Advanced Taxation · 2021

(a) DIY Limited Computation of tax liabilities for 2017 – 2019 years of assessment (YOA) 2017 YOA N’000 N’000 Adjusted profit (Wk 1) 72,700 Unrelieved loss b/f (28,000) Loss relieved 28,000 (28,000) Assessable profit 44,700 Less: Capital allowances (CA) Unclaimed CA b/f 50,000 Capital allowance for the year (Wk 3) 23,550 Capital allowance claimable 73,550 Capital allowance claimed (44,700) 44,700 Unclaimed CA c/f 28,850 Total profit NIL Dividend distributed and paid 30,000 Since dividend distributed and paid (N30,000,000) exceeded the total profit, the income tax for 2017 YOA shall be computed on dividend basis (S.19 CITA 2004). N’000 N’000 CIT (30% x N30,000) 9,000 TET (2% x N44,700) 894 Total tax liability 10,454 2018 YOA N’000 N’000 Assessable profit (Wk 1) 94,510 Less : Capital allowances Unclaimed CA b/f 28,850 Capital allowances for the year (Wk 3) 30,615 Capital allowances claimable 59,465 Capital allowances claimed (59,465) (59,465) Total profit 35,045 Dividend distributed and paid 40,000 Dividend distributed and paid (N40,000,000) exceeded the profit (N35,045,000) therefore , income tax for 2018 YOA shall be computed on dividend basis (S19 CITA 2004). 51 N’000 N’000 CIT (30% X N40,000) 12,000 TET (2% X N94,510) 1,890 Total tax liability 13,890 2019 YOA N’000 N’000 Assessable profit (Wk 1) 146,354 Less: Capital allowances Capital allowances for the year (Wk 3) 42,861 Capital allowances claimable 42,861 Capital allowances claimed (42,861) 42,861 Total Profit 103,493 CIT @ 30% X N103,493 31,048 TET (2% X N146,354) 2,927 Total tax liability 33, 975

Workings 1. Computation of adjusted profits for 2017 – 2019 YOA 2017 YOA 2018 YOA 2019 YOA N’000 N’000 N’000 Profit before tax b/f 57,000 74,100 117,780 Add: Depreciation and amortization 15,700 20,410 28,574 Adjusted profits 72,700 94,510 146,354

2. Depreciation and amortisation included in other overheads 2017 YOA 2018 YOA 2019 YOA N’000 N’000 N’000 Other overheads 78,500 102,050 142,870 Depreciation and amortisation (20% thereof) 15,700 20,410 28,574

3. Capital allowances: (Wk 3) Capital allowances: 2017 YOA 2018 YOA 2019 YOA N’000 N’000 N’000 Depreciation and amortisation (Wk 2) 15,700 20,410 28,574 Capital allowances (150% thereof) 23,550 30,615 42,861 52 Tax and non- tax factors may enable or hinder investment promotion in Nigeria. Enablers Tax factors which enhance investment promotion in Nigeria include:

(i) 100% foreign ownership in a new venture except those in banking, oil, insurance and mining as allowed by Nigerian Enterprises Promotion Act;

(ii) Free trade zone encourages investments in Nigeria as operators within the zone are granted tax holiday;

(iii) The Nigerian Enterprises Promotion Act guarantees foreign investors unconditional transferability of funds through an authorised dealer;

(iv) Small business incentive (0% tax rate for small businesses); and

(v) Pioneer legislation (tax holiday for a minimum of 3 years). Non-Tax factors include:

(i) Economic and political stability;

(ii) Adequate physical, business, accounting and legal infrastructure;

(iii) Absence (or limited presence) of bureaucratic obstacles;

(iv) Effective banking system; and

(v) Adequate communication channels. Hindrances These include:

(i) Corruption;

(ii) Unstable fiscal/monetary policy;

(iii) Infrastructural deficit ( especially epileptic power supply);

(iv) Insecurity of life, business and property;

(v) Unstable regulatory environment/ government policy; and

(vi) Multiple taxation. 53 b) Poknos & Co Suite 104 Mea Shopping Mall, Lagos May 24, 2021 The Founder DIY Limited 1 Lagos Road, Daura Katsina Dear Sir, RE: AFRICAN CONTINENTAL FREE TRADE AREA (AfCFTA) AGREEMENT AND ECONOMIC COMMUNITY OF WEST AFRICAN STATES (ECOWAS) TREATY We refer to your letter of May 8, 2021 requesting for a brief advice on the above subject and hereby make submission as follows: AfCFTA and ECOWAS Africa Continental Free Trade Area (AfCFTA) is an example of “free trade area”, and one of the four main types of regional economic integration. Free Trade Area is the most basic form of economic cooperation. Member countries remove all barriers to trade within themselves but are free to independently determine trade policies with non-member countries. The similarities and dissimilarities between AfCFTA and ECOWAS are as follows:

(i) Both are examples of customs union;

(ii) CET is only applicable in ECOWAS;

(iii) Both AfCFTA and ECOWAS harmonise custom practises;

(iv) Both promote use of non-tariff barrier reporting mechanism;

(v) Both promote related institutional structures that are part of the ECOWAS free trade zone; and

(vi) Both are relevant in area of trade and customs integration. Opportunities and challenges from implementation of AfCFTA Agreement The opportunities derivable from implementing AfCFTA include the following:

(i) Trade creation: AfCFTA creates more opportunities for countries to trade with one another by removing the barriers to trade and investment; 54

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

(iii) Consensus and cooperation: Member nations may find it easier to agree with smaller number of countries. Regional understanding and similarities may also facilitate closer political cooperation;

(iv) Impetus for private sector planning and investment: AfCFTA 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: AfCFTA may allow a member country to reap other non-economic benefits such as peace and security. The possible challenges from implementing AfCFTA include:

(i) Trade diversion: Member countries may trade more with one another than non-member nations, which may mean increasing trade with a less efficient or more expensive producer simply because it is a member nation. Inefficient companies can be protected inadvertently by the agreement;

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

(iii) Employment shifts and reduction: Countries and companies in one member nation may move production to another member country with a cheaper labour market. Also workers, may move to gain access to better jobs and wages;

(iv) Loss of national sovereignty: Discussions and agreements within a regional bloc, may necessitate nations given up their political and economic rights; and (v) It is a form of trade barriers with countries which are not members of the free trade area. We hope the above will give you an insight into understanding of the agreement among member nations. While thanking you for the opportunity given us to advise on the above subject matter, please do not hesitate to contact us if you require further information on any aspect of this report. Yours faithfully, Baba Tee Principal Partner 55 (c)i. DIY Limited is not liable to prepare and submit Country-by-Country Reports for 2017 – 2019 years of assessment and 2022 – 2024 years of assessment if the business expansion into Ghana is implemented.’ It is pertinent to state that the company is not a member of multinational enterprise (MNE) group because:

• It does not meet the definition of MNE group. For the purpose of Country- by- Country Reporting. MNE group means any group that includes two or more enterprises resident in different jurisdictions or includes an enterprise that is resident for tax purposes in one jurisdictions and is subject to tax with respect to the business carried out through a permanent establishment in another jurisdiction; and

• A group is also an excluded MNE if, in any accounting year of the group, is having total consolidated group revenue of less than €750 million or N160 billion during the accounting year immediately preceding the reporting accounting year as reflected in its consolidated financial statements for such preceding accounting year. (c)ii. The relevant tax authority will be the tax authority of the reporting entity. In the case of DIY limited, the FIRS is the relevant tax authority. This is because DIY Limited, (the parent company) is the reporting entity and is resident in Nigeria. In a situation where a surrogate parent entity (the subsidiary in Ghana in this case) is the reporting entity, the tax authority in Ghana will be the relevant tax authority.

Examiner’s Report The question tests the candidates’ understanding of the basis of assessing companies to tax, using the dividend basis approach; African Continental Free Trade Area (AfCFTA) agreement and Country- by- Country Reports (CbCR). Being a compulsory question, almost all the candidates attempted the question. Candidates demonstrated a fair understanding of the question, particularly in the computation of companies income tax and tertiary education tax; but performance was average. The commonest pitfall was the inability of the candidates to differentiate between AfCFTA agreement and ECOWAS treaty from the perspective of trade in goods. Candidates are advised to familiarise themselves with AfCFTA agreement and ECOWAS treaty by reading extensively the Institute’s Study Text and other relevant textbooks. 56

Marking Guide Marks Marks (a) Computation of tax liabilities for 2017 YOA: Adjusted profit ½ Unrelieved loss b/f ½ Loss relieved ½ Assessable profit ½ Unclaimed capital allowances b/f ½ Capital allowances for the year ½ Capital allowances claimable ½ Capital allowances claimed ½ Total profit ½ Dividend distributed and paid ½ Companies income tax ½ Tertiary education tax ½ Computation of tax liability for 2018 YOA: Assessable profit ½ Unclaimed capital allowances b/f ½ Capital allowance for the year ½ Capital allowance claimed ½ Total profit ½ Dividend distributed and paid ½ Note on dividend distributed and paid that exceeded the total profit ½ Companies income tax ½ Tertiary education tax ½ Computation of tax liability for 2019 YOA: Assessable profit ½ Capital allowances for the year ½ Capital allowances claimed ½ Total profit ½ Companies income tax ½ Tertiary education tax ½

Workings Adjusted profits (2017) ½ (2018) ½ (2019) ½ Depreciation and amortisation: (2017) ½ (2018) ½ (2019) ½ Capital allowances: 57 (2017) ½ (2018) ½ (2019) ½ Factors that may enable investment promotions in Nigeria (Any 4 correct points @½mark each) OR Factors that may hinder investment promotions in Nigeria (Any 4 correct points @½ mark each) 2 20

(b) Heading of the report 1 AFCFTA and ECOWAS (Any 3 correct points x 1mark each) 3 Opportunities from implementation of the AfCFTA (Any 3 points @1mk each) 3 Challenges from implementing AfCFTA (3 correct points @1 mark each) 3 10

(c) (i) DIY Ltd not liable to prepare and submit country by country reports 2 3 correct reasons to substantiate why DIY Ltd is not liable @ 1mark each 3 5 (c)(ii) The relevant tax authority as the tax authority of the reporting entity 2 2 correct discussions on the relevant tax authority @ 1½ marks each 3 5 40

(a) Nature Agricultural Products Limited Computation of adjusted profit For the year ended February 28, 2019 N N Net profit for the year ended 28/2/2019 15,350,000 Add back: disallowable items Deprecation 1,725,000 Legal charges for purchase of leasehold 1,500,000 Loss on revaluation 2,104,000 Fines for traffic offence 70,000 58 Expenses on increase in share capital 1,201,000 6,600,000 Adjusted profit for the year 21,950,000

(b) Nature Agricultural Products Limited Computation of income tax liabilities For 2018, 2019 and 2020 assessment years 2018 assessment year (10 months) N Adjusted profit = 10/12 x N21,950,000 18,291,667 Deduct: Capital allowances (W1) 9,637,666 Total profit 8,654,001 Companies income tax @ 30% 2,596,200 Tertiary education tax (2% of N18,291,667) 365,832 Total tax liability 2,962,032 2019 assessment year (12 months) Adjusted profit 21,950,000 Deduct: Capital allowances (W1) 3,387,800 Total profit 18,562,200 Companies income tax @ 30% 5,568,660 Tertiary education tax (2% of N21,950,000) 439,000 Total tax liability 6.007,660 2020 assessment year (12 months) Adjusted profit 21,950,000 Deduct: Capital allowances (W1) 2,512,790 Total profit 19,437,210 Companies Income Tax @ 20% (Medium- sized company) 3,887,442 Tertiary education tax (2% of N21,950,000) 439,000 Total tax liability 4,326,442 Appendix I: Capital allowances computation Motor vehicles Industrial buildings Ranching & plantation Furniture & fittings Capital allowances IA 50% AA 25% IA 15% AA 10% IA 30% AA 50% IA 25% AA 20% N N N N N 2018 Y/A Cost 6,500,000 14,680,000 3,000,000 1,850,000 IA (3,250,000) (2,202,000) (900,000) (462,500) 6,814,500 59 AA (W1) (677,083) (1,039,833) (875,000) (231,250) 2,823,166 9,637,666 2019 Y/A TWDV 2,572,917 11,438,167 1,225,000 1,156,250 AA (W2) (812,500) (1,247,800) (1,050,000) (277,500) 3,387,800 2020 Y/A TWDV 1,760,417 10,190,367 175,000 878,750 AA (812,500) (1,247,800) (174,990) (277,500) 2,512,790 2021 Y/A TWDV 947,917 8,942,567 10 601,250

Workings (1) Annual allowances for 2018 Y/A AA = Cost – IA n Motor vehicles AA = N6,500,000 – N3,250,000 x 10/12 4 = N677,083 Industrial building AA = N14,680,000 – N2,202,000 x 10/12 10 = N1,039,833 Ranching and plantation AA = N3,000,000 – N900,000 x 10/12 2 = N875,000 Furniture & fittings AA = N1,850,000 – N462,500 x 10/12 10 = N231,250 (2) Annual allowances for 2019 Y/A Motor vehicles AA = N6,500,000 – N3,250,000 4 = N812,500 60 Industrial buildings AA = N14,680,000 – N2,202,000 10 = N1,247,800 Ranching and plantation AA = N3,000,000 – N900,000 2 = N1,050,000 Furniture & fittings AA = N1,850,000 – N462,500 5 = N277,500

Examiner’s report The question tests the candidates’ knowledge of assessment of a company to tax, after its pioneer period. Overt 80% of the candidates attempted the question and they exhibited a clear understanding of the requirements of the question, therefore, performance was good. The commonest pitfall was the inability of the candidates to correctly apply the commencement principles in the determination of total profits for the second (2019) and third (2020) years of assessment. Candidates are advised to pay attention to the principles of basis period and determination of total profit by using the Institute’s Study Text, other relevant textbooks and tax laws.

Marking guide Marks Marks (a) Computation of adjusted profit: Net profit as per accounts ¼ Depreciation ¼ Legal charges for purchase of leasehold ½ Loss on revaluation ½ Fines for traffic offence ½ 61 Expenses on increase in share capital ½ Adjusted profit for the year ½ 3

(b) Tax liabilities: 2018 assessment year: Adjusted profit ½ Capital allowances ½ Total profit ½ Companies income tax 1 Tertiary education tax 1 2019 assessment year: Adjusted profit ½ Capital allowances ½ Total profit ½ Companies income tax 1 Tertiary education tax 1 2020 assessment year: Adjusted profit ½ Capital allowances ½ Total profit ½ Companies income tax 1 Tertiary education tax ½ Appendix: Capital allowances computation 2018 Y/A IA (4 ticks @ ¼ mark) 1 AA (4 ticks @ ¼ mark) 1 Capital allowances (3 ticks @ ¼ mark) ¾ 2019 Y/A TWDV (4 ticks @ ¼ mark) 1 AA (4 ticks @ ¼ mark) 1 Capital allowances (1 tick @ ¼ mark) ¼ 2020 Y/A TWDV (4 ticks @ ¼ mark) 1 AA (3 ticks @ ¼ mark) ¾ Capital allowances (1 tick @ ¼ mark) ¼ 17 20 Total 62

ABC & Co. (Chartered Accountants) 3rd Floor, Glass House, Surulere, Lagos May 12, 2021 The Managing Director Wakanda Oil Exploration Limited 2, Ozumba Mbadiwe Road Victoria Island Lagos Dear Sir, RE: REPORT ON PROPOSED ACQUISITION OF KRUDE EXPLORA LIMITED We refer to your letter dated May 8, 2021 requesting for explanation on the offer to acquire Krude Explora Limited. We wish to comment as follows:

a) Acquisition and merger Acquisition is a form of business combination whereby one company purchases all or majority of the equity shares of another company, thereby gaining controlling interest over the acquired company. Examples of recent acquisition in the Nigerian petroleum industry are the acquisition of a 50% ownership interest in Petrobras Oil and Gas B.V (“POGBV) by Africa Oil Corp. (AOI), in 2020; Globeleq Limited acquired 74% majority equity of CPGNL Limited in 2021; and Oando Energy Resources acquired 100% ownership of OML 131 that owned by Medal Oil Ltd in 2014. Merger on the other hand, is a form of business combination where two or more companies come together to become one enlarged surviving company. In a merger arrangement, one of the companies may be the surviving entity while the other loses its identity. In another merger arrangement both companies lose their identities, while a new company entirely is formed to survive them. A merger may occur between companies in same line of business and in the same industry (horizontal merger) or between companies in different lines of business of same industry (Vertical merger).

b) Tax implications of the acquisition arrangement Where one existing company takes over the business of another existing company either by acquisition or absorption, the following shall be the tax implications of the arrangement:

i. Tax implications for Krude Explora Limited

• The acquired or absorbed company shall cease operations and cessation provisions will be applied to the company.

• Capital gains tax (CGT) shall be paid by the shareholders of 63 Krude Explora Limited, the ceased company, unless the consideration is settled by shares in Wakanda Oil Exploration Limited. ii. Tax implications for Wakanda Oil Exploration Limited

• No commencement rule will be applied to Wakanda Oil Exploration Limited unless its line of business is not the same with that of Krude Eplora Limited being acquired.

• No initial or investment allowance will be granted on assets taken over or transferred to Wakanda Oil Exploration Limited, while annual allowances claimable shall be based on the tax written down values of the asset taken over for the remaining tax lives of the assets.

• Unrelieved losses of Krude Explora Limited cannot be carried forward.

• Unclaimed capital allowances cannot be carried forward against the assessable profits of Wakanda Oil Exploration Limited.

• Increase in the share capital as a result of the merger will attract stamp duties.

• Professional service fee payable in connection to the merger will be subject to value added tax (VAT) and withholding tax. ▪ Wakanda Oil Exploration Limited will file annual returns as the surviving company.

• Any cost associated with the merger or acquisition arrangement shall not be allowable for tax purposes.

c) The impact of AfCFTA agreement and the local (Nigeria) economy on the proposed acquisition or merger ; These include:

i. Further increase in the size of Nigerian market will enable investors, Wakanda Oil Exploration Limited, benefit not only from Nigerian market but also from other countries in Africa;

ii. Eliminating tariffs: The arrangement will enable the companies to benefit from reduced import duties and preferential tariffs to import from other countries;

iii. Potential growth for small and medium-sized companies. The new arrangement will enhance growth of emerged company;

iv. The companies will be exposed to competitive production, thereby increasing production capacity; 64

v. The arrangement will enable the emerged company to benefit from wider sources of finance;

vi. The arrangement will necessitate the emerged company to improve its production technology as AfCFTA does not allow dumping of poor products; and

vii. The success of the proposed transaction will encourage other companies to opt for either merger of acquisition as against complete liquidation of corporations, which will negatively affect the investors. While hoping that the points noted above will facilitate the conclusion of the arrangement, please do not hesitate to contact us if any aspect of the report needs further clarification. Yours faithfully, Olabisi Jay.

Examiner’s report The question tests candidates’ understanding of the tax implications and the impact of AfCFTA agreement and the local economy on the proposed acquisition or merger. About 40% of the candidates attempted the question, but majority of them lacked a good understanding, hence performance was below average. The major pitfall of the candidates was their inability to recognise the impact of AfCFTA agreement and the local economy on the transaction. Candidates are advised to read the Institute’s Study Text on economic regional integration, AfCFTA agreement, merger and acquisition.

Marking guide Marks Total A Heading (address & introduction) 1 Any 4 points on explanations of “acquisition” and “ merger” @ 1mark 4 5 b (i) 2 correct points on tax implications for Krude Explora Nigeria Ltd @ 2 marks 4 (ii) Any 4 correct discussions on tax implications for Wakanda Oil Exploration Ltd @ 1 mark 4 8 C Any 7 correct discussions on impact of AfCFTA agreement and the local economy on the transactions on the @ 1 mark 7 20 65

(a) The circumstances under which a non-resident company will be assessable to tax in Nigeria are: (i) Income derived through a fixed base or permanent establishment;

(ii) Income derived in Nigeria through a dependent agent;

(iii) Income derived from supervisory activity that lasts more than 3 months;

(iv) Income derived in Nigeria from a turnkey project;

(v) Income derived by non-resident company from professional consultancy, management and technical services rendered in Nigeria;

(vi) 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;

(vii) Income derived from a contract awarded to a Nigerian company, but sub-contracted to a non-resident company; and

(viii) Where the non-resident company has a significant economic presence in Nigeria.

(b) Gen Power Incorporated Computation of tax liabilities For 2019 year of assessment N’000 N’000 Turnover ($3 x N362) 1,086,000 Less: Expenses: Materials and other direct inputs 320,800 Hire of special equipment 25,000 Foreign experts cost and emolument 65,300 Personnel costs 110,400 Administrative expenses (N52,000 – N12,000) 40,000 Repairs and maintenance (N7,200 – N1,700) 5,500 Fuel and oil 8,200 Miscellaneous expenses 27,100 602,300 Adjusted profit 483,700 Capital allowances 57,000 Relieved (57,000) (57,000) Unutilised capital allowances c/f NIL 66 Total profit 426,700 Companies income tax @ 30% 128,010 Tertiary education tax @ 2% of adjusted profit 9,674 Withholding tax on hire of special equipment (10% of N31,500) 3,150

Examiner’s Report The question tests candidates’ understanding of taxation of non-resident company. About 80% of the candidates attempted the question and they showed fair understanding and performance was above average. The commonest pitfall was the candidates’ inability to correctly identify the disallowable expenses in the determination of adjusted profit. Candidates are encouraged to improve their understanding of allowable and disallowable expenses by reading the Institute’s Study Text and other relevant textbooks before sitting for future examinations.

Marking guide Marks Marks (a) 5 correct points @ 1 mark per point 5

(b) Heading 1/2 Turnover 1 Materials and other direct inputs 1 Hire of special equipment 1 Foreign experts cost and emolument 1 Personnel costs 1 Administrative expenses 1 Repairs and maintenance 1 Fuel and oil 1 Miscellaneous expenses 1 Adjusted profit 1 Capital allowances relieved 1 Total profit 1 Companies income tax 1 Tertiary education tax 1 Withholding tax on hire of special equipment ½ 15 20 67

24 Abbey Plaza, Ikeja Lagos April 10, 2021 The Managing Director DD Nigeria Limited Colmas Road, Alabata Abeokuta Dear Sir, RE: CAPITAL GAINS TAX ON DISPOSAL OF CHARGEABLE ASSETS I refer to your mail of April 5, 2021, requesting for our advice on tax matters in respect of transactions relating to the above subject-matter. We wish to comment as follows:

(a) Disposal of plant on September 15, 2019 This is a partial disposal of plant from entire plant and machinery which was acquired for N5,000,000. The cost apportioned to the plant is N2,243,590, as per the attached appendix I. There is chargeable gain of N1,006,410, being the difference between the consideration of N3,500,000 received and the cost of the plant. The chargeable gain will be liable to capital gains tax at 10% resulting to tax liability of N100,641, as per the attached appendix II.

(b) Disposal of land in May 2018 and June 2019

(i) Roll-over Relief: A relief is available in the capital gains tax (CGT), where the consideration received from disposal of class of asset is re- invested in the acquisition of another asset of same class. The relief is known as roll-over relief. Where roll-over relief is applicable, the capital gains tax on the chargeable gain arising on the disposal of the old asset will be deferred until the new asset is eventually disposed.

(ii) The disposal of the company’s existing acre of land for N12,500,000 to acquire a new acre of land for N15,000,00 will result to the grant of a full roll-over relief of N5,750,000 (see appendix III) on the disposal of the existing land and the capital gains tax will only be payable when the new land is eventually disposed.

(iii) The cost of the new acre of land will be its carrying cost (N9,250,000), which is the original cost of the new land (N15,000,000) less chargeable gain rolled over on the old land (N5,750,000). 68

(iv) There is no capital gains tax payable on disposal of the old land because of the full roll-over relief claimed on it.

(v) The CGT of N875,000 is due on the disposal of the new land in 2019 year of assessment as per the attached appendix IV.

(c) Tax implication on the compensation under policy of insurance received on the damaged industrial building

(i) Where an asset is lost or destroyed but compensation is received under a policy of insurance and the capital sum received by way of compensation is utilized to purchase another asset in replacement of those lost or destroyed within 3 years, roll-over relief shall be available.

(ii) The N2,200,000 compensation received under policy of insurance from part of the industrial building damaged constitutes disposal and the compensation shall be deemed to be consideration received from such disposal.

(iii) The intention of the company to utilize the compensation for acquisition of another building will qualify DD Nigeria Limited for roll- over relief on the old (damaged) building provided the new building is acquired within three years after the disposal of the old building.

(d) Treatment of gains arising from business re-organization (S.49, Finance Act 2019)

(i) Effective 2020 year of assessment, any gains on asset transferred in a related-party business reorganization shall be treated as assets specifically exempted from Capital Gains Tax subject to minimum holding test. Minimum holding test requires that:

(ii) The acquired company that transferred its asset must be member of the group for at least 365 days prior to the date of the reorganization; and (iii) The acquiring company to hold the underlying asset transferred for 365 days and above after the date of the transaction. If the minimum holding conditions are not fulfilled, the exemption shall be withdrawn. Attached appendix (I)-(IV) is for your information. Kindly get back to us in case you require further clarification. Yours faithfully, Sunny Kajooo Principal Partner 69 APPENDIX I: Cost of acquisition for plant disposed This is given by the formular: A A + B X C Where: A = Consideration received from plant sold N3,500,000 B = Market value of machine unsold N4,300,000 C = Total cost of whole plant and machinery N5,000,000 N 3,500,000 x N5,000,000 = N2,243,590 N3,500,000 + N4,300,000 APPENDIX II: Computation of CGT for 2019 year of assessment N Sale proceeds 3,500,000 Less: incidental selling expenses 250,000 Net Sales proceed 3,250,000 Less: Cost of Acquisition (appendix I) 2,243,590 Chargeable gains (CG) 1,006,410 CGT @ 10% x N1,006,410 100,641 APPENDIX III: Computation of CGT for 2018 year of assessment Disposal of old land: N N Sale proceeds (old land) 12,500,000 Less: Cost of acquisition (old land) 6,750,000 Chargeable gains (CG) available for roll-over relief 5,750,000 Apply roll-over relief Amount re-invested 12,500,000 Less: Cost of acquisition (old land) 6,750,000 Roll-over relief (5750,000) Chargeable gains (CG) liable NIL Capital gains tax payable NIL 70 APPENDIX IV: Computation of CGT for 2019 year of assessment N N Sales proceed (new land) 18,000,000 Less: Cost of acquisition (carrying cost): Original cost 15,000,000 Less: CG rolled over on old land 5,750,000 Carrying cost of new land (9,250,000) Chargeable gain (CG) 8,750,000 Capital gains tax payable @ 10% x N1,006,410 875,000

Examiner’s report The question tests candidates’ knowledge on issues relating to capital gains tax, with emphases on partial disposal and roll-over relief. About 70% of the candidates attempted the question. Majority of the candidates showed a good understanding and the performance in parts (a), (b) and (c) of the question was satisfactory, whilst that of part (d) was fair. The major pitfall was the inability of the candidates to explain correctly the treatment of gains arising from business re-organisation in line with the provisions of Finance Act 2019. Candidates are advised to read the Institute’s Study Text, other relevant textbooks and Finance Act 2019, as this will go a long way in assisting them to pass future examinations.

Marking guide Marks Total (a) Disposal of plant on September 15, 2019 Heading ½ Body of the report- Disposal of plant on 15 Sept. 2019 (CGT of N100,641 as appendix I & II) 1 Computation of CGT for 2019 Y/A (appendix I) Sale proceeds ½ Incidental selling expenses ½ Cost of acquisition ½ Chargeable gains ½ CGT @ 10% ½ Cost of acquisition formula ½ Result of cost acquisition (N2,243,590) ½ 5

(b) Disposal of land in May 2018 and June 2019 Body of the report Any 2 correct discussions of relief available and tax liability @ 1 mark each 2 Computation of CGT for 2018 year of assessment 71 (appendix III) Sale proceeds (old land) ½ Cost of acquisition (old land) ½ Chargeable gain available for roll-over relief ½ Amount re-invested ½ Cost of acquisition (old land) ½ Roll-over relief ½ Chargeable gains liable ½ CGT payable ½ Computation of CGT for 2019 year of assessment Sale proceeds (new land) ½ Cost of acquisition (carrying cost) Original cost ½ Roll-over relief on old asset ½ Carrying cost of new land ½ Chargeable gains ½ CGT @ 10% ½ 9

(c) Tax implications on the compensation under policy of insurance: Any 2 correct tax implications on the compensation under policy of insurance received @ 1 mark 2

d) Treatment of gains arising from business re- organisation : Any 2 correct treatments of gains arising from business re-organization @ 2 marks 4 20

(a) Fiscal federalism

(i) Fiscal federalism is the system of revenue generation and redistribution within a federal system. It involves the financial, functions and responsibilities of units within a federal structure.

(ii) The Nigerian Constitution C.23 LFN 2004 (as amended) establishes the fundamental principles of federalism.

(iii) Section 2(1) of the Constitution of Nigeria provides that “Nigeria is one indivisible state to be known by the name of the Federal Republic of Nigeria”, while section (2) further provides that “Nigeria shall be a federation consisting of states and a federal capital territory”. 72 Other countries described as federation include:

(i) Australia; (ii) Belgium; (iii) Canada; (iv) Ethiopia; (v) Germany; (vi) India; (vii) Malaysia; (viii) Mexico; (ix) Pakistan; (x) Switzerland; (xi) United Arab Emirates; (xii) United States of America; (xiii) Venezuela; (xiv) Republic of South Africa; (xv) Ghana; (xvi) Togo; (xvii) Republic of Benin; (xviii) Tanzania; (xix) Malawi; (xx) Tanzania; (xxi) Cote D’Ivoire; (xxii) Liberia; (xxiii) Sierra Leone; (xxiv) Uganda; (xxv) Zambia; (xxvi) Republic of Congo; (xxvii) Cameroun, etc. (b)i Roles of the three tiers of government Federal government The Federal government is responsible for the administration, assessment and collection of taxes due from all taxable corporate bodies, personnel of the Nigeria armed forces and those employed in the Nigeria’s foreign missions through the Federal Inland Revenue Service (FIRS). State government Each state government is responsible for the administration, assessment and collection of the taxes due from all taxable persons resident in State with the exception of the employees of Nigerian Armed Forces and Nigeria foreign missions through the relevant authority in a State. Local government A Local government is responsible for collecting specified levies to generate revenue through the Local Government Revenue Committee in each local government of the federation.

(b) ii Structure and taxing rights of different levels of government For tax purposes and according to the constitutional provision, Nigeria is divided into three tiers or levels. These include Federal, State and Local governments. The taxing rights of each of the three levels of government are as contained in the Taxes and Levies (Approved List for Collection) Act Cap T2 LFN 2004 (as amended). The taxing rights of the different levels of government are as summarized below: Taxing right of Federal government The tax jurisdiction or taxes approved to be collected by Federal government through the Federal Inland Revenue Service (FIRS) are:

• Companies income tax;

• Withholding tax on companies and non-resident individuals;

• Petroleum profits tax;

• Value added tax;

• Tertiary education tax;

• Capital gains tax on companies, and non-resident individuals

• Stamp duties on corporate bodies; and

• Personal income tax of members of the Armed Forces of Nigeria, the Nigeria Police Force, staff of the Ministry of External (Foreign) Affairs and non-resident individuals. Taxing right of State governments and Federal capital territory The tax jurisdiction or taxes approved for collection by State Government through each State Board of Internal Revenue Services (SBIR) are:

• Pay As You Earn (PAYE);

• Withholding tax on individuals;

• Capital gains tax on individuals;

• Stamp duties on Investments executed by individuals;

• Pools betting, lotteries, gaming and casino Taxes;

• Road taxes;

• Business premises registration fees for:

- Urban areas-as defined by each state- N10,000 (maximum) for registration and N5,000 for annual renewal of registration; and - Rural areas as defined by each state – N2,000 for registration and N1,000 for annual renewal of registration.

• Development levy for individuals only not more than N100.00 per annum on taxable individuals;

• Naming of street registration fees in State capital;

• Right of occupancy fees on lands owned by the State in urban cities of the state; and

• Market taxes and levies where State finance is involved. With the enactment of FCT Internal Revenue Service Act, 2015, FCT-IRS now collects the following taxes and levies in the FCT:

• Personal income tax;

• Pay as You Earn (PAYE) in respect of all individuals resident in FCT under employment in both public and private sectors;

• Direct assessment in respect of self-employed individuals and enterprises;

• Federal capital territory property tax;

• Stamp duties in respect of individuals and enterprises resident in FCT

• Withholding tax in respect of individuals and enterprises resident in FCT; and

• Capital gains tax in respect of individuals and enterprises in FCT. Taxing right of Local government The tax jurisdiction or taxes approved for collection by Local governments are:

• Shops and kiosks rates;

• Tenement rates;

• Marriage, birth and death registration fees;

• Slaughter slab fees;

• On and off liquor license fees;

• Street naming registration fee except in State capital;

• Right of occupancy fees on lands in rural areas ((exclusive of those collectable by Federal and State governments);

• Market taxes and levies excluding any market where state finance is involved;

• Motor park fees;

• Domestic animal license fees;

• Bicycle, truck, canoe, wheel barrow and cart fees, other than a mechanically propelled truck;

• Cattle tax-payable by cattle farmers only;

• Road closure levy;

• Radio and television license fees (other than radio and television transmitter);

• Radio license fees (to be imposed by the Local government of the State in which the car is registered);

• Illegal parking fees;

• Public convenience sewage and refuse disposal fees;

• Customary burial ground permit fees

• Religious places establishment permit fees; and

• Signboard and advertisement permit fees.\

(b) iii. Functions of various tax administration at the State government level The tax administrative organs at the State government level comprises of:

• The State Board of Internal Revenue (SBIR); and

• The Technical Committee of the SBIR. Functions of the State Board of Internal Revenue (SBIR) The State Board of Internal Revenue 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 Joint Tax Board (JTB) on tax policy, tax reform, tax legislation, tax t 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. Functions of the Technical Committee of the SBIR The Technical Committee shall:

• Have powers to co-opt additional staff from within the State service, in the discharge of its duties;

• Consider all matters that require professional and technical expertise and make recommendations to the State board;

• Advise the State board on all its powers and duties; and

• Attend to such other matters as may, from time to time, be referred to it, by the board.

(c) Causes and possible remedies of multiple taxation in Nigeria The likely causes of multiple taxation include: i. The alarming approved numbers of taxes for collection by a local government is a factor encouraging local government into the inordinate drive for revenue through those taxes/levies; ii. The administrative problems of some SIRS, such as poor funding, lack of infrastructure, poor remuneration and lack of motivated skilled personnel; iii. Deliberately denial by some States government of the revenue due to local governments; iv. Failure of the three tiers of government to adequately fund their departments and agencies; and

v. Lack of information and data. The possible remedies to the causes of multiple taxation include: i. Reviewing the current statutory provisions in Nigeria to delimiting the scope of taxes and levies collectible by each level of government and imposing penalties for contravention of the laws; ii. Making available to the local governments their portion of revenue from the federation account; iii. Adequate funding the various agencies and departments of the State governments; iv. Ensuring that the Ministry of Local Government and the House of Assembly play their oversight functions very well on the activities of the local government; and v. Maintaining an up to date database of taxpayers in Nigeria.

Examiner’s Report The question tests candidates’ knowledge of fiscal federalism and tax administration in Nigeria. About 30% of the candidates attempted the question and they showed a good understanding of the question, hence performance was good. The commonest pitfall was the inability of the candidates to correctly explain the term, fiscal federalism. Candidates are advised to familiarise themselves with these aspects of the syllabus as this will enhance their performance in future examinations.

Marking guide Marks Total (a) Any 2 correct explanations of fiscal federalism @ 2 marks 4 4 examples of other countries that practice federalism @ ½ mark 2 6

(b) i Roles of the 3 tiers of govt. @ 1 mark 3 ii Structure and taxing rights of Federal govt. (4 points @ ¼ mark) 1 Structure and taxing rights of State govt. (4 points @ ¼ mark) 1 Structure and taxing rights of Local govt. (4 points @ ¼ mark) 1 iii Any 3 correct explanations of the functions of SBIR @½ mark 1½ Any 3 correct explanations of the functions of Technical Committee of the SBIR @½ mark 1½ 9

(c) Any 3 correct causes of multiple taxation @1 mark 3 Any 2 correct remedies to causes of multiple taxation @ 1 mark 2 5 20 THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA

Shinny Tax Consultants Plot 3, Junaid Avenue, Ilorin March 19, 2021 The Group Managing Director Carrol Nigeria Limited Kaduna RE: MAINTENANCE OF BOOKS OR RECORDS OF ACCOUNTS, BACK AUDIT AND COMPUTED TAX LIABILITIES We refer to our discussion and subsequent appointment as the company’s tax consultant for the purpose of providing professional services on issues of concern to the company. Our comments are as follows:

a. Provisions of Companies Income Tax Act (CITA) CAP C21 LFN 2004 (as amended) and Finance Act 2020 on maintenance of books or records of accounts Maintenance of books or records of accounts is essential for correct assessment of a taxpayer (individual or corporate entity) to be made by the relevant tax authority. In order to give clarity and importance to this aspect, section 63, CITA 2004 (as amended) was expunged and substituted with a new one, Section 17, Finance Act 2020. The new provisions in Finance Act 2020 include the following:

i. Every company, including a company granted exemption from incorporation, shall, whether or not the company is liable to pay tax, maintain books or records of accounts, containing sufficient information or data of all transactions; ii. The books and records required to be maintained shall be in English language and shall, for the purposes of tax accounts, be consistent with the format that may be prescribed by the Revenue Service; iii. Where a record of a company is maintained in a language other than the English language, the company shall, on demand by the Revenue Service, produce, at its own expense, a translation in English language, which shall be certified by a sworn translator; iv. Any company that on request by the Revenue Service, fails to provide any record or book prescribed by this Act shall be liable to pay as penalty: - N100,000 in the first month in which the failure occurs; and - N50,000 for each subsequent month in which the failure continues. v. Where, in the opinion of the Revenue Service, a company fails or refuses to maintain books or records of accounts or adequate for the 49 purposes of tax, the Revenue Service may, by notice in writing, require it to maintain such records, books and accounts as the Service considers adequate, in such form and language as may be specified in the notice; vi. Any direction of the Service made shall be subject to objection and appeal in like manner as an assessment; and vii. Any book or record required to be kept shall be kept for a period of at least six years after the year of assessment in which the income relates.

b. Back duty audit and its implication Back duty: The tax laws, CITA 2004 (as amended) (for companies) and PITA 2004 (as amended) (for individuals and unincorporated entities) provide that relevant tax authority may from time to time and as long as it wishes, carry out a back duty audit on a taxpayer. Back duty has the following features:

i. During the course of the audit, the records of the taxpayer are checked to examine the truth in the information that was earlier provided in the annual returns or tax computations; ii. The objective of the back duty audit is to confirm that income has not been materially understated and that expenses have not been overstated; iii. It also seeks to determine whether all the expenses included in the tax computations are allowable for tax purposes; and iv. The audit will also verify the values of the qualifying capital expenditure so as to confirm that the basis of capital allowance computation is reliable. Implications of back duty audit are: i. At the end of the audit, the findings of the tax computations are reviewed and compared with the tax computations earlier submitted and on which remittances were previously based. The shortfall on a yearly basis is determined and this forms the basis of an additional assessment. ii. An additional assessment arising from such an exercise is subject to the objection and appeal procedures. iii. The Service during the back duty audit may open the records of the company to the preceding years up to 6years or beyond. 50

c. Computation of the company’s tax liability The attached Appendices 1, 2 and 3 show the results of the adjusted profit, tax liability and capital allowance. The results indicate that the adjusted profit of the company for the year ended December 31, 2020 was N32,810,000. The company was able to relieved its capital allowance, which amounted to N11,697,990, thereby having a total profit of N21,267,010. In line with the provision of Finance Act 2019, the company being a medium-sized company was liable to pay companies income tax at the rate of 20%. This gives tax liability of N4,253,402. Following the provision of Tertiary Education Trust Fund (Establishment, etc) Act 2011 (as amended), the company is liable to pay 2% of its assessable profit as tertiary education tax. This amounted to N659,300. In order not to be sanctioned by the Revenue Service, you are advised to file your annual returns, which must include the audited financial statements and schedule of tax computations with the Revenue Service and payment made within the statutory period allowed. Please do not hesitate to contact the undersigned, should you require further clarifications. Yours faithfully, Raheem Ojo Principal Partner For: Shinny Tax Consultants Appendix 1: Computation of adjusted profit for the year ended December 31, 2020 N N Net profit as per accounts 26,410,000 Add back: Disallowable items: Depreciation of factory plant 1,890,000 Depreciation of office equipment 2,640,000 Administrative expenses 250,000 Motor running expenses (30% of N1,250,000) 375,000 Repairs and maintenance 215,000 General provision for doubtful debts 600,000 Understatement of turnover 750,000 6,720,000 33,130,000 Less: Disposal of old plant 320,000 Adjusted profit 32,810,000 51 Appendix 2: Tax liability for 2021 Tax Year N N Adjusted profit 32,810,000 Add: Balancing charge 155,000 Assessable profit 32,965,000 Less: Capital allowances Unutilised b/f 1,500,000 For the year 10,197,990 Available for relief 11,697,990 Relieved (11,697,990) (11,697,990) Unutilised c/f NIL Total profit 21,267,010 Companies income tax @ 20% of N21,267,010 4,253,402 Tertiary education tax @ 2% of N32,965,000 659,300 Appendix 3: Capital allowance computation Factory building Furniture & Fittings Motor van Industrial plant IA 15% AA 10% IA 25% AA 20% IA 50% AA 25% IA 50% AA 25% Capital allowance 2017 Y/A N N N N N Cost 3,800,000 1,600,000 IA (570,000) (400,000) 970,000 AA (323,000) (240,000) 563,000 1,533,000 2018 Y/A TWDV 2,907,000 960,000 AA (323,000) (240,000) 563,000 2019 Y/A 2,584,000 720,000 Cost 4,200,000 IA (2,100,000) 2,100,000 AA (323,000) (240,000) (525,000) 1.088,000 3,188,000 2020 Y/A TWDV 2,261,000 480,000 1,575,000 AA (323,000) (240,000) (525,000) 1,088,000 2021 Y/A TWDV 1,938,000 240,000 1,050,000 Cost 6,500,000 2,000,000 4,240,000 5,700,000 IA (975,000) (500,000) (2,120,000) (2,850,000) 6,445,000 AA W3(875,500) (539,990) W1 (1,055,000) W2 (712,500) 3,182,990 Invest allow (570,000) 570,000 10,197,990 52

Workings 1. Annual allowance for furniture and fittings in 2021 Y/A AA for the old asset = N240,000 – N10 = AA for the new acquisition = N2,000,000 – N500,000 5 N239,990 300,000 539,990 2. Annual allowance for motor van in 2021 Y/A AA for the old asset = AA for the new acquisition = N4,240,000 – N2,120,000 4 N525,000 530,000 1,055,000 3. Annual allowance for factory building in 2021 Y/A Old factory building AA = New factory building AA = N6,500,000 – N975,000 10 N323,000 552,500 875,500

Examiner’s report The question tests the candidates’ understanding of the provisions of Companies Income Tax Act 2004 (as amended) and Finance Act 2019 regarding maintenance of books or records of accounts, back duty audit and computations of companies income tax. Being a compulsory question, all the candidates attempted the question. Candidates demonstrated a fair understanding of the question and performance was above average. The commonest pitfall was the inability of some candidates to state correctly the provisions of Finance Act 2019 in respect to maintenance of books or records of accounts. Candidates are advised to familiarise themselves with issues concerning maintenance of books or records of accounts by reading extensively the Institute’s Study Text, other relevant textbooks and the Finance Act 2019. 53

Marking guide Marks Marks (a) Heading 1 Provision of CITA and Finance Act (Discussions on any 3 points @ 1 mark each) 3 4

(b) Back duty audit (Any 2 points @ 1 mark each) 2 Implication (Any 2 points @ 1 mark each) 2 4

(c) Computation of tax liability: Main body of the letter (Any 2 points @ ½ mark each) 1 Appendix 1- Adjusted profit: Net profit as per accounts ½ Depreciation of factory plant ½ Depreciation of office equipment ½ Administrative expenses ½ Motor running expenses ½ Repairs and maintenance ½ General provision for doubtful debts ½ Understatement of turnover ½ Disposal of old plant ½ Adjusted profit ½ Appendix 2- Tax liability for 2021 tax year: Balancing charge ½ Assessable profit ½ Capital allowances: Unutilised ½ For the year ½ Total profit ½ Companies income tax ½ Tertiary education tax ½ Appendix 3- Capital allowance computation: 2017 Y/A (9 ticks @ ¼ mark each) 2¼ 2018 Y/A (5 ticks @ ¼ mark each) 1¼ 2019 Y/A (10 ticks @ ¼ mark each) 2½ 2020 Y/A (7 ticks @ ¼ mark each) 1¾ 2021 Y/A (19 ticks @ ¼ mark each) 4¾ 22 Total 30 54

Debby Oil Limited Plot 45, Aboki Road, PortHarcourt INTERNAL MEMO April 1, 2021 From: Assistant Tax Manager To: Tax Manager Subject: COMPUTATION OF TAX LIABILITY FOR 2020 YEAR OF ASSESSMENT Your memo on the above subject matter dated March 28, 2021, refers. I have completed the assignment and the result shows that our company will pay a total tax liability of N2,132,004,000, which comprises chargeable tax of N2,080,208,000 and N51,796,000 tertiary education tax. Attached herewith for your perusal and further necessary action, is the schedule, which shows how the result was arrived at. Best regards, Segge Oshah Assistant Tax Manager 55 SCHEDULE OF COMPUTATION OF TAX LIABILITY Debby Oil Limited Computation of Tax Liability For 2020 Year of Assessment N’000 N’000 N’000 Crude oil exported (W1) 9,664,200 Crude oil sold locally 2,900,500 Difference in inventory (N1,220,000 – N1,380,000) (160,000) Other income (N1,235,300 – N735,000) 500,300 Balancing charge 8,000 12,913,000 Less: Allowable expenses Production cost 3,440,000 Operating expenses 1,789,600 Intangible drilling cost 1,425,200 Traveling expenses 54,000 Salaries and wages 1,860,000 Pension fund contribution 175,000 Loan interest (N150,000 – N78,000) 72,000 General expenses (N800,500 – N580,500) 220,000 Royalties and production rentals 810,000 Bank charges 25,300 Harbour dues 15,000 Non-productive rent 350,000 Audit and accountancy fees 28,000 Customs duty on essentials 7,300 Tertiary education tax (2/102 x N2,641,600) 51,796 10,323,196 Adjusted profit/Assessable profit 2,589,804 Less: Capital allowances: Lower of actual annual allowance 120,000 Petroleum investment allowance (W2) 22,500 142,500 Or 85% of assessable profit of N2,589,804 2,201,333 Less 170%of PIA (1.7 x N22,500) 38,250 2,163,083 142,500 Chargeable profit 2,447,304 Assessable tax @ 85% of N2,447,304 2,080,208 Chargeable tax 2,080,208 Tertiary education tax 51,796 Total tax liability 2,132,004 56

Workings (1) Crude oil exported API $ Standard 320 35.00 Actual 340 Difference 20 x $0.2 0.40 Posted price 35.40 Since US $1 is equivalent to N420, the posted price in Naira = 35.4 x N420 = N14,868 per barrel Crude oil exported = N14,868 x 650,000 barrels = N9,664,200,000. This is greater than the actual receipt of N9,524,000,000 as reported in the financial statements. The practice of the Revenue is to pick the higher of the two figures. (2) Petroleum investment allowance (PIA) Cost of a new pipeline and storage tank = N150 million Location of the asset is 180 metres water depth. Rate = 15% Therefore, PIA = 15% of N150 million = N22.5 million.

Examiner’s report The question tests the candidates’ knowledge of assessment of an oil prospecting company to petroleum profits tax. Over 70% of the candidates attempted the question and they exhibited a clear understanding of the requirements of the question. Performance was good. The commonest pitfall was the inability of some candidates to correctly identify allowable expenses needed for the determination of assessable profit. Candidates are advised to pay attention to assessment of oil prospecting companies to petroleum profits tax by reading the Institute’s Study Text, other relevant textbooks and tax laws. 57

Marking guide Marks Heading of the memo 1 Discussion on the result of the tax computation (Body of the memo) 1 Schedule of computation of tax liability: Heading 1 Crude oil exported ½ Crude oil sold locally ½ Difference in inventory ½ Other income ½ Balancing charge ½ Production cost ½ Operating expenses ½ Intangible drilling cost ½ Travelling expenses ½ Salaries and wages ½ Pension fund contribution ½ Loan interest ½ General expenses ½ Royalties and production rentals ½ Bank charges ½ Harbour dues ½ Non-productive rent ½ Audit and accountancy fees ½ Customs duty on essentials ½ Tertiary education tax ½ Adjusted profit/assessable profit ½ Actual annual allowance ½ Petroleum investment allowance (PIA) ½ 85% of assessable profit ½ 170% of PIA ½ Capital allowance figure (N142,500) ½ Chargeable profit ½ Assessable tax ½ Chargeable tax ½ Tertiary education tax ½ Total tax liability ½ Workings: Posted price figure ($35.40) ½ Value of crude oil exported (N9,664,200,000) ½ PIA value (N22.5 million) ½ Total 20 58

Sunny & Co. (Tax Consultants) Success Avenue Lagos October 4, 2021 The Managing Director Dragbat Limited Independence Road Lagos. Dear Sir, RE: ADVICE ON TAX PLANNING, TAX AVOIDANCE AND THIN CAPITALISATION I refer you to our discussion in your office requesting us to address and provide advice on the above subject. We have since concluded the assignment and our comments are as follows:

a. Concepts of tax planning, tax avoidance and thin capitalisation

i. Tax planning

• This is the analysis and arrangement of a taxpayer’s financial situation in order to maximise allowances and tax reliefs and minimise tax liabilities in a legal and efficient manner.

• It involves anticipating a set of circumstances and the identification of opportunities to minimise or defer tax liabilities within the law.

• Tax rules can be complicated, but taking some time to know and use them for one’s benefit can change how much one ends up paying as tax.

ii. Tax avoidance

• This arises in a situation where the taxpayer arranges his financial affairs in a form that would make him pay the least possible amount of tax.

• For example, avoidance of value added tax can be achieved by anyone or organisation that does not buy the goods and /or services on which VAT is levied.

• Apart from boycotting the goods or services, tax avoidance schemes are carried out after a critical review of the tax laws. The taxpayer would then implement devices to exploit loopholes in the tax laws that would enable him avoid or minimise tax.

• To a very large extent, tax avoidance is legal once it is done within the limits permissible by the tax laws. 59

iii. Thin capitalisation

• A company is said to be thinly capitalised when its capital is made up of a much greater proportion of debt than equity. It shows that the company’s gearing or leverage is too high.

• A thinly capitalised company is perceived to create problems for two classes of people. These are:

- Creditors: They bear the solvency risk of the company, which has to repay the bulk of its capital with interest; and - Tax authorities: They are concerned about abuse by excessive interest deduction, which at the end of the day, will lead to loss of tax income to the tax authorities/government.

• Following from the review carried out by us on your financial statements, your company is headed towards thin capitalisation. We advise that the terms of the loan should be restructured in such a way that annual interest payment will be less and the principal sum spread over long period. In such a way, more money hitherto spent in paying the loan will be freed and used for other ventures that will have positive effect on the company’s profitability.

b. Tax planning activities and strategies The following are known tax planning activities and strategies: i. There are always tax planning opportunities for companies regardless of their sizes or the jurisdictions they work in; ii. At the local level, corporate tax planning is carried out through a review of the company’s income generation activities, expenses, benefits and other deductions, profit distribution, tax rates and any other variable that may affect the final result, against the applicable law to find optimisation opportunities; iii. In addition to local planning strategies, multinational enterprises can make use of international tax planning to take advantage of the differences in the rates from one jurisdiction to another, and the different tax benefits that may be offered between jurisdictions; iv. With a sound corporate tax planning process, companies can reflect their requirements to comply with local legislation in countries they operate; v. Tax planning is a right that taxpayers, including your company, must exercise to reduce tax liability and improve profitability while fully complying with the extant legislation to avoid penalties and further risks; and vi. As a matter of urgency, your company should engage an experienced and trusted tax planning strategist/ consultant to receive sound advice and guidance so as to make informed decisions on how to protect the company. Perhaps, this may be the cutting hedge your competitor is using over the years to pay lesser tax liabilities. 60

c. Tax implications on companies that practise tax planning, tax avoidance and thin capitalisation are:

i. There is no offence in practising tax planning so far it is not done to the limit. If properly implemented, planning could result in significant financial advantage to a business concern as lower tax liability will be paid; ii. However, if it is practiced to the limit, the tax authorities can disregard such transactions and appropriate tax liability paid by the taxpayer; iii. On tax avoidance, this is also supported by tax laws and is legal as the taxpayer only exploited loopholes in the tax legislation to pay reduced/lower tax liability; iv. When tax avoidance schemes are stretched to the limit, transactions would be seen only in mere form and lacking in substance. When this signal is present, the Revenue Service would want to step in to disallow such transactions; v. The possible reaction of the Revenue Service to where loopholes in the tax legislation have been exploited is to take steps to block the loopholes. Thus, specific legislation would be passed to block particular loophole(s); vi. For companies having thin capitalisation issues, the profit as well as tax liabilities will be significantly affected negatively; and vii. The Revenue Service will pay more attention to the interest payment. When it is above a particular threshold in a year (such as 30% of earnings before interest, taxes, depreciation and amortisation, on loans by a foreign connected person, Finance Act 2019), such is considered as excess interest and recognised as a disallowable deduction in that year. If you require further clarifications on issues raised above, please do not hesitate to contact us. Your faithfully, Sunny Kaj Principal Partner For: Sunny & Co. (Tax Consultants) 61

Examiner’s report The question tests candidates’ understanding of the concepts of tax planning, tax avoidance and thin capitalisation. About 50% of the candidates attempted the question, but majority of them lacked a good understanding of the requirements of the question, hence performance was below average. The major pitfall of the candidates was their inability to state clearly tax implications on companies that practice tax planning, tax avoidance and thin capitalisation. Candidates are advised to read extensively the Institute’s Study Text on tax planning, tax avoidance and thin capitalisation and other relevant tax laws.

Marking guide Marks Marks (a) Heading 1 Tax planning (Discussions on any 2 points @ 1 mark each) 2 Tax avoidance (Discussions on any 3 points @ 1 mark each) 3 Thin capitalisation (Any 3 points @ 1 mark each) 3 9 (b) Tax planning activities and strategies (Discussions on any 6 points @ 1 mark each) 6 (c) Tax implications on companies that practice tax planning, tax avoidance and thin capitalisation (Discussions on any 5 points @ 1 mark each) 5 Total 20 62

ToksBlaqy & Co (Tax Consultants) 20, Camp Road, Abeokuta January 22, 2021 The Managing Director COLENDS Nigeria Limited Abeokuta Dear sir, RE: CONNECTED PERSONS, ARTIFICIAL TRANSACTIONS AND TAX COMPUTATION We refer to your memo dated January 10, 2021 and our meeting with the company’s management on January 12, 2021, seeking our services as tax consultants to help address the above subject matter. We have completed our assignment and our comments are as follows:

a. Connected persons and artificial transactions These are explained as follows: i. In tax practice, certain persons are treated as being so closely involved with each other that they have to be viewed as the same person or that transactions between them need to be treated differently from those ―at arm’s length‖. These persons are referred to as ―connected persons‖; ii. Transactions between such persons may be regarded as artificial or fictitious for the purpose of determining the tax liability arising there from; iii. The Revenue Service can make whatever adjustments as it considers necessary to counteract the reduction of liability to tax that could otherwise result from such transactions; iv. Section 23 of Capital Gains Tax 2004 (as amended) provides that where a person acquires an asset and the person making the disposal is connected with him, the person acquiring the asset and the person making the disposal shall be treated as parties to a transaction made otherwise than by way of a bargain at arm’s length; v. The consideration (amount paid) shall be disregarded if less than the market value and the effective consideration shall be deemed to be the market value; and vi. By applying the provisions of the law to the transactions made by the company, the disposal of the company’s plant and machinery to one of its subsidiaries and salon motor vehicle to the General Manager are clearly artificial transactions as the company’s subsidiary and the General Managers are connected to the company. This is the main reason why the Revenue Service rejected the proceeds received by the company (from plant and machinery, N32million and saloon motor 63 vehicle, N3.5 million) and chose instead, the market values of N40million and N5.5 million for the two assets, respectively.

b. Tax implications on transactions executed are:

i. Section 32 of Capital Gains Tax Act 2004 (as amended) makes provision for specific classes of asset that qualify for roll-over relief. The relief is granted to a taxpayer that applied consideration received from disposal of old asset used only for the purposes of trade in acquiring a new asset similar to the one disposed; ii. The amount of the roll-over relief is deducted from capital gains before the determination capital gains tax payable; iii. All the assets disposed, except motor vehicle, are part of the classes of asset that qualified for roll-over relief; and iv. Schedule 1 provides the details of the tax implications on transactions executed. The company is liable to pay:

• N1,825,000 as capital gains tax on land and building;

• NNil on plant and machinery;

• N50,000 on saloon motor vehicle; and

• NNil on generator. This gives total tax payable of N1,875,000. Kindly get in touch with us if you need further clarifications. Yours faithfully Abiodun Bambam Senior Tax Consultant For: ToksBlaqy & Co (Tax Consultants) SCHEDULE 1 (i) Computation of capital gains tax liability Land and building N’000 N’000 Consideration 125,000 Less: Cost of acquisition 70,000 Advertisement 500 Estate agent’s commission 6,250 76,750 Capital gains record 48,250 Less: Roll-over relief (W1) 30,000 Capital gains 18,250 Capital gains tax @ 10% of capital gains 1,825 64 Plant and machinery N’000 Consideration (market value) 40,000 Less: Cost of acquisition 28,000 Capital gains record 12,000 Less: Roll-over relief (W1) 12,000 Capital gains NIL Capital gains tax @ 10% of capital gains NIL Saloon motor vehicle N’000 Consideration (market value) 5,500 Less: Cost of acquisition 5,000 Capital gains 500 Capital gains tax @ 10% 50 Generator N’000 N’000 Consideration 15,000 Less: Cost of acquisition 12,000 Disposal expenses 200 12,200 Capital gains record 2,800 Less: Roll-over relief (W1) 3,000 Capital gains NIL Capital gains tax @ 10% of capital gains NIL

(ii) Computation of roll-over relief Land and building Plant and machinery Generator N’000 N’000 N’000 Lower of: Sale proceeds (old asset) 125,000 40,000 15,000 Re-investment (new asset) 100,000 50,000 20,000 Less: Cost of acquisition (old asset)70,000 28,000 12,000 Roll-over relief 30,000 12,000 3,000 65

Examiner’s report The question tests candidates’ understanding of the concepts of connected persons and artificial transactions, and capital gains tax computations. About 70% of the candidates attempted the question and they showed good understanding of the question and performance was good. The commonest pitfall was the candidates’ inability to correctly identify the assets that qualify for roll-over relief, necessary for correct computation of capital gains tax liabilities. Candidates are advised to prepare adequately for future examinations by reading the Institute’s Study Text and other relevant textbooks.

Marking guide Marks Marks (a) Heading 1 Main body of the letter (discussions on any 3 points @ 1 mark each) 3 4

(b) Tax implications on transactions executed Main body of the letter (discussions on any 2 points @ 1 mark each) 2 Schedule 1: Computation of capital gains tax liability- land and building: Consideration ½ Cost of acquisition ½ Advertisement ½ Estate agent’s commission ½ Roll-over relief ½ Capital gains ½ Capital gains tax ½ Computation of capital gains tax liability- plant and machinery: Consideration ½ Cost of acquisition ½ Roll-over relief ½ Capital gains ½ Capital gains tax ½ Computation of capital gains tax liability- saloon motor vehicle: 66 Consideration ½ Cost of acquisition ½ Capital gains ½ Capital gains tax ½ Computation of capital gains tax liability- generator Consideration ½ Cost of acquisition ½ Disposal expenses ½ Roll-over relief ½ Capital gains ½ Capital gains tax ½ Computation of roll-over relief Sale proceeds- old asset (3 entries x ¼ mark each) ¾ Re-investment- new assets (3 entries x ¼ mark each) ¾ Cost of acquisition- old asset (3 entries x ¼ mark each) ¾ Roll-over relief (3 entries x ¼ mark each) ¾ 16 Total 20 67

Zigzag Tax Consultants Aseye Road, Benin City August 29, 2021 TWITTY Incorporation California USA. Attention: The Principal Partner, MAAbioro Partners Sabon-Yewa Avenue Kano Dear Sir, RE: SIGNIFICANT ECONOMIC PRESENCE OF A FOREGN ENTITY We refer to our discussion on August 22, 2021, in respect of the above subject matter and our subsequent engagement as a tax consultant to TWITTY Incorporation, USA. Having concluded the assignment, we are pleased to present our report for further necessary action by the management of TWITTY Incorporation.

a. The objectives of the provisions of Finance Act 2019 and Companies Income Tax (Significant Economic Presence) Order 2020 These are:

i. The Finance Act 2019 introduced the concept of significant economic presence to expand the scope of Nigerian tax on foreign companies deriving income from their activities in Nigeria which were hitherto not captured in the tax net; ii. Consequently, the Companies Income Tax (Significant Economic Presence) Order 2020 was issued by the Federal Government of Nigeria; and iii. The Order provides clarification on what constitutes a significant economic presence for foreign companies doing business, or providing services to customers in Nigeria, in line with section 13(2)(c) and (e) of Companies Income Tax Act 2004 (as amended). 68

b. Conditions for determination of significant economic presence for digital activities The Order provides that a foreign company shall have a significant economic presence in Nigeria in any accounting year, where it: Derives N25million annual gross turnover or its equivalent in other currencies from any or combination of the following digital activities:

i. Streaming or downloading services of digital contents, including but not limited to movies, videos, music, applications, games and e-books to any person in Nigeria; or ii. Transmission of data collected about Nigerian users which has been generated from such users’ activities on a digital interface including website or mobile applications; or iii. Provision of goods or services other than those under sub-paragraph 5 of the Order, directly or indirectly through a digital platform to Nigeria; or iv. Provision of intermediation services through a digital platform, website or other online applications that link suppliers and customers in Nigeria; or v. Uses a Nigerian domain name (i.e. .ng) or registers a website address in Nigeria; or vi. Has a purposeful and sustained interaction with persons in Nigeria by customising its digital page or platform to target persons in Nigeria, including reflecting the prices of its products or services in Nigerian currency or providing options for billing or payment in Nigerian currency.

c. Determination of significant economic presence for technical and consultancy services The Order provides that a foreign company providing technical, professional, management or consultancy services shall have a significant economic presence in Nigeria in any accounting year where:

i. It earns any income; or ii. Receives any payment from a person resident in Nigeria; or

iii. It has a fixed base or agent of a foreign company in Nigeria.

d. Activities exempted from significant economic presence in Nigeria The Order exempts the activities of the following foreign companies from constituting a significant economic presence in Nigeria:

i. Any foreign company under a multilateral agreement and consensus arrangement to address tax challenges arising from the digitalisation 69 of the economy who will be treated under such agreement or arrangement; or ii. Any foreign company making any payment, where the payment, is made:

• To an employee under a contract of employment; or

• For teaching in an educational institution or for teaching by an educational institution; or

• By a foreign fixed base of a Nigerian company.

e. The tax implications of the Order 2020 on the activities of TWITTY Incorporation are:

i. The current status of TWITTY Incorporation is within the ambit of the Order 2020. The implication is that profit derived by the company from Nigerian operation will be assessable to tax in Nigeria; ii. Maintenance of proper books of accounts that will be relevant for assessment of the company to Nigerian taxes; iii. For the company to enjoy from numerous tax incentives available to companies incorporated in Nigeria, the company should have a fixed base or better still be fully incorporated as a Nigerian company; and iv. Failure by the company to comply with the Order 2020 may result to severe sanctions from the Nigerian government. This can cause disruption in operations of the company within the Nigerian space. Should you need further clarifications, please do not hesitate to contact us. Yours faithfully, Otigba Suru Senior Partner For: Zigzag Tax Consultants

Examiner’s report The question tests candidates’ knowledge of the provisions of Finance Act 2019 and Companies Income Tax (Significant Economic Presence) Order 2020 on the treatment of digital and other service providers of a foreign entity having significant economic presence in Nigeria. About 50% of the candidates attempted the question. Candidates showed poor understanding of the question, therefore, performance was below average. The major pitfall was the inability of some candidates to explain correctly the objectives of the relevant provisions of Finance Act 2019 and Companies Income Tax (Significant Economic Presence) Order 2020. 70 Candidates are advised to read the Institute’s Study Text, other relevant textbooks, Finance Act 2019 and Companies Income Tax (Significant Economic Presence) Order 2020 as this will go a long way in assisting them to pass future examinations.

Marking guide Marks Marks (a) Heading 1 The objectives of the provisions of Finance Act and Order 2020 tend to achieve (Any 2 points @ 1 mark each) 2 3 (b) Conditions for determination of significant economic presence (discussions on any 5 points @ 1 mark each) 5 (c) Determination of significant economic presence for technical and consultancy services (Any 2 points @ 1 mark each) 2 (d) Activities exempted from significant economic presence in Nigeria (Any 3 points @ 1 mark each) 3 (e) Tax implications of the Order 2020 on activities of TWITTY (Any 2 points @ 1 mark each) 2 Total 15

Welldone Manufacturing Company New Area Avenue, Jos INTERNAL MEMORANDUM From: Tax Manager To: General Manager Date: October 5, 2021 Subject: BASE EROSION AND PROFIT SHIFTING (BEPS) In line with our discussion of October 3, 2021 on your request to be informed on the above subject matter, my comments are as follows:

a. Distinction between base erosion and profit shifting Base erosion has the following attributes: i. It is the use of financial measures and tax planning to reduce the size of the company’s taxable profits in a country; ii. It is often achieved by structuring income to have more favourable tax 71 treatment or by finding ways to write off certain expenditure against taxable income; and iii. It has the effect of reducing a company’s tax payment below it would otherwise have been. Profit shifting: Profit shifting has the following attributes: i. This involves making payment to other group companies in order to move profit from high-tax jurisdictions to lower-tax regimes; ii. This serves to increase the overall profits available to the group shareholders; iii. Often, these inter-group payments take the form of royalties and interest payments, as these expenses can be deducted from pre-tax profits; and iv. Another issue with these types of payment is that some jurisdictions Have lower tax rates on them when received as income by other persons.

b. Techniques of base erosion and profit shifting Base erosion and profit shifting could be achieved using any of the following techniques:

i. Trademark and technology licensing/transfer pricing: Managing the group’s trademark, design and patent through an entity that applies a lower tax rate to intellectual property, and then charging group companies royalties on the use of the brand; ii. Thin capitalisation: By setting up subsidiaries with minimal share capital, group can use a financing arm to fund the new company’s operation with debt. This large debt attracts interest, which has different treatment in some jurisdiction and can therefore reduce the group tax payment if structured correctly; iii. Hybrid mismatch arrangements: Different tax rules between countries can sometimes give rise to unintended effects like ―double non- taxation‖, which can be exploited by businesses to reduce their tax burden. This primarily applies to national treatment of certain instruments in such a way that they are treated in the paying country as tax deductible debt, but seen in the receiving country as tax exempt income; iv. Putting assets into entity without substance: Some countries introduce preferential tax regimes as a way to compete for business. However, this is only useful if the business with substance begin to locate them in the country. Otherwise, this form of tax competition simply erodes the tax base of the country where the activity takes place; and 72

v. Tax havens: A multi-national enterprise may locate its head office in a jurisdiction with tax preference on tax haven and its operations with its subsidiaries and permanent establishments located in another jurisdiction may be such that is eroding the tax base of the countries where the subsidiaries are located.

c. The Organisation for Economic Cooperation and Development (OECD)’s SIX action initiatives against base erosion and profit shifting. These include the following:

i. Address the tax challenges of the digital economy; ii. Neutralise the effects of hybrid mismatch arrangements; iii. Strengthen controlled foreign company rules; iv. Limit base erosion via interest deductions and other financial payments; v. Counter harmful tax practices more effectively, taking into account transparency and substance; vi. Prevent treaty abuse; vii. Prevent the artificial avoidance of permanent establishment status; viii. Assure that transfer pricing outcomes are in line with value-creation- intangibles; ix. Assure that transfer pricing outcomes are in line with value-creation- risk and capital; x. Assure that transfer pricing outcomes are in line with value-creation- other high risk transactions; xi. Establish methodologies to collect and analyse data on BEPS and the action to address it; xii. Require taxpayers to disclose their aggressive tax planning arrangement; xiii. Re-examine transfer pricing documentation and country-by-country reporting; xiv. Make dispute resolution mechanisms more effective; and xv. Develop a multilateral instrument to modify bilateral tax treaties.

d. The implications on the company if it engages in base erosion and profit shifting are:

i. Base erosion and profit shifting are basically tax avoidance strategies used to exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations; ii. It reduce the total profit upon which tax is payable; iii. It reduce the tax revenue in the country where it is being practiced; iv. This act is totally condemned by more than 100 countries in the world as being unfair practice; and 73

v. The initiatives put in place by OECD in combating this activity are legendary. It is therefore advisable for the company (in collaboration with its parent company) not to involve in this act.

Examiner’s report The question tests candidates’ understanding of the concept and techniques of base erosion and profit shifting. About 50% of the candidates attempted the question and they showed fair understanding of the question, therefore, performance was average. The commonest pitfall was the inability of the candidates to correctly explain the techniques of base erosion and profit shifting. Many candidates mistook it for examples of base erosion and profit shifting. Candidates are advised to read the Institute’s Study Text and other relevant laws on base erosion and profit shifting, when preparing for future examinations.

Marking guide Marks Marks a. Heading 1 Discussion on base erosion (Any 2 points @ ½ mark each) 1 Discussion on profit shifting (Any 2 points @ ½ mark each) 1 3 b. Discussion on techniques of base erosion and profit shifting (Any 4 points @ 1 mark each) 4 c. OECD initiatives against base erosion and profit shifting (Any 6 points @ 1 mark each) 6 d. Implication on the company if it engages in base erosion and profit shifting (Any 2 points @ 1 mark each) 2 15 74

Jaiye & Co. (Chartered Accountants) 11 Edith Muhammad Street Ojodu, Lagos 13 October 2021 The Chairman MATS State Board of Internal Revenue Odo-Eran Nigeria Dear Sir, Re: Assessment and Collection of Taxes from Self-Employed Taxpayers We refer to our appointment as Consultant to MATS State Internal Revenue Service for the purpose of providing advisory services on the above subject. Self-employed taxpayers are unincorporated individuals or body of individuals engaged in their own businesses either as sole traders or in partnerships. Such persons include individual contractors, traders, professionals, consultants, market men and women, artisans and all other entities that are not liable to tax under the Companies Income Tax Act, but under the Personal Income Tax Act CAP P8 LFN 2004 (as amended). This means such persons are taxable on income accruing to them personally. All self-employed taxpayers are required to file self-assessment tax returns with the relevant state tax authorities every year. Such tax return is expected to disclose transactions relating to the individual’s income for the year.

(a) Constraints being faced by tax authorities in assessing and collecting taxes from self-employed taxpayers include:

(i) Lack of taxpayers’ data /information There is no detailed information on or database for the self- employed in Nigeria, thus bringing them into the tax net is difficult; 75

(ii) Inefficient utilisation of tax revenue There is a general apathy to voluntary compliance with the provisions of the tax laws because of the level of decay in basic infrastructure which has always called to question the need for continued payment of tax in Nigeria;

(iii) Tax evasion and avoidance It is easier for self-employed persons to evade tax than employees whose incomes are taxed at source. Also self- employed persons have evolved several tax avoidance strategies which require anti- avoidance provisions;

(iv) Lack of experience and suitable qualified personnel There is the dearth of experienced tax personnel, hence the difficulty in ascertaining the correct assessments for self- employed taxpayers;

(v) Inadequate penalties / absence of enforcement In Nigeria, the penalties for non-compliance with relevant tax provisions are too lenient to compel the self-employed to pay tax. There is also a general lack of enforcement of existing penalties;

(vi) Inadequate records Most self-employed persons do not maintain records of their income and expenditure. Some also mix their business activities with their private affairs, thus making it difficult to determine the income taxable;

(vii) Lack of public enlightenment Most taxpayers do not know what tax to pay, when to pay, who to pay to, where to pay and what reliefs and allowances they are entitled to. A good tax system should be certain and easy to administer. The public should be educated on their responsibility with respect to tax at all times;

(viii) Level of corruption Some tax officials collude with would-be taxpayers to defraud the government of taxes;

(ix) Level of poverty Several self-employed persons are struggling to survive due to the unconducive operating environment. The society has been impoverished such that paying tax may further impoverish the low-income earners; and 76

(x) The over-dependence on oil revenue for a very long time has led to the neglect of all other non-oil revenue sources.

(b) Strategies for expanding the Nigerian tax net to improve tax collection drive covering the self-employed are:

(i) Public enlightenment and education The revenue should embark on aggressive publicity and education of taxpayers on the various taxes payable by all self- employed individuals;

(ii) Enforcement of withholding tax provision By further encouraging companies to implement the withholding tax provision, more self-employed persons who render various services to companies can be brought into the ‗tax net’;

(iii) Requirement for presentation of tax clearance certificate (TCC) By providing and insisting that TCC be produced for any form of transaction with government, more self-employed persons will be compelled to pay their taxes;

(iv) Stiffer penalties for non-compliance If the consequences of failure to comply with the provisions of the tax laws are made stiffer, more taxpayers will willingly comply with the tax laws;

(v) Encouragement of cooperative unions By encouraging artisans in particular, to form associations through which government can reach the members, improvement in tax revenue generation from that category of self-employed persons will be achieved;

(vi) Effective utilisation of tax revenue Improvement in the level of basic infrastructural facilities will encourage voluntary compliance with provisions of the tax laws as they will show that the tax revenue is being utilised effectively;

(vii) Promulgation of anti-avoidance provision Making provisions to block the several loop holes in the tax laws will enhance further compliance with the tax laws and increase tax revenue; 77

(viii) Use of information technology The use of appropriate information technology that will make it difficult to evade tax will enhance tax revenue from self- employed taxpayers;

(ix) Investigation and intelligence unit The investigation and intelligence units of the Revenue should be vibrant and effective. It is the responsibility of these units to trace self-employed persons in the society, who have not been paying their taxes. This can be done by going through the Land Registry and Vehicle Licencing Offices. Information can also be obtained from banks by insisting that they should file returns of all their new customers with the Revenue;

(x) Engagement of experienced and qualified personnel Employing qualified personnel and paying competitive remuneration will further enhance dedication to duty and ultimately increase tax revenue; and

(xi) Regular amendment to the tax laws The tax laws should be regularly updated and the provisions should be such that are reasonable and easy to comply with. Most of the provisions of the Nigerian tax laws are outdated and which makes it difficult to comply with. Some of those provisions encourage tax evasion. Please do not hesitate to contact the undersigned, should you require further clarifications. Yours faithfully, Bunmmy AY For: Jaiye & Co (Chartered Accountants) 78

Examiner’s report The question tests candidates’ knowledge of constraints facing the tax authorities in the assessment and collection of taxes from self-employed taxpayers and the strategies for improving tax collection. About 80% of the candidates attempted the question. Candidates displayed good understanding of the question and performance was good. The major pitfall was the inability of some candidates to proffer correctly the strategies for improving tax collection from self-employed category of taxpayers. Candidates are advised to ensure that they read the Institute’s Study Text and other relevant textbooks on assessment and collection of taxes when preparing for future examinations.

Marking guide Marks Marks (a) Heading of the letter 1 Constraints in assessing and collecting tax (7 correct points @ 1 mark each) 7 8

(b) Strategies for expanding the Nigeria tax net to improve collection (7 correct points @ 1 mark each) 7 Total 15 THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA