Certificate of acceptance on fixed assets (CAFA) in Nigeria. Is it time to review process and threshold or discontinue?
One of the most important roles of IID (The Industrial Inspectorate Division (IID) of the Federal Ministry of Industry) is to inspect, value and certify capital expenditure incurred by businesses in Nigeria.
In this regard, every business that incurs or intends to incur capital expenditure of N500,000 or more must inform IID. The IID, after satisfactorily making a verification, issues a Certificate of Acceptance of Fixed Assets (CAFA) certifying the value of the capital expenditure.
Why is CAFA required?
The Industrial Inspectorate Act Cap I8, Laws of the Federation of Nigeria (LFN) 2007 (the Act) is the legislation that established the Industrial Inspectorate Division (IID) of the Federal Ministry of Industry, Trade and Investment (FMITI) for the purpose of investigating and following the undertakings of industries, including investments and other related matters.
Under the Industrial Inspectorate Act (IIA), IID estimate the cost of any projected, new and existing capital expenditure.
How to get CAFA?
The companies must inform IID of its intention to incur capital expenditure. The process involves preliminary confirmation of fixed assets schedules, preparation and submission of a written application. Next, IID will check the submission and conduct a physical inspection of the company’s asset.
If satisfied, IID will issue a Certificate of Acceptance of Fixed Assets (CAFA).
The certificate shows the name of taxpayer, value of capital expenditure and year of acquisition.
The need to ensure consistent valuation of capital expenditure amongst the various government agencies who would in performance of their duties need to validate the values of capital expenditure made by businesses emphasizes the relevance of the IID. Thus, Federal Inland Revenue Service (FIRS) is one of such government agencies specifically mentioned in the IID Act.
Companies that incur qualifying capital expenditure (QCE) for the purpose of their businesses are allowed to recover the costs of such investment through capital allowance claim when calculating their income tax liability.
This tax benefit is specifically provided for in the Second schedule of the Companies Income Tax Act (CITA). Also, CITA states the categories of QCE upon which capital allowances can be claimed, subject to provision of CAFA, as stipulated in the Act. FIRS generally seeks to withdraw the capital allowance claimed by a company where the company is unable to provide CAFA in support of its investment in the acquisition of such QCE.
Consequently, a company that fails to provide CAFA for its QCE runs the risk of increased income tax liability. In order to obviate this risk, companies engage with IID with a view to process and obtain the “almighty” CAFA.
The process of obtaining CAFA is usually not a walk in the park even when there are valid documents to support the acquisition of fixed assets. There are most times usually long delays at various stages of the process (i.e. pre-inspection, inspection and follow up). These bottlenecks come at a cost to companies.
Apart from the administrative cost of deploying personnel of the company or engaging the services of a tax advisor to process CAFA, companies appear to be at the mercy of IID officials. Moreover, the excuse of a delay from IID is not usually accepted by FIRS especially where the application for CAFA coincides with the notification of a tax audit exercise by FIRS. Thus, companies are invariably forced to pay income tax on valid business expenses.