TAT rules on the conditions for deductibility of expenses and claim of input VAT

The Federal Inland Revenue Service audited Chi Limited and issued a tax assessment of about N585m. In arriving at the assessment, the FIRS:

1. disallowed certain expenses for Companies Income Tax ( purposes including expenses for: sales promotion, bad and damaged goods, repairs and maintenance, and statutory fees paid to the Abia State Government Advertising Agency. The FIRS also disallowed foreign exchange losses on usance adjustments, exports and loan revaluations, and subjected certain exchange gains to tax. According to the FIRS, the expenses were not justifiably proven to have been Wholly, Reasonably, Exclusively, and Necessarily (WREN) incurred for business purposes.
2. adjusted the Company’s input VAT claimed on raw and packaging materials on the basis that input VAT should only be claimed when the relevant output has been sold. The FIRS also adjusted input VAT in respect of discounts granted by Chi to its distributors.
3. calculated penalty and interest on the assessment.

The TAT ruled in favour of the FIRS on all issues. 

This judgement re-emphasises the need to keep adequate support documentation. The expenses were disallowed largely due to the failure to provide enough support documents on the part of the taxpayer. Companies that incur significant write offs due to obsolescence or damaged goods should also maintain a company policy and endeavour to carry out other reasonable procedures to justify the expenses, as this is an area typically scrutinised by the FIRS.

With regards the issue of input VAT, there may be scope for the decision to be appealed, in line with some of the technical points in our analysis.

Please see our Alert and the TAT judgement below:

Download PwC Tax Alert - TAT rules on the conditions for deductibility of expenses and claim of input VAT (1)

Download CHI V. FIRS Judgement