Advanced Taxation · May 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