Advanced Taxation · November 2020

ABC & CO. (Tax Consultants) ABC Avenue, Lagos. April 10, 2020 The Managing Director Sunchi West Africa Holdings Ibadan Dear Sir, RE: TAXATION OF RESIDENT AND NON-RESIDENT COMPANIES IN NIGERIA I refer to your mail of April 5, 2020 on the above subject, requesting us to unravel the issue of payment of companies income tax by resident and non-resident companies operating in Nigeria. Please find below relevant issues that will facilitate your understanding of the situation:

a) Resident company A company is resident in Nigeria under the extant law, if it is incorporated or registered in Nigeria. This means that the taxpayer is liable to tax on the income or profits accruing in, derived from, brought into, or received in Nigeria Non-resident company This is a company that is not registered or incorporated in Nigeria, but which derives income or profits from Nigeria. A non-resident corporation or individual is liable to tax only on the profit or income deemed to be derived from Nigeria. 41

b) Circumstances under which a non-resident company will be liable to tax in Nigeria These include: ▪ Fixed base of business: If a non-resident company has a ―fixed base‖ from which it carries on its business or trade in Nigeria, the profits from such activities would be deemed to be derived from Nigeria; ▪ Agency operation: Where a non-resident company does not have a fixed base but habitually operates a trade or business through a person in Nigeria who:

- is authorised to conclude contracts on its behalf or on behalf of some other companies controlled by it or which has controlling interest in them or

- habitually maintains a stock or goods or merchandise in Nigeria from which deliveries are regularly made by a person on behalf of the company, then an agency arrangement is deemed to have arisen. The profit deemed to have been derived from Nigeria is the profit attributable to the business or trade or activities carried on through the agent. ▪ Turnkey projects: This is a trade or business or activity which involves a single contract for the surveys, deliveries, installations or construction. For Nigerian income tax purposes, the profit from such a tunkey project is considered as derived from Nigeria and this will be liable to tax. ▪ Income derived by non-resident company from professional consultancy, management and technical services rendered in Nigeria. ▪ Income derived from supervisory activity that lasts more than three (3) months. ▪ Income derived by a non-resident company from investment, such as dividend, interest, rent and royalties. The withholding tax deducted from these incomes is taken as the final tax. ▪ Income derived from a contract awarded to a Nigerian company, but sub- contracted to a non-resident company. 42 c i) Relationship between a Nigerian branch and a foreign parent company ▪ Under the Companies Income Tax Act Cap C21 LFN 2004 (as amended) citizens of other countries, that are foreign nationals can incorporate a company or corporation (other than a corporation sole). This is regarded as a resident company that is a Nigerian company. ▪ However, a Nigerian branch of a foreign company is treated as a corporate entity. Income or profits derived by such company in Nigeria is taxable in Nigeria. The conditions under which such a Nigerian company will not be liable to Nigerian tax are where: ▪ The branch of the foreign company is used solely for the storage or display of goods or merchandise; and ▪ The branch is used for collection of information. c ii) Nigerian subsidiary and a foreign parent company ▪ Under the Nigerian tax laws, the subsidiary of the foreign parent company must be incorporated in Nigeria. ▪ The foreign equity participation may be 100% (wholly-owned) or less than 100% (partly owned), this will not affect the residence status in Nigeria. ▪ Dividends distributed by the Nigerian subsidiary of the parent company is a franked investment income and shall be exempted from tax in the hands of the parent company. But it will be subjected to withholding tax of 7.5% in Nigeria.

d) Overseas branch of a Nigerian company ▪ For tax purposes, the profit of an overseas branch of a Nigerian company is deemed to be derived in Nigeria and is therefore fully liable to tax in Nigeria. ▪ It is essential to know that the foreign tax suffered is allowable as a deduction in determining the overseas profits. ▪ Assets in such a branch are eligible for capital allowances claim in Nigeria. ▪ Losses incurred can be set off against profit in Nigeria provided such losses were incurred from the same source. ▪ Double Taxation Relief (DTA) is available for any foreign tax suffered. 43

e) Overseas subsidiary of a Nigerian company ▪ For tax purposes, the profit of an overseas subsidiary is not deemed to be derived in Nigeria and will therefore not be liable to tax in Nigeria. ▪ It is only dividend received from such overseas subsidiary that will be considered for Nigerian tax purposes. ▪ Technical and management fees paid to the Nigerian company by the overseas subsidiary will be subjected to tax in Nigeria. ▪ Capital allowances will not be claimable on the assets of the overseas subsidiary.

f) Computation of companies income tax payable by the Nigerian subsidiary The companies income tax payable by the Nigerian subsidiary is N31,415,100, while the tertiary education tax is N2,899,400 (See Appendix I). The China operation is not liable to Nigerian tax, hence no computation of adjusted/assessable profit. We have commented on areas deemed necessary. Nevertheless, if you should still need further clarification(s), please do not hesitate to contact us. Yours faithfully, Chukwu, A. O Senior Consultant 44 APPENDIX I Sunchi West Africa Holdings Computation of adjusted profit For the year ended December 31, 2018 N’000 N’000 Net profit as per accounts 120,510 Add back: Disallowable expenses: Depreciation 9,900 Loss on revaluation of non-current assets 1,490 Legal expenses: Preliminary expenses 2,100 Land acquisition 550 Allowance for doubtful debts (General prov) 5,820 Repairs and maintenance: Improvement on office building 2,250 Administrative expenses (court fine) 600 Foreign exchange loss provision 1,750 24,460 Adjusted profit/Assessable profit 144,970 Computation of companies income tax for 2018 year of assessment N’000 Adjusted/assessable profit 144,970 Deduct: Capital allowances (w1) 40,253 Total profit 104,717 Companies income tax @ 30% of total profit 31,415.1 Tertiary Education Tax @ 2% of assessable profit 2,899.4 Total tax payable 34,314.5 45

Workings (1) Capital allowances computation Factory Building Office Total Building Capital Allow. 1A 15 15 50 50 25 50 AA 10 10 25 25 20 25 N’000 N’000 N’000 N’000 N’000 N’000 N’000 2018 Y/A Cost 20,200 12.450 25,000 16,120 4,700 4,000 1A (3,030) (1,868) (12,500) (8,060) (1,175) (2,000) 28,633 AA (1,717) (1,058) (3,125) (2,015) (705) (500) 9,120 Inv. All. ______ ______ (2,500) _______ ______ ______ 2,500 40,253 2019 Y/A TWDV c/f to 2019 Y/A 15,453 9,524 9,635 6,381 2,820 1,542 (2) Annual allowances for 2018 in N’000 Factory building AA = N20,200 10 − N3,030 = N1.717 Office building AA = N12,450 10 − N1,868 = N1,058.25 = N1.058 Plant & machinery AA = N25,000 − 4 Plant Machinery N12,500 = N3,125 Motor vehicle AA = N16,120 4 − N8,060 = N2,015 46 Motor Vehicle Furniture Fittings Office Equip. Furniture & fittings AA = N4,700 − 4 N1,175 = N705 Office equipment AA = N4,000 − 4 N2,000 = N500

Marking Guide Marks Marks a) Heading ½ Address ½ Correct definition of resident company 1 Tax implication of resident company ½ Correct definition of non-resident company 1 Tax implication of non-resident company ½ 4

b) 2 marks for each description of circumstances which income or profit of a non-resident company will be assessable to tax subject to a maximum 5 points 10 c i) 1 mark for each correct description of the relationship between a Nigerian branch and a foreign parent company subject to a maximum of 3 points 3

ii) 1 mark for each correct description of the relationship between Nigerian subsidiary and a foreign parent company subject to a maximum of 3 points 3

d) 1 mark for each correct description of overseas branch of a Nigerian company subject to a maximum of 3 points 3

e) 1 mark for each correct description of overseas subsidiary of a Nigerian company subject to a maximum of 3 points 3 f) Heading ½ Net profit as per accounts ½ 47 Depreciation ½ Loss on revaluation of asset ½ Preliminary expenses ½ Land acquisition ½ General provision for doubtful debt ½ Improvement to office building ½ Court fine ½ Foreign exchange loss provision ½ Adjusted profit ½ Tax liability: Adjusted profit ½ Capital allowance ½ Total profit ½ Companies income tax ½ Tertiary education tax ½ Total tax payable ½ 8½ Capital allowances (18 ticks x 1/4 mark each) 4½ That is: 2018 Y/A (1 tick) IA (6 ticks) AA (6 ticks) Investment allowance (1 tick) Total capital allowance (4 ticks) Conclusion (memo) 1 14 Total 40

Examiner’s Report The question tests the candidates’ understanding of the principles relating to taxation of resident and non-resident companies. Being a compulsory question, almost all the candidates attempted the question. Candidates demonstrated a fair understanding of the question, especially in companies income tax computations; and performance was average. The commonest pitfall was the inability of the candidates to differentiate between overseas branch and a Nigerian company. Candidates should endeavour to read extensively the Institute’s Study Text and other relevant textbooks. 48

XYZ & Co (Chartered Accountants) Port Harcourt Date ---- The Managing Director Sunny Oil Producing Nigeria Limited Niger Delta Region Dear Sir, RE: TAX APPEALS AND THE TAX IMPLICATION OF THE COMPANY’S PROPOSED TRANSPORTATION BUSINESS Having concluded our assignment, we are pleased to report as follows:

ai. Preparation to be made before the commencement of the proceedings at the tribunal These include: ▪ All the relevant documents for the plant and equipment acquired and donation made would be collated and reviewed; ▪ All such documents would be photocopied and marked for easy reference; and ▪ Adequate provisions of the law that back the claim of capital allowances on the plant and equipment and donation as allowable expenses would be documented.

ii. Steps to be taken by the company if the decision of the Tribunal is not acceptable to it These include: ▪ Any person dissatisfied with a decision of the Tribunal may appeal against such decision on a point of law to the Federal High Court; ▪ The appeal must be in writing to the Secretary to the Tribunal within 30 days after the date on which such decision was given; ▪ A notice of appeal shall be filed which will set out all the grounds of law on which the appellant’s case is based; and ▪ Upon receipt of a notice of appeal, the secretary to the Tribunal shall cause the notice to be given to the Chief Registrar of the Federal High Court along with all the exhibits tendered at the hearing before the Tribunal. 49

iii. The tax implication of the company’s proposed transportation business The profit of oil producing companies that are involved in transportation business shall not be assessable to tax under the Petroleum Profits Tax Act or put differently, the business is covered under the Companies Income Tax Act 2004 (as amended). We hope that this report adequately represents the mandate assigned to us. Should you need any further clarification on this, we will be glad to address it. Yours faithfully, Debby Made Principal Consultant

(b) Sunny Oil Producing Nigeria Limited Petroleum Profit Tax For 2018 Year of Assessment N’000 N’000 Export sales (W1): Bonny light ($63.06 x N305 x 150,000) 2,884,995 Forcados ($65 x N305 x 100,000) 1,982,500 Bonny medium ($64.50 x N305 x 90,000) 1,770,525 Domestic sales (N720 x 80,000) 57,600 Natural gas (W2) 487,679 7,183,299 Deduct: Allowable expenditure: Operating expenses 255,000 Tangible drilling cost 80,000 Production & exploration (N1,100,600 – N80,000 – N200,200) 820,400 Intangible drilling cost 420,800 Admin expenses 225,500 Non-productive rent 80,700 Bad debts 20,150 Repairs and renewals 92,600 Transport & traveling 73,200 Royalties or domestic sales 22,500 Royalties others 200,400 Miscellaneous expenses (N63,800 - N12,750 - N50,000) 1,050 Salaries and wages 830,700 Pension fund contribution 74,450 Customs duty 10,400 50 Habour dues 3,300 Interest on loan 52,350 Appraisal wells (N120,000 x 2/3) 80,000 Tertiary education tax (2/102 x N3,089,799) 60,584 3,404,084 Adjusted profit 3,779,215 Deduct: unrelieved loss b/f 750,000 (i) Assessable profit 3,029,215 Less: Capital allowances Lower of: Actual capital allowances for the year 130,250 Unutilised capital allowance b/f 12,500 142,750 Petroleum investment allowance (w3) 24,845 167,595 Or 85% of assessable profit (85% of N 3,029,215) 2,574,833 Less 170% of PIA (1.7 x N24,845) 42,237 2,532,596 167,595 ii. Chargeable profit 2,861,620

iii. Assessable tax @ 85% of N2,861,620 2,432,377 Less MOU -

iv. Chargeable tax 2,432,377 Tertiary education tax 60,584 Chargeable tax 2,432,377 v Total tax payable 2,492,961

Workings (1) Export sales Bonny Light Forcados Bonny medium API $ API $ API $ Standard 360 63.03 360 65.00 360 64.53 Actual 370 360 350 10x 0.03 0.03 00x 0.03 (0.00) (10 )x 0.03 (0.03) 63.06 65.00 64.50 51 (2) Natural gas sales Akin Gas Limited 60−66 60−70 = 15.5−14.3 15.5−x −6 − 10 = 15.5 − x 1.2 = 𝐱 𝟏𝟒.𝟕𝟖% N’000 Gross sales 220,000 Less: G-factor allowance (14.78% of N220,000,000) (32,516) Net sales 187,484 Bollah Limited = 70 − 71 70 − 80 = 14.3 − x 14.3 − 13.6 = −1 10 = 14.3 − x 0.7 = 𝐱 𝟏𝟒.𝟐𝟑% N’000 Gross sales 350,000 Less: G-factor allowance (14.23% of N350,000) 49,805 Net sales 300,195 Total net sales = N187,484,000 + 300,195,000 = N487,679,000 (3) Petroleum investment allowance (PIA) N’000 Plant: N 120,500,000 x 10% = 12,050 Pipeline & storage tank: N 85,300,000 x 15% = 12,795 Total 24,845 52

Marking Guide Marks Marks a i) 1 mark for each of the points on preparations to be made by the consultant and the company subject to a maximum of 2 points 2 a ii) 1 mark for each of the points on the steps to be taken by the company if the decision is not favourable to it subject to a maximum of 2 points 2 a iii) ½ mark for each of the points on the tax implication of the company’s proposed transportation business subject to a maximum of 2 points 1

bi. Heading 1/4 Export sales : Bonny light 1/4 Forcados 1/4 Bonny medium 1/4 Domestic sales 1/4 Natural gas 1/4 Operating expenses 1/4 Tangible drilling cost 1/4 Production & exploration 1/4 Intangible drilling cost 1/4 Admin expenses 1/4 Non-productive rent 1/4 Bad debts 1/4 Repairs and renewals 1/4 Transport and traveling 1/4 Royalties (domestic sales) 1/4 Royalties (others) 1/4 Miscellaneous expenses 1/4 Salaries and wages 1/4 Pension fund contribution 1/4 Customs duty 1/4 Habour dues 1/4 Interest on loan 1/4 Appraisal wells 1/4 Tertiary Education tax 1/4 Adjusted profit 1/4 Unrelieved loss b/f 1/4 53

Workings: Export sales (Bonny light) ½ (Forcados) Bonny medium Natural gas (Akin Ltd) 1/4 (Bollah Ltd) 1/4 i. Assessable profit 1/4 8 Actual capital allowances for the year 1/4 Unutilized capital allowance b/f 1/4 Petroleum investment allowance 1/4 Total value 1/4 85% of assessable profit 1/4 Less 170% of PIA 1/4 Total value 1/4 Capital allowance figure (N 167,595) 1/4 Workings on PIA (Total value) ½ ii. Chargeable profit ½ 3 iii. Assessable tax @ 85% of chargeable profit 1 iv. Chargeable tax 1 v. Total tax payable: Tertiary education tax ½ Chargeable tax ½ Total tax payable 1 2 Total 20

Examiner’s Report The question tests the candidates’ knowledge on assessment and appeal procedures and petroleum profits tax computations. Majority of the candidates attempted the question and they exhibited a clear understanding of the requirements of the question and performance was satisfactory. The commonest pitfall was the inability of the candidates to correctly treat the loss relief brought forward and donation in the determination of assessable profit. Candidates are advised to cover the specific areas of the syllabus which relates to the topic by using the Institute’s Study Text, other relevant textbooks and tax laws. 54

PQR & CO. CHARTERED ACCOUNTANTS, LAGOS INTERNAL MEMORANDUM Date: November 25, 2020 From: Desk Officer (International Tax Matters) To: The Principal Partner RE: REPORT ON LARRY LIMITED’S REQUEST ABOUT REGIONAL ECONOMIC INTEGRATION AND TRADE BLOC I refer to our client’s request on regional integration and trade bloc and hereby present a report for your review before same is presented to the client.

a) Regional integration This is a process in which neighbouring states enter into an agreement in order to upgrade cooperation through common institutions and rules. The objectives of the agreement could range from economic to political and environmental. Although, it has typically taken the form of a political economy initiative where commercial interests are the focus for achieving broader socio-political and security objectives, as defined by national governments. Regional integration has been organised either via supranational institutional structures or through inter-governmental decision-making, or a combination of both. Past efforts at regional integration have often focused on removing barriers to free trade in the region, increasing the free movement of people, labour, goods, and capital across national borders, reducing the possibility of regional armed conflict (for example, through confidence and security building measures), and adopting cohesive regional stances on policy issues, such as the environment, climate change and migration. The examples include North American Free Trade Agreement (NAFTA), Asian Pacific Economic Cooperation Forum (APECF). 55 Trade blocs A trade bloc is basically a free-trade or near-free-trade formed by one or more tax, tariff, and trade agreement between two or more countries. Some trading blocs have resulted in agreements that have been more substantive than others in creating economic cooperation. Of course, there are pros and cons for creating regional agreements. In the past decade, there has been an increase in these trading blocs with more than one hundred agreements in place and more in discussion. Some of the examples include European Union (EU), ECOWAS, Africa Continentila Free Trade Area (ACFTA).

b) Objectives of regional integration Regional integration is the joining of individual states within a region into a larger whole. The degree of integration depends upon the willingness and commitment of independent sovereign states to share their sovereignty. Regional integration initiatives should fulfill at least the following eight important objectives:

i) The strengthening of trade integration in the region; ii) The creation of an appropriate enabling environment for private sector development; iii) The development of infrastructure programmes in support of economic growth and regional integration; iv) The development of strong public sector institutions and good governance; v) The reduction of social exclusion and the development of an inclusive civil society; vi) Contribution to peace and security in the region; vii) The building of environmental programmes at the regional level; and viii) The strengthening of the region’s interaction with other regions of the world.

c) Benefits of regional economic integration and trade blocs The benefits derivable from regional economic integration and trade blocs agreement include the following:

i) Trade creation: These agreements create more opportunities for countries to trade with one another by removing the barriers to trade and investment. Due to a reduction or removal of tariffs, cooperation results in cheaper prices for consumers in the bloc countries. Studies indicate that regional economic integration significantly contributes to the relatively high growth rates in the less-developed countries; 56

ii) Employment opportunities: By removing restrictions on labour movement, economic integration can help expand job opportunities;

iii) Consensus and cooperation: Member nations may find it easier to agree with smaller numbers of countries. Regional understanding and similarities may also facilitate closer political cooperation; iv) Impetus for private sector planning and investment: Regional economic integration can serve a useful economic purpose beyond the direct gains from trade liberalisation, by reducing uncertainties and improving credibility and thus making it easier for the private sector to plan and invest; and

v) Other non-economic benefits: Regional economic integration may allow a member country to reap other non-economic benefits, such as peace and security.

d) Disadvantages of regional economic integration and trade blocs These include:

i) Trade diversion: The flip side to trade creation is trade diversion. Member countries may trade more with each other than with non- member nations. This may mean increased trade with a less efficient or more expensive producer because it is in a member country. In this sense, inefficient companies can be protected inadvertently with the bloc agreement acting as a trade barrier. In essence, regional agreements have formed new trade barriers with countries outside of the trading bloc.

ii) Employment shifts and reductions: Countries may move production to cheaper labour markets in member countries. Similarly, workers may move to gain access to better jobs and wages. Sudden shifts in employments can distort the resources of member countries.

iii) Loss of national sovereignty: With each new round of discussions and agreements within a regional bloc, nations may find that they have to give up more of their political and economic rights.

iv) Regional integration and trade blocs are forms of trade barriers with countries which are not members of the trading bloc.

v) Investment diversion: One of the problems facing many smaller economies is lack of foreign investment. Investment decision is a potential economic disadvantage of regional economic integration programme. Foreign investors from non-member countries may see a member country as less attractive place to invest due to higher burden of tariffs and regulations

e) Common market and Economic Union Regional economic integration has enabled countries to focus on issues that are relevant to their stage of development as well as encourage trade between neighbours. Common market and Economic Union are types of regional economic integration. Common market allows for the creation of economically integrated markets among member countries. Trade barriers and any restrictions on the movement of labour and capital between member countries are removed. Like customs unions, there is a common trade policy for trade with non- member nations. The primary advantage to workers is that they no longer need a visa or work permit to work in another member country of a common market. An example is the Common Market for Eastern and Southern Africa (COMESA). Economic Union: This is created when countries enter into an economic agreement to remove barriers to trade and adopt common economic policies. An example is the European Union (EU). Economic Union requires the integration of monetary and fiscal policies such as use of common currencies and fixed exchange rates. It is hoped that the matters discussed above will meet your expectations. Mrs Charity Kay

Marking Guide Marks Marks Heading/Address 1 a) ½ mark each for correct description of regional Integration subject to a maximum of 3 points 1½ ½ mark each for correct description of trade blocs subject to a maximum of 3 points 1½ 4

b) 1 mark for each objective of regional integration subject to a maximum of 5 points 5

c) 1 mark for each benefit of economic integration and trade blocs subject to a maximum of 4 points 4 58

d) 1 mark for each disadvantage of economic integration and trade blocs subject to a maximum of 3 points 3

e) 1 mark each for correct description of common market subject to a maximum of 2 points 1 mark each for correct description of economic union subject to a maximum of 2 points 2 2 Total 20

Examiner’s Report The question tests candidates’ understanding of the principles of economic regional integration and trade bloc. Many candidates’ attempted the question but sizeable number of them lacked understanding of the question and performance was poor. The major pitfall of the candidates was their inability to differentiate common market from economic union. Candidates are advised to read the relevant laws and textbooks on economic regional integration and trade bloc. 59

LMN & Co (Tax Consultants) Kaduna March 6, 2020 The Managing Director Able Associates Kano Dear Sir, RE: NIGERIAN TAX INCENTIVES I refer to your letter with Reference Number Able/03/20 dated February 25, 2020 engaging our firm to provide professional advice on the above subject. Our comments are as follows:

a) Objectives of tax incentives Tax incentives in Nigeria are meant to:

(i) Encourage voluntary tax compliance;

(ii) Attract domestic and foreign investments into Nigeria;

(iii) Encourage businessmen to invest in certain preferred sectors of the economy;

(iv) Encourage investment to develop rural areas and export processing (EPZ);

(v) Promote export activities;

(vi) Encourage repatriation of foreign earnings to Nigeria;

(vii) Encourage research and development activities;

(viii) Encourage and accelerate the growth of small scale businesses; and

(ix) Encourage businesses to make financial contributions to activities which the government considers socially desirable. 60

b) Forms of tax incentives The incentives may be granted based on industry or type of tax and may include:

(i) Exemption from payment of taxes;

(ii) Reduction in rate of tax to be paid;

(iii) Grant of allowances and deductions from profits subject to tax, etc; and

(iv) Claiming of reliefs such as loss relief and double taxation relief. c i) Manufacturing sector Fiscal measures have been drawn to provide for deductions and allowances in the determination of taxable income of manufacturing enterprises. They include: ▪ Pioneer status This is a concession to pioneer companies located in economically disadvantaged areas by providing a tax holiday period of three to five years. These industries must be considered by the government to be beneficial to the country’s economy and in the interest of the public. Companies that are involved in local raw material development; local value added; labour intensive processing; export–oriented activities; in-plant training; are also qualified for additional concessions; ▪ Tax relief for research and development (R&D) Up to 120% of expenses on R&D are tax deductible provided that such R&D activities are carried out in Nigeria and are connected with businesses to which allowances are granted. The result of such research could be patented and protected in accordance with internationally accepted industrial property rights; ▪ Small business income tax rate of 20% if the business is within its first 5 years and turnover of N1 million or below (Prior to Finance Act 2019); ▪ Based on the provisions of the Finance Act 2019, any business with less than N25 million turnover is exempted from companies income tax. While, any company with turnover from N25 million to less than N100 million attracts income tax rate of 20% on total profit; 61 ▪ Local raw materials utilization; 30% tax concession for five years to industries that attain minimum local raw materials utilisation as follows: agro – 80%; agro allied – 70%; engineering – 65%; chemical – 60%; and petro-chemical – 70%; ▪ Labour intensive mode of production 15% tax concession for five years. The rate is graduated in such a way that an industry employing one thousand persons or more will enjoy 15% tax concession while an industry employing one hundred will enjoy only 6%, while those employing two hundred will enjoy 7% and so on; ▪ Local value added 10% tax concession for five years. This applies essentially to engineering industries, while some finished imported products serve as inputs. This is aimed at encouraging local fabrication rather than the mere assembly of completely knocked down parts; ▪ In-plant training 2% tax concession for five years, of the cost of the facilities for training; ▪ Export oriented industries 10% tax concession for five years. This concession will apply to industries that export not less than 6% of their products; ▪ Rural investment allowance This is an allowance given to a company which incurs capital expenditure or the provision of facilities, such as electricity, water and tarred road. The rates are as follows: No facilities at all (100%); no electricity (50%); no water (30%) and no tarred road (15%). ▪ Investment in economically disadvantaged areas 100% tax holiday for seven years and additional 5% depreciation over and above the initial capital depreciation; and ▪ Excise duty Excise duty is the money paid to the government by manufacturing concerns for goods purchased. It is a production tax. The tax can also be levied on intangible items such as internet data and telecommunication fees. 62 c ii. Agriculture Incentives include; General incentive-pioneer status; ▪ Tax relief for research and development; ▪ 30% tax credit for 5 years for agro-allied form that attains maximum level of local raw material utilization of 70%; ▪ Effective 2012 YOA, agricultural machinery and equipment attracts no duty; ▪ No restriction on the amount of capital allowance claimable in any year of assessment; ▪ Agricultural business is exempted from minimum tax provision; ▪ Interest on loans granted to agricultural business is exempted from tax provided the moratorium period is not less than 18 months and the interest is not more than the base lending rate at the time it was granted; ▪ Agro-allied plants and equipment enjoy enhanced capital allowance of up to 50%; and ▪ Application of small business income tax rate of 20% if the business is within its first 5 years and turnover is N 1 million or below. c iii. Telecommunications These include: ▪ Provision of non-fiscal incentives to private investors in addition to a tariff structure that ensures that investors recover their investment over a reasonable period of time, bearing in mind the need for differential tariffs between urban and rural areas; and ▪ Rebate and tax relief are provided for the local manufacture of telecommunications equipment and provision of telecommunication services.

d. Non-tax factors considered by foreign investors in locational determinants, will differ from one business to another, depending on the objectives of the investment. The more important non-tax factors include: ▪ Economic and political stability; ▪ Adequate physical, business, accounting and legal infrastructure; ▪ The absence (or limited presence) of bureaucratic obstacles; ▪ Adequate communication channels; ▪ Ability to negotiate profit freely; ▪ Effective banking system; and ▪ The availability of an adequate dispute resolution mechanism. 63 Please do not hesitate to contact us if you require any further clarification on the above subject. Yours faithfully, Victor Aminu Principal Consultant

Marking Guide Mark a. Heading/address 1 ½ mark for each objective of tax incentives subject to a maximum of 6 points 3 4 b. 1 mark for each form of tax incentives mentioned subject to a maximum of 2 points 2 c. i 1 mark each for tax incentives available to the manufacturing sector subject to a maximum of 6 points 6 ii ½ mark each for tax incentives available to the agricultural sector subject to a maximum of 4 points 2 iii 1 mark each for tax incentives available to the telecommunications sector subject to a maximum of 2 points 2

d. 1 mark each for correct discussion on non-tax factors subject to a maximum of 4 points 4 Total 20_

Examiner’s Report The question tests candidates’ understanding of tax incentives available to specific sectors in the Nigerian business environment. Many candidates attempted the question and they showed fair understanding of it and performance was above average. The commonest pitfall was the candidates’ inability to identify the various incentives available to agricultural and telecommunication sectors. The candidates are encouraged to read widely before sitting for examinations in order to perform well. 64

a. Organisation for Economic Co-operation and Development (OECD) identifies three key factors in deciding whether a jurisdiction is a tax haven or not. These are:

i) Nil or only nominal taxes Tax havens impose nil or only nominal taxes (generally or in special circumstances) and offer themselves, or are perceived to offer themselves, as a piece to be used by non-residents to escape high taxes in their countries of residence;

ii) Protection of personal financial information Tax havens typically have laws or administrative practices under which businesses and individuals can benefit from strict rules and other protections against scrutiny by foreign tax authorities. This prevents the transmittance of information about taxpayers who are benefitting from the low tax jurisdiction; and

iii) Lack of transparency A lack of transparency in the operation of the legislative, legal or administrative provisions is another factor used to identify tax havens. The OECD is concerned that laws should be applied openly and consistently, and that information needed by foreign tax authorities to determine a taxpayer’s situation is available. Lack of transparency in one country can make it difficult, if not impossible, for other tax authorities to apply their laws effectively. Secret rulings, negotiated tax rates, or other practices that fail to apply the law openly and consistently are examples of a lack of transparency. Limited regulatory supervision or a government’s lack of legal access to financial records is a contributing factor.

b. To avoid tax competition, many high tax jurisdictions have enacted legislation to counter the tax sheltering potential of tax havens. Generally, such legislation tends to operate in the following ways:

i) Attributing the income and gains of the company or trust in the tax haven to a taxpayer in the high-tax jurisdiction on an arising basis. Controlled foreign corporation legislation is an example of this;

ii) Transfer pricing rules, standardization of which has been greatly helped by the promulgation of OECD guidelines

iii) Restrictions on deductibility or imposition of a withholding tax when payments are made to offshore recipients;

iv) Taxation of receipts from the entity in the tax haven, sometimes enhanced by notional interest to reflect the element of deferred payment. The EU withholding tax is probably the best example of this. 65

v) Exit charges or taxing of unrealized capital gains when an individual, trust or company emigrates;

vi) Many jurisdictions employ blunter rules. For example, in France, securities regulations are such that it is not possible to have a public bond issue through a company incorporated in a tax haven; and

vii) Usage of ―forced disclosure‖ of tax mitigation schemes. These involve the revenue authorities compelling tax advisors to reveal details of the scheme, so that the loopholes can be closed during the following tax year, usually by one of the methods highlighted above. Although not specifically aimed at tax havens, given that so many tax mitigation schemes involve the use of offshore structures, the effect is much the same.

d. Advantages of tax havens These include:

i) Personal residency Since the early 20th century, wealthy individuals from high- tax jurisdictions have sought to relocate themselves to low-tax jurisdictions. In most countries in the world, residence is the primary basis of taxation. Almost no tax haven assesses any kind of capital gains tax or inheritance tax. Individuals who are unable to return to a higher-tax country in which they used to reside for more than a few days a year are sometimes referred to as tax exiles;

ii) Corporate residency Corporate persons, in contrast to natural persons, can own subsidiary corporations in many countries. That allows them to take advantage of the variety of laws, regulations and conventions in multiple countries, without overtly engaging in any questionable activities. Only in extreme cases will they move their formal corporate headquarters; and

iii) Asset holding This involves utilizing an offshore trust or offshore company or a trust owning a company. The company or trust will be formed in one tax haven and will usually be administered and resident in another. The function is to hold assets, which may consist of a portfolio of investments under management, trading companies or groups, physical assets such as real estate or valuable chattels. The essence of such arrangements is that by changing the ownership of the assets into an entity which is not tax resident in the high-tax jurisdiction, they cease to be taxable in that jurisdiction. 66 Criticism of tax havens These are:

i) Tax havens have been criticised because they often result in the accumulation of idle cash which is expensive and inefficient for companies to repatriate;

ii) The tax shelter benefits result in a tax incidence disadvantaging the poor;

iii) Many tax havens are thought to have connections with fraud, money laundering and terrorism;

iv) Investigations of illegal tax haven abuse have been ongoing, there have been few convictions;

v) Lobbying pertaining to tax havens and associated transfer pricing has also been criticized; and

vi) Activities in tax havens facilitate practice of base erosion and profit shifting (BEPS).

Marking Guide Marks Marks a 2 marks for each of the OECD’s perspectives subject to a maximum of 3 points 6 b 1 mark for each method of coping with the issue of tax Have subject to a maximum of 5 points 5 c 2 marks for correct discussion on advantages of tax haven, maximum of 3 points 6 1 mark each for criticism subject to a maximum of 3 points 3 9 Total 20

Examiner’s Report The question tests candidates’ knowledge on issues relating to tax haven. Many candidates did not attempt the question. The performance of the candidates in part (a) of the question was poor, whilst that of parts (b) and (c) was average. The major pitfall was the inability of the candidates to explain the key factors in deciding whether or not a jurisdiction is a tax haven from the perspective of the OECD. 67 Candidates are advised to read widely the Institute’s Study Text, Pathfinder and other relevant textbooks, as this will go a long way in assisting them to pass future examinations.

a) (i) Structure and taxing rights of different levels of government For tax purposes and in accordance with its constitutional provision, Nigeria is divided into three constituencies – The Federal, State and Local Governments. The taxing right for each of the three tiers of government is contained in the Taxes and Levies (Approved List for collection) Act Cap T2 LFN 2004 (as amended). Federal Government The Federal Government is responsible for the administration and collection of taxes due from all taxable corporate bodies, personnel of the Nigerian Armed Forces and those employed in Nigeria’s foreign missions through the Federal Inland Revenue Service (FIRS). Examples of taxes collected by Federal Government are Companies income tax, Petroleum profits tax, Value added tax, Personal income tax from members of armed forces personnel, police force, Capital gains tax for companies and non-residents, withholding tax from companies, etc.

NOTE: With the enactment of the FCT-IRS Act 2015, taxes payable by residents of the FCT are now due to the FCT-IRS. State Government Each state government is responsible for administration, assessment and collection of the taxes due from all taxable persons resident in the state with the exception of the Nigerian Armed Forces and employees of the Nigeria foreign missions through each State’s Internal Revenue Service (SIRS). Examples of taxes collected by State Government are Personal income tax, withholding tax from individuals and unincorporated entities, Capital gains tax for individuals and unincorporated entities, road taxes, pools betting and lotteries, gaming and casino taxes, development levy, etc. 68 Local Government Local government is responsible for collecting levies such as shop and kiosk rates, tenement rates, on and off liquor licenses fees, slaughter slab fees, marriage, birth and death registration fees, motor park levies, road closure levy, etc. Local government taxes/levies are collected by the Local Government Revenue Committee in each state.

(a) (ii) Functions of organs of tax administration in Nigeria are as follows: Federal Inland Revenue Service Board (FIRSB) The FIRSB shall be responsible to: ▪ Provide the general policy guidelines relating to the functions of the Service; ▪ Manage and superintend the policies of the Service, on matters relating to the administration of the revenue assessment, collection and accounting system under this Act or any enactment or law; ▪ Review and approve the strategic plans of the Service; ▪ Employ and determine the terms and conditions of service including disciplinary measures of the employees of the Service; ▪ Stipulate remuneration, allowances, benefits and pensions of staff and employees in consultation with the National Salaries, Income and Wages Commission; and ▪ Do such other things, which in its opinion, are necessary to ensure the efficient performance of the functions of the Service under the Act. State Board of Internal Revenue Service (SBIRS) The SBIRS shall be responsible for: ▪ Ensuring the effectiveness and optimum collection of all taxes and penalties due to the Government under the relevant laws; ▪ Doing all such things as may be deemed necessary and expedient, for the assessment and collection of the tax and shall account for all sums so collected, in a manner to be prescribed by the Commissioner; ▪ Making recommendations, where appropriate, to the JTB on tax policy, tax reform, tax legislation, tax treaties and exemptions as may be required from time to time; ▪ Generally controlling the management of the State Service on matters of policy, subject to the provisions of the law setting up the State Internal Revenue Service; and ▪ Appointing, promoting, transferring and imposing discipline on employees of the State Internal Revenue Service. Local Government Revenue Committee (LGRC) The LGRC shall be: ▪ Responsible for the assessment and collection of all taxes, fines and rates, under its jurisdiction and shall account for all amounts so collected, in a manner to be prescribed by the Chairman of the Local Government; ▪ Autonomous of the local Government Treasury department and shall be responsible for the day-to-day administration of the Department, which forms its operational arm; ▪ Responsible for tax payer education; and ▪ Responsible for collection of data and information to develop and reform tax policies legislation and administration.

(b) Multiple taxation Multiple taxation is a tax regime under which various and similar types of taxes are imposed on taxpayers by different tiers of government. For instance, while the Federal Government imposed the Value added tax on consumption and made it applicable throughout the Federation, some notably, Lagos State, introduced the sales tax based on the same principle as the former and made it applicable in Lagos State.

i) Causes of multiple taxation in Nigeria The possible causes of multiple taxation in Nigeria are: ▪ The number of taxes which local government has constitutional right to collect; ▪ Lack of funding, particularly, for most States may result to multiple taxation where the Board attempts to source for fund through levying of tax notwithstanding whether such tax had already been levied either by the Federal or Local Governments; ▪ Some of the state governments deliberately deny their local governments the revenue due to them, consequently the local government as a way of survival desperately and aggressively focus on anything that will generate revenue to them; ▪ Lack of tax education and awareness; ▪ Inability of all the tiers of government adequately fund their departments and agencies; ▪ Multiplicity of revenue agencies; ▪ Overlapping taxing rights as contained in the Constitution and the taxed and levies (approved list for collection); and ▪ Manual tax administration system and unauthodox tax collection mechanism.

ii) Possible solutions to multiple taxation in Nigeria include: ▪ Streamlining the number of taxes in Nigeria in view of the low yields of many of the taxes, This will involve the review of current statutory provisions in Nigeria; ▪ Reviewing all the existing taxes in Nigeria and harmonise where necessary, as recommended by various study groups; ▪ Reviewing of the Constitution to address the overlap in taxing rights and limit the number of taxes that can be imposed by different levels; ▪ Abolishing unauthodox method of tax collection and implement technology for tax administration; and ▪ Limiting the number of revenue agencies.

Marking Guide Marks Marks a.i 1 mark on general comments/introduction to structure and taxing rights 1 1 mark each for discussions on Federal Government, State State Government and Local Government 3 4 ii 1 mark each on functions of two organs of the administration in Nigeria subject to a maximum of 4 points per organ 8

b. 1 mark each on causes of multiple taxation in Nigeria subject to a maximum of 4 points 4 1 mark each on possible solutions to multiple taxation in Nigeria subject to a maximum of 4 points 4 8 20

Examiner’s Report The question tests candidates’ knowledge on tax administration and fiscal policy in Nigeria. Many candidates attempted the question and they showed mixed understanding of the question. The performance of the candidates in part (a) of the question was above average while it was fair in part (b). The major pitfall was the candidates’ poor understanding of the causes and solutions to multiple taxation in Nigeria. Candidates are advised to pay attention to the specific areas of the syllabus relating to the topic as this will enable them to perform very well in future examinations. THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA