Fiscal challenges in the construction sector in Nigeria has been saved
Fiscal challenges in the construction sector in Nigeria
Is any relief in sight?
The high operating costs obtainable in the construction industry which result in low profit margins has also created tax challenges for the companies as they have been unable to fully utilize opportunities for relief available under the provisions of the tax Laws.
That Nigeria possesses enormous human and natural resources is a fact already taken for granted the world over. However, the infrastructure and social service delivery systems in the country have remained parlous. Nigeria thus remains an economy in need of serious infrastructural investment howsoever can be achieved. With more than 75% of her national budget being allocated to recurrent expenditure, it is very evident that the balance of 25% (or less due to leakages from varied causes) does not, cannot, will not make (and has not made) any indelible impact on the infrastructure development deficit gap!
The construction sector continues to be the go-to sector for solutions when it comes to certain infrastructure projects and the biggest player or stakeholder in this industry remains the Government, whether at Federal, State or Local level. The other players in this space are the private sector companies who compete for projects on tender basis.
Construction contracts are contracts specifically negotiated for the construction of an asset or a combination of assets that are closely interrelated or interdependent in terms of their design, technology, and function for their ultimate purpose or use. Further, construction contracts may involve activities such as building of roads, bridges, buildings, dams and civil engineering works, which are usually expected to be carried out over a significant period of time with defined milestones.
These contracts enable the Project Owner and the Counter-party to define the pricing of the project and to allocate associated risks. Obviously, the Project Owner reserves the power to decide the type of contract, arrangement or model to be used for the project as well as related terms and conditions. Thus, whatever infrastructure procurement and delivery model that is adopted or pursued by the government, companies which play in the construction industry have faced certain unremitting fiscal challenges.
Different cost and revenue estimates are perhaps generated during the life cycles of these type of contracts for accounting purposes. Under International Accounting Standard (IAS) 11, the accounting treatment that is prescribed for recognizing the revenue and costs associated with construction contracts requires an estimation of the contract revenues and expenses associated with the contract activities that occurred in a financial period. Where this cannot be reliably estimated, revenue is recognized only to the extent of the contract costs that is recoverable. These revenue recognition principles also form the basis for taxation of contract revenues. The issuance of Certificates of Completion by contract owners to contractors in acknowledgement of extent of work completed has become an established industry practise. This has also become accepted procedure for incurred in the course of carrying out construction contracts must be attributable to certified work done.
Consequently, only costs that relate directly to the percentage of work carried out will be allowable for tax purposes if they are wholly, reasonably, exclusively and necessarily incurred in earning the profits for the period. The use of Certificates of Completion for revenue recognition purposes raises the issue the risk of potential mismatch in accounting for revenue and expenses over the life of construction projects.
The high operating costs obtainable in the construction industry which result in low profit margins has also created tax challenges for the companies as they have been unable to fully utilize opportunities for relief available under the provisions of the tax Laws. The constant challenge in this industry is that Project Owners usually deduct tax at 5% from the entire contract sum instead of withholding only on the required percentage of the profits accruing to the Counter-party companies. Given that construction companies typically operate at low margins, they are in perpetual tax refund position. This also has significant impact for their cash flow position. In addition, there is that perennial challenge for construction companies to claim input VAT.
Whilst it is within Nigeria's rights to glory in such statistics as:
- Biggest economy in Africa
- 26th largest economy in the world
- Population size of more than 167 million people with the tag “Nigeria is the largest country in Africa and accounts for 47% of West Africa's population”.
- Biggest oil exporter in Africa (though oil prices are plummeting), with the largest natural gas reserves in the continent
- Sustained averaged 6.8% annual growth since 2010 and the assurance that Nigeria remains an attractive investment destination for multinationals seeking new markets, it is imperative to refine the fiscal framework surrounding market actors whose services and continued operations in the Nigerian economy would assist to deliver the requisite infrastructural renewal or regeneration that Nigeria desperately needs.