Rima Agro Processing: Interest Cap, Related-party Service Fees and a Debt-for-Equity Proposal

Interest cap. Nigerian law limits the deduction of interest on debt to 30% of EBITDA (banks and insurers are outside the rule). EBITDA of NGN 2.4bn x 30% = NGN 720m of deductible interest. Interest incurred of NGN 1.3bn therefore leaves NGN 580m disallowed for the year. At the 30% companies income tax rate that is roughly NGN 174m of additional tax for 2025, before interest and penalties. Ask whether the excess can be carried forward and for how long - the rule and its carry-forward mechanics have been amended more than once, so confirm against the current Act and any FIRS circular before filing; do not rely on the treatment applied in an earlier year.

Interaction with transfer pricing. Pass the 30% cap first is not the end of the analysis. The 11% rate must independently satisfy the arm's-length principle under the Income Tax (Transfer Pricing) Regulations. The 2021 study is stale: benchmark against a refreshed search of comparable loans with similar tenor, currency and credit standing, and document it in the local file. If the arm's-length rate were, say, 9%, a further NGN 240m of interest would be disallowed. Under the Regulations the tax authority may recharacterise the excess interest as a distribution - which triggers 10% withholding tax on the recharacterised amount and may affect the dividend exemption analysis.

Presentation. The loan is a related-party debt and must be disclosed in the TP disclosure section of the annual return; failing to disclose it exposes the company to penalties for non-compliance independent of the tax itself. Input the numbers into the tax computation, and consider a voluntary disclosure or advance ruling before an audit is opened.

Deductibility test. Two hurdles must be cleared: the general rule (wholly, exclusively, necessarily and reasonably incurred for producing the profits) and the transfer pricing arm's-length/benefit test. The evidence here is weak on both. There are no secondee time records, only two visits, and the invoices are generic. The tax authority will ask what service was actually received, who delivered it, how the cost was allocated and what benefit the Nigerian company derived. Generic descriptions such as 'technical support and know-how' are routinely disallowed; the burden is on the company to substantiate.

Documentation to assemble now: the signed agreement and any amendments, a cost-allocation key and a comparison of fees against a recognised benchmark, secondee contracts and immigration records, visit logs, emails and deliverables, board minutes evidencing the benefit, and a contemporaneous local file. If the fee is not arm's length, the excess will be disallowed at 30% - up to NGN 105m of tax on the full NGN 350m - and the deduction may be treated as a distribution with 10% withholding consequences.

VAT. The service is imported. Under the VAT (Modification) Order 2021, a non-resident supplier of services to a Nigerian customer must register and charge VAT; if it has not, the Nigerian recipient must self-account for VAT by reverse charge at 7.5%. Exposure: 7.5% x NGN 350m = NGN 26.25m, plus penalties and interest, and the input VAT may not be recoverable in full if the underlying costs are not wholly attributable to taxable supplies. Withholding tax deducted on the fee does not discharge the VAT obligation.

Recommendation. Regularise the VAT, strengthen the documentation for future years, consider renegotiating the fee to a cost-plus recharge with a time-based allocation, and disclose the transaction properly.

Mechanics. Converting NGN 4bn at 11% removes about NGN 440m of interest, saving up to NGN 132m of tax a year at 30%. That is the headline benefit the board is likely to focus on, and it is real, provided part of that interest is currently deductible - the 30% cap means NGN 580m of 2025 interest was already disallowed, so some of the 'saving' is a saving of disallowed interest that was not giving a deduction anyway. Redo the arithmetic on the post-conversion EBITDA: interest falls to about NGN 880m against a cap of NGN 720m, so a further NGN 160m of interest still falls outside the cap.

Costs to set against it. (i) Dividends are not deductible and attract 10% withholding tax when paid, a leakage of up to NGN 400m on NGN 4bn of distributions; the company must be able to pay dividends, and the excess-dividend rule can tax distributions that exceed taxable profit. (ii) Equity raises the return required by the shareholder, so the group's overall cost of capital may be unchanged or higher. (iii) Thin capitalisation is a group-level question: if the parent has other Nigerian subsidiaries, consider whether the debt is better located where the EBITDA base is larger.

Alternative. Rather than a straight conversion, consider partial conversion sized so that remaining interest sits inside the 30% cap - here roughly NGN 2.4bn of debt at 11% produces NGN 264m of interest... on these numbers almost the whole loan is supportable only if EBITDA grows; model a range of EBITDA outcomes. Also fix the pricing to an arm's-length rate and refresh the benchmarking study, since some of the disallowance may be a pricing problem rather than a leverage problem. Model the after-tax cost of debt against the after-tax cost of equity, including withholding tax leakage, before recommending.