Advanced Taxation · November 2021

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