Daily Tax Report: International

INSIGHT: Nigeria—Fair Valuation and Minimum Tax Implications

Feb. 12, 2019, 10:07 AM

The adoption of the International Financial Reporting Standards in Nigeria has led to some unforeseen tax issues that have significant cash flow implications for companies if not properly managed. One tax issue is the impact of asset revaluation and fair valuation on minimum tax computation.

Companies in Nigeria have embraced the International Financial Reporting Standards (“IFRS” or “the Standards”) for financial reporting, after the Federal Executive Council approved the roadmap for IFRS adoption in July 2010.

This article addresses some of the challenges taxpayers now face as a result of the adoption of revaluation and fair valuation models as the basis for subsequent recognition of property, plant and equipment (“PPE”) and investment property in the financial statements.

Impact of Asset Revaluation and Fair Valuation on Net Assets

The value of an asset will typically change from its historical cost with time, use, demand, and other factors. This means that the cost of an asset may subsequently decrease or increase.

With the advent of the Standards, companies can now choose to recognize such changes in the historical cost of their assets through a concept known as fair valuation/revaluation. They can also continue to recognize such assets at their historical cost value. Such valuations, however, will not have any cash implication in the financials of a company.

However, the “net assets” position of a company, which is the excess of a company’s assets over its liabilities, will increase or decrease with the corresponding increase or decrease in the asset position arising from the valuation.

This occurrence has serious implications on the minimum tax position of a company, as the “net asset” value is one of the parameters used in determining minimum tax. A company may find itself paying significantly more taxes, simply because of a revaluation of its assets, which is only notional. This impact is examined in greater detail below.

Minimum Tax Implication of Asset Revaluation and Fair Valuation

The minimum tax provision in the Nigerian Companies Income Tax Act (“CITA”) (the Companies Income Tax (CIT) Act, Cap. C21, Laws of the Federation of Nigeria (LFN), 2004 [as amended by the CIT (Amendment) Act, 2007] provides the legal basis for the imposition of taxes on the income of companies in Nigeria, other than those involved in the exploration and production of petroleum) is one of a series of anti-tax avoidance provisions in the Nigerian tax laws. It combines several parameters (including net assets) to define the minimum tax payable by a company.

By the provision, companies with no taxable profit or taxable profit less than minimum tax, and which do not meet the exemption criteria, are required to pay income tax based on the minimum tax computed.

Specifically, section 33(1) of the Act provides that:

“Notwithstanding any other provisions in this Act where in any year of assessment the ascertainment of total assessable profits from all sources of a company results in a loss, or where a company’s ascertained total profits results in no tax payable or tax payable which is less than the minimum tax, there shall be levied and paid by the company the minimum tax as prescribed by subsection (2) of this section.”

In calculating this minimum tax, section 33(2) provides that:

“for the purposes of subsection (1) of this section, the minimum tax to be levied and paid shall:

a. If the turnover of the company is N500,000 or below and the company has been in business for at least four calendar years be —

i. 0.5 percent of gross profit; or

ii. 0.5 percent of net assets; or

iii. 0.25 percent of paid up capital; or

iv. 0.25 percent of turnover of the company for the year,

whichever is higher, or

b. if the turnover higher than N500,000, be whatever is payable in paragraph (a) of this subsection plus such additional tax on the amount by which the turnover is in excess of N500,000 at a rate which shall be 50 per cent of the rate used in (a) (iv) above.”

Based on the above provision, companies risk paying more taxes based on net assets, from the upward revaluation of their assets.

Put simply, revaluation gains will lead to increased minimum taxes. In some circumstances, such increase in minimum tax could easily run into billions of Nigerian naira (1 naira = $0.0027). Land is one category of assets that would quickly and easily fit into this narrative.

With the understanding that such revaluations are only notional and have no cash flow implication, and undertaken to reflect changes in their market values in the financial statements, it is important to consider the provisions of the tax laws as well as the position of the tax authorities with respect to revaluation of assets and its overreaching implications.

Position of CITA on Asset Revaluation and Fair Valuation

Unfortunately, the CITA has not been updated to reflect the accounting changes introduced by the IFRS. Hence, the CITA does not specifically provide guidelines on how revaluations and fair valuations of assets should be treated for tax purposes.

However, inference can be drawn from the Second Schedule to the CITA which provides the basis of how capital allowances can be claimed on qualifying assets. Based on Paragraph 1 of this Schedule, capital allowances are to be claimed on qualifying expenditure.

Qualifying expenditure, as defined by the CITA, means expenditure incurred on qualifying assets. This implies that capital allowances should only be claimed on the historical cost of assets (i.e. actual expenditure incurred) and not on the revalued amounts of assets.

From the above, it is evident that the CITA supports the historical cost model as the basis for valuing assets for tax purposes, and so fair valuation and revaluation should be disregarded for tax purposes.

However, the Federal Inland Revenue Service (“FIRS”) has, over time, required companies to pay minimum tax based on the revalued amount of net assets as presented in the financial statements. The reason is due largely to the fact that revaluations and fair valuations will usually result in a higher net assets value, thereby resulting in a higher minimum tax liability.

The FIRS’ position is based on the conflicting provisions contained in one of the FIRS’ clarification circulars. This is discussed in further detail below.

Conflicting Positions of FIRS’ Circular on Asset Revaluation and Fair Valuation

In March 2013, to address the tax issues associated with the adoption of the newly introduced IFRS, the FIRS published a circular: “Tax Implications of the Adoption of IFRS” (“the Circular”). Among other things, the Circular sought to clarify the tax treatment of asset revaluation and fair valuation. The provisions of the Circular in this regard are discussed below:

  • Paragraph 8.9 of the Circular states that “Cost and Tax Written Down Value (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.”
  • Paragraph 17.4 of the Circular also states that capital allowances are not allowed on the revalued amount but on the historical cost of the asset in line with the provisions of the tax laws.

From the above paragraphs, taxpayers will only be allowed to claim capital allowances based on the historical cost of assets. This implies that the computation of capital allowance will not be based on “revalued cost” or “deemed cost” of PPE for tax purposes.

Therefore, the inference from the combined reading of Paragraphs 8.9 and 17.4 of the Circular is that all asset impairments and revaluations are to be disregarded for tax purposes. This position aligns with the provisions of the Second Schedule of the CITA, discussed earlier.

  • Paragraph 30.1 of the Circular states that all gains and losses that may arise from fair value measurement shall be disregarded for tax purposes.

Therefore, based on the above, it appears that the intention of the Circular is to disregard all revaluations and fair valuations for tax purposes. This position, again, clearly aligns with the Second Schedule of the CITA which supports the historical cost as the basis for asset valuation for tax purposes.

However, Paragraphs 17.2 and 17.7 of the Circular seem to contradict Paragraphs 8.9, 17.4 and 30.1 of the Circular, and thus provide a basis for the FIRS’ position on revaluation for minimum tax purposes.

  • Paragraph 17.2 states that “no adjustment shall be allowed to the net asset on the financial statement for the purpose of computing minimum tax.”
  • Paragraph 17.7 provides that “where there is reversal of impairment, no adjustment would be required to the net assets on the financial statement for the purpose of computing minimum tax.”

The interpretation of the above Paragraphs is that the net assets in the financial statement should not be adjusted by elements such as fair valuations and revaluations which are notional while computing minimum tax.

The situation in which companies pay minimum tax based on the revalued net assets value is contrary to the provisions of the CITA, which disregard revaluations and fair valuations for asset valuation.

In addition, the FIRS’ position on minimum tax amounts to double standards. While on the one hand, the FIRS supports the view that capital allowances are to be computed on the historical cost of assets and that revaluation and fair value measurements are to be disregarded for tax purposes, on the other hand, the FIRS is advocating that taxpayers pay minimum tax based on the revalued amount of net assets.

This is self-contradictory and negates the doctrine of tax equity and fairness which the Nigerian National Tax Policy advocates. Moreover, it must be emphasized that positions taken by the FIRS in its circulars cannot take precedence over the clear provisions of the CITA.

Our Position

Since the provision of the CITA is unambiguous on the basis on which assets should be valued for tax purposes, which is on the historical cost (i.e. actual expenditure incurred), and the Circular is also clear on the tax treatment to be accorded revaluation gains and losses for tax purposes, the same basis should be adopted for minimum tax purposes.

Therefore, for minimum tax purposes, the historical cost of assets should be adopted as the basis for computing a company’s net assets value. All forms of surplus or deficit arising from fair valuation and revaluation are to be totally disregarded in line with the provisions of the tax law.

Thus, when a company revalues its PPE and fair values its investment property and these result in a loss in asset value, such losses which amount to a reduced net assets value should be disregarded for minimum tax purposes.

By the same token, when assets are revalued and fair valued resulting in a surplus, such surplus, which leads to increased net asset value, should also be disregarded for tax purposes.

Where the FIRS insists on using the revalued amounts for the purpose of minimum tax, it should also consider allowing taxpayers to claim capital allowance on the same revalued amounts, as this is only fair and equitable.


It is clear by the provisions of the CITA that revaluation/fair value changes are to be disregarded for tax purposes. The FIRS needs to review and update the Circular to ensure alignment with the provisions of the tax laws.

In addition, while the proactivity of the FIRS on the release of the guidelines is laudable, the FIRS needs to ensure that such clarifications are not only consistent with the law, but also free of bias or contradictions. Ultimately, the need for our tax laws to catch up with changing accounting policies and regulatory standards cannot be overemphasized.

Planning Point

In calculating their minimum tax positions, taxpayers that have revalued their assets at any time, would need to make sure that necessary adjustments are made to ensure that those assets are recognized at their historical cost, for tax purposes.

Kenneth Mgbemena and Tobi David are Senior Tax Advisers with KPMG Advisory Services, Lagos, Nigeria and may be contacted at: kenneth.mgbemena@ng.kpmg.com, and oluwatobi.david@ng.kpmg.com.

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