do not expect Seplat to allow its PAT to fall that low considering they could still call on more tax credits in 2018. The company currently holds around N41.83 billion in deferred tax asset and has already paid about N9.6 billion of tax liabilities in advance as at the end of Q3 2018. Therefore, the oil producer still has more tax credits to collect at their disgression which may see them report profits that significantly exceeds our forecasted N36 billion PAT. A deferred tax asset is an asset on a company’s balance sheet that may be used to reduce taxable income. It is created when recorded income taxes payable are higher than the income taxes paid to the government. Presco, one of Nigeria’s largest oil palm producing companies is expected to see its PAT decline to N7 billion in 2018 from N25.4 billion in 2017. Presco owes most of its profit in 2017 to the government after it received about N14.4 billion in tax credit, adding to its PBT of around N10.9 billion. The tax credit accounted for around 57 percent of PAT and 132 percent of PBT. Asides the tax credit, Presco’s profit was also lifted by revaluation gains of around N2.78 billion which analysts now expect that the revaluation gains and tax credits may not be available for pickup as it was last year. Another oil company with a similar story is Forte Oil which has been in the news lately as its former owner is currently divesting away from the company. In 2017, Forte Oil received tax credit of around N1.6 billion, which helped the company deliver PAT of around N12.2 billion after the company reported N10.6 billion in PBT. This year, analysts project that the company’s full year 2018 PAT will be around N8.9 billion if Uncle Sam fails to extend a helping hand once again. Unlike Seplat, the company’s revenue and PBT is expected to be slightly lower in 2018 than it was in 2017 due to sluggish sales. “We will have to wait and see if these companies take a hit on profit in 2018 when their full year reports are released. While I see Forte oil and Presco reporting lower yearend profit, its possible Seplat will deliver profits that show marginal growth if the deferred tax assets are converted to tax credits in their reports,” said Tochukwu Okafor, Lecturer in Banking and Finance department at Covenant University. Dangote Cement another benefactor of tax credits in 2018 reported its highest profit ever in 2018 after it collected tax credit of around N89.5 billion when it secured its pioneer status last year. Analysts say the company may struggle to match its N390.3 billion PAT it achieved last year in 2019.   Source: Business day