The Federal Inland Revenue Service (FIRS) has just published an Information Circular on the tax implications of the adoption of International Financial Reporting Standards (IFRS). Key highlights include:
- Transition adjustments - Taxpayers are required to present a reconciliation of their IFRS transition adjustments for tax purposes
- Minimum Tax - The new net asset based on IFRS adoption shall not be adopted for minimum tax computation in the year of transition.
- Excess dividend tax – where dividend paid exceeds taxable profit excess dividend tax at 30% will apply notwithstanding that profit being distributed may have resulted from transition adjustments
- Extension of time for filing returns – First time adopters of IFRS would on application in accordance with Section 26 (5) of FIRSEA (and provisions of Self-Assessment Regulations 2012) be granted 3 months extension for filing of their first set of IFRS Financial statements and related returns to allow sufficient time to overcome initial conversion problems.
- Inventory - (e.g. returnable packaging materials) reclassified in line with IFRS as non-current asset shall continue to be treated as inventory in line with the existing tax practice.
- Decommissioning - Provision/estimate of cost of abandonment, dismantling, removing the item of PPE and site restoration shall not be allowed for capitalisation with PPE.
- Revaluation – Cost (and TWDV) is the basis of capital allowance computation, FIRS shall continue to disregard all revaluation of PPE. Any revaluation surplus shall not be taxable while deficit shall not be an allowable deduction.
- Asset valuation fees - Professional fees and valuation expenses relating to revaluation of PPE shall not be allowed for tax purposes.
- Componentisation – The breakdown of componentised PPE inclusive of the basis for determining the value of each component shall be filed with the FIRS as it shall form the basis of capital allowance claims and applicable rates.
- Interest free loan - when it relates to individual, it shall be regarded as benefit in kind and taxed under the provisions of PITA. In the case of corporate taxpayer, it shall be treated in line with Transfer Pricing Regulations. In all cases, the interest rate to be used shall be MPR plus a spread to be determined by the Finance Minister in line with Section 32(1) of FIRS Act.
- Impairment - all impairment losses shall not be allowed for tax purposes.
- Intangible assets - certain intangible assets such as software, franchise, and website cost will qualify for tax deduction based on amount amortised over the useful life.
- Discontinued Operation - Cessation rule shall apply when a taxpayer discontinues a line of business and commencement rule will apply if the line of business is bought over by another party at arm's length in line with Section 29 (9) of CITA.
- Financial Instruments - classified as Fair Value Through Profit or Loss (FVTPL) or held for trading are revenue in nature and therefore liable to CITA.
- Fair value measurement - All gains and losses that may arise from fair value measurement shall be disregarded for tax purposes.
Although one may not agree entirely with some of the positions taken by the FIRS, overall it is commendable that the FIRS is now proactively dealing with issues to provide certainty of treatment for taxpayers rather than taking a back seat and then turn round later to penalize taxpayers for non compliance.