Advanced Taxation · 2022

OK & Co (Chartered Accountants) Igbogbo Road, Lagos Date: …… The Managing Director Dadinkowa Nigeria Limited Lagos. Dear Sir, RE: COMPUTATION OF TAX LIABILITIES AND OTHER MATTERS THEREOF I refer to our discussion of April 12, 2022 on your request for computation of the company’s tax liabilities for 2022 assessment year and advice on treatment of donations made during the year and dividends exempted from tax. I hereby present a report for your review before same is processed for filing with the tax authorities.

(a) Determination of tax liabilities Financial records of the company for the year ended December 31, 2021 revealed an operating loss of N6,530,000. For tax purposes and in line with the provisions of Companies Income Tax Act 2004 (as amended), the profit or loss made by a corporate entity has to be adjusted. When this was done, the company made an adjusted profit of N54,145,000. The company was able to relieve all the unabsorbed losses for the 2017, 2018, 2019 and 2020 tax years, which amounted to N36,070,000. However, only N18,075,000 out of N71,568,980 capital allowances available for relief was utilised, while the unutilised portion of N53,493,980 is deferred to next year for possible utilisation from profit. Following from above, the company has zero total profit for the period under review. Section 13 of Finance Act 2020 stipulates that any company that falls into this category (zero or insufficient profit) has to pay a minimum tax. Thus, the company is liable to pay a minimum tax of N1,946,650. There is also tertiary education tax that is compulsory for companies operating in Nigeria to pay. The new rate is 2.5% of adjusted profit, which is N1,489,000. The total tax liabilities for the 2022 tax year is N3,435,650. We suggest that every effort be put in place for filing of annual tax returns with the Federal Inland Revenue Service within the statutory time limit provided under the Act. 52

(bi) The treatment of donations made by the company during the year under review The CITA 2004 (as amended) recognises the importance of donations made by corporate entity. However, for such donations to be allowed as expenses in the determination of total profit and subsequently tax liabilities payable in any year of assessment, it has to fulfill some conditions. These conditions are:

• It must be made to any of the funds, bodies, institutions in Nigeria contained in the Fifth Schedule to CITA;

• It must be made out of profit;

• It must not be of capital nature, except donations to a university or other tertiary or research institutions;

• It must not exceed 10% of the company’s total profits for an assessment year before any deduction for donation. In the case of donations to tertiary or research institution, up to 15% of total profit or 25% of tax payable in the year, whichever is higher;

• Donations made by companies in cash or kind to any fund set up by the Federal Government or to any similar fund or purpose in consultation with any Ministry, department or agency of the Federal Government, in respect of any pandemic, natural disaster or other exigency shall be allowed as deduction provided that requisite documentation documenting the donations and the cost thereof are provided to the relevant tax authority; and

• The amounts allowable for deduction in respect of the above, in any year of assessment shall be limited to 10% of assessable profits after deduction of allowable donations made by the company. Based on the foregoing, it is evident that the N12 million donations made by the company to a fund established by the Federal Government for victims of crisis was to a recognised fund. However, the amount of the donation was in excess of 10% of the company’s total profits for an assessment year before any deduction for donations. It is on the basis of the above that the tax authority will not regard the whole of N12 million donations made by the company as an allowable expense in the determination of tax liabilities for 2022 tax year. The Revenue Service will only allow the amount of donations, which is restricted to 10% of assessable profits after such deduction. This is equal to N5,415,000. (bii) Dividends exempted from taxation. The CITA 2004 (as amended) clearly provides for treatment of dividend income. There is no inconsistency in its treatment. The following are dividends exempted from taxation:

• Dividends received by way of a bonus issue of shares; 53

• Dividends received from a pioneer company;

• Dividends received from a company subjected to tax under the PIA 2021;

• Dividends received from a foreign investment, provided such dividend is received through a domiciliary account;

• Dividends received net of withholding tax by a Nigerian company from another Nigerian company;

• Dividends received from small companies in the manufacturing sector in the first five years;

• Dividends received from investment in wholly export-oriented business;

• Dividends received from a unit trust scheme;

• Dividends received by a company from another one, provided that the equity participation on which the dividend is paid:

- either wholly paid for in foreign currency or by assets brought to Nigeria; and - not less than 10% of the equity share capital of the company paying the dividend. We hope that this report adequately represents the mandate assigned to us. Should you need further clarification on this, we will be glad to address it. Kem Adek Principal Consultant Appendix 1: Computation of tax liabilities N’000 N’000 Loss as per accounts (6,530) Add back: Disallowable expenses Improvement to industrial building 700 Construction of company’s gate 900 General allowance for doubtful debts 17,400 Fine for driving offences 470 Donations 12,000 Stamp duties for increase in share capital 1,500 Depreciation 35,600 Loss on disposal of foreign equity shares 1,750 70,320 63,790 Less: Tax exempt income Dividend received (net) 3,460 Excess on revaluation of investment 770 4,230 59,560 Less: Allowable donations (10/110 x N59,560) 5,415 Adjusted profit/assessable profit 54,145 54 Less: Unabsorbed loss b/f: 2017 8,290 2018 4,380 2019 9,800 2020 13,600 36,070 18,075 Less: Capital allowances Unrelieved b/f 15,200 For the year (appendix II) 56,368.98 Total available for relief 71,568.98 Relieved (18,075) (18,075) Unrelieved c/f 53,493.98 Total profit Nil Companies income tax (w. 6) 1,946.65 Tertiary education tax @ 2.5% of N59,560) 1,489 Total tax liabilities payable 3,435.65 Appendix II: Capital allowances computation Industrial building Manufacturing Motor Furniture & Non- industrial plant vehicles fittings industrial building Capital allowances IA 15% AA 10% IA 50% AA 25% IA 50% AA 25% IA 25% AA 20% IA 15% AA 10% N N N N N 2022 Tax Year TWDV 84,000,000 28,000,000 14,000,000 2,700,000 Additions 700,000 - 4,500,000 1,200,000 900,000 IA (105,000) - (2,250,000) (300,000) (135,000) 2,790,000 AA (16,860,000) W1 (27,999,980) W2 (7,562,500) W3 (1,080,000) W4 (76,500) W5 53,578,980 56,368,980 TWDV c/f 67,735,000 20 8,687,500 2,520,000 688,500 55 Working notes (1) AA for 2022 tax year- Industrial building Old:N84,000,000 = N16,800,000 10 – 5 years New: N700,000 – N105,000 = 60,000 10 years 16,860,000 (2) AA for 2022 tax year- Manufacturing Industrial plant = N28,000,000 = N28,000,000 less N10 x2 4 – 3 years = N27,999,980 (3) AA for 2022 tax year- Motor vehicle Old: N14,000,000 = N7,000,000 4 – 2 years New: N4,500,000 – N2,250,000 = 562,500 4 years 7,562,500 (4) AA for 2022 tax year- Furniture & fittings Old: N2,700,000 = N900,000 5 – 2 years New: N1,200,000 –N300,000 = 180,000 5 years 1,080,000 (5) AA for 2022 tax year- Non-industrial building = N900,000 – N135,000 = N76,500 10 years (6) Minimum tax computation Section 13 of Finance Act 2020 provides that minimum tax = 0.5% of gross turnover of the company less franked investment income. It also states that the applicable minimum tax is reduced to 0.25% for tax returns provided and filed for any year of assessment falling due on any date between 1 January 2020 and 31 December 2021. 0.5% of gross turnover of the company less franked investment income Minimum tax = 0.5% of (N382,500,000 + N6,830,000) = = 0.5% of (N389,330,000) = N1,946,650 56

Examiner’s Report The question tests the candidates’ understanding of the provisions of Companies Income Tax Act 2004 (as amended) regarding treatment of donations made, exemption of dividends from taxation 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 average. The commonest pitfall was the inability of some candidates to state correctly the provisions of Companies Income Tax Act 2004 (as amended) in respect of exemption of dividends from taxation. Candidates are advised to familiarise themselves with issues concerning treatment of donations and exemption of dividends from taxation by reading extensively the Institute’s Study Text, other relevant textbooks, and the Companies Income Tax Act 2004 (as amended).

Marking Guide Marks (a) Determination of the company’s tax liabilities Discussion (Memo) ½ Appendix I: Loss as per accounts ½ Improvement to industrial building ½ Construction of company’s gate ½ General allowance for doubtful debts ½ Fine for driving offences ½ Donations ½ Stamp duties for increase in share capital ½ Depreciation ½ Loss on disposal of foreign equity shares ½ Dividend received (net) ½ Excess on revaluation of investment ½ Donations ½ Adjusted profit ½ Unabsorbed loss b/f (N36,070) ½ Capital allowances: Unrelieved b/f ½ For the year ½ Relieved ½ Unrelieved c/f ½ Total profit ½ Companies income tax ½ 57 Marks Tertiary education tax ½ Total tax liabilities payable ½ Appendix II: Capital allowances computation (2022 tax year) Additions (Industrial building) ½ Additions (Non-Industrial building) ½ IA (Industrial building) ½ IA (Non-Industrial building) ½ Additions (Motor vehicles) ½ Additions (Furniture and fittings) ½ IA (Motor vehicles) ½ IA (Furniture and fittings) ½ IA (Capital allowance) ½ AA (Industrial building) ½ AA (Manufacturing industrial plant) ½ AA (Motor vehicles) ½ AA (Furniture and fittings) ½ AA (Non-industrial building) ½ AA (Capital allowance) ½ Total (Capital allowance) ½ Minimum tax computation ½ 20

(bi) Treatment of donations 1 mark for each condition for donation to be allowed for tax purposes, subject to a maximum of 3 points 3 1 mark for each reason why the whole donation made by the Company was not allowed for tax purposes, subject to a maximum of 2 points 2 5 (bii) Exemption of dividends from donations 1 mark for each exemption of dividends for tax purposes, subject to a maximum of 5 points 5 Total 30 58

“Technological tools, impact and challenges to tax practice and administration”. Being a paper delivered at an in-house training for staff of ABC & Co (Chartered Accountants) In the last few years, professional accounting firms and tax administrators have been facing more pressure than ever to deliver value to clients and taxpayers, respectively. Deployment of relevant technological tools has been seen to be a viable option in curtailing the challenges being faced by these tax practitioners and administrators. Some of the acclaimed technological tools that can assist both tax practitioners and administrators are discussed in turn:

(a) Technology-driven tools

(i) Cloud computing technology: There are cloud-based independent automated solutions for tax management. When a tax practice or administration subscribes to a cloud-based tax management solution, it is relieved of the need to invest in physical onsite servers with the attendant costs of maintenance and support. Cloud-based tax management solutions also enable tax practitioners and administrators to work remotely from practically any device with internet connection and serve their clients from any location at any time. This tool further helps tax practitioners to facilitate collaboration among themselves, clients and taxpayers.

(ii) Artificial intelligence and robotics: In the conventional tax practice, practitioners put a lot of efforts into collating and analysing financial data in order to serve their clients and taxpayers. Artificial intelligence and robotics make it easier for tax practitioners to simplify and accelerate various data- related tasks. Robotic Process Automation (RPA) software has been demonstrated to be effective in handling routine monotonous aspects of the tax man’s job. Artificial intelligence and robotics help reduce costs and errors by streamlining operations.

(iii) Blockchain technology: This tool became popular globally through the advancements in digital currency transactions such as Bitcoin. Many businesses now leverage on the technology to record their financial and non-financial transactions in an open, secured and decentralised ledger. Where the tax consultants or the tax administrators are part of the transaction flow and given access to the data chain, it makes it possible for all parties to see each transaction and determine the tax implication. The tool can also be used to facilitate tax payments to the government at highly reduced processing cost.

(iv) Data analytics technology: This tool makes use of data and it allows real-time status monitoring of financial matters including their tax implications to be easily achieved. In the financial realm, data produces valuable insights, drives results and creates a better 59 experience for clients. The tool helps tax administrators to improve internal operations and build revenue for the government. Through data analytics software, tax practising firms could offer more valuable advisory services to their clients.

(v) Social media technology: The social media platforms: These platforms (such as Twitter, Facebook, Linkedin, Instagram) have become useful tools in the hands of tax practitioners and administrators. They are used primarily for dissemination of tax information due to their wide reach and makes collaboration among tax professionals, clients and administrators seamless.

(vi) Mobile app technology: Tax practitioners can make use of their mobile devices to access the financial data of their clients anytime and anywhere, especially where the client has adopted cloud accounting technology. Also, tax administrators and practitioners could develop and deploy mobile apps which taxpayers and clients could download and install for tax updates and news.

(b) The identified technology-driven tools impact tax practice and administration in the following ways:

(i) Cloud computing technology

• Tax management software hosted in the cloud;

• Storage and retrieval of tax transaction data in the cloud;

• Access and anayse tax data anytime, anywhere and on any device;

• Present results in robust databoards; and

• Collaboration and exchange of information between tax authorities and/or taxpayers.

(ii) Artificial intelligence and robotics

• Zero data entry;

• Responding to queries;

• The machine can be made to learn from tax auditor’s conclusion and uses it on future scenarios; and

• Identify patterns in both structured and unstructured transactions data- which ones are “normal and abnormal”.

(iii) Blockchain technology

• Decentralisation and distribution of shared database;

• All parties to a business transaction are involved in recording and validation from inception;

• No reconciliation needed; and

• No tax audit required. 60

(iv) Data analytics technology

• Analysis of volumes of data and helps in gaining better business insight;

• Identification and prediction of tax risk factors and anomalies; and

• Improved business and tax advisory services due to deeper insight.

(v) Social media technology

• Gain visibility and exposure;

• Be recognised as experts;

• Build their online networks; and

• Keep the clients informed and provide better and prompt customer service.

(vi) Mobile app technology

• Mobile accounting provides tax practitioners many benefits such as on-demand data and information, even if they are on the go; and

• Starting a laptop or computer every time one wants to work is a mere waste of time as against getting all the information with just a single tap with mobile app.

(c) Challenges of technology-driven tools to tax practice and administration are:

(i) Low computer literacy level; (ii) Poor internet facility; (iii) Possible cyber threat (attack); (iv) High set up and implementation costs; (v) Lack of technical know-how; (vi) Challenge of data validation- garbage-in-garbage-out; (vii) Resistance from the management and other users; and (viii) Security risk.

Examiner’s report The question tests the candidates’ knowledge of technological-driven tools being used by tax practitioners and administrators in Nigeria. Over 60% of the candidates attempted the question and they exhibited a clear understanding of its requirements. The performance was above average. The commonest pitfall was the inability of some candidates to identify correctly and explain the technological-driven tools. Candidates are advised to pay attention to taxation of digital economy by reading the Institute’s Study Text and other relevant textbooks. 61

Marking Guide Marks Marks (a) Identification and explanation of technological-driven tools 1 mark for each technological tool identified, subject to a maximum of 4 tools 4 1 mark for each discussion of technological tools, subject to a maximum of 4 tools 4 8

(b) The impact of technological-driven tools on tax practice and administration 2 marks for discussion of the impact of each of the identified technological-driven tools on tax practice and administration, subject to a maximum of 4 tools 8

(c) Challenges of technological-driven tools to tax practice and administration 1 mark for each of the challenges of technology-driven tools to tax practice and administration, subject to a maximum of 4 points 4 Total 20

BB Philip & Co (Chartered Accountants) Maiduguri Road, Calabar INTERNAL MEMO Date: …… From: Assistant Tax Manager To: Head (Tax Matters) Subject: Re: Tax Issues on Disposal of Assets by Nice-One Nigeria Limited I refer to our client’s request on provision of Capital Gains Tax Act 2004 (as amended) on principles underlying disposal of chargeable assets and determination of capital gains tax payable on various disposals during the year ended December 31, 2021. I hereby present a report for your review before same is presented to the client.

(a) The principles of disposal as provided for in Section 6 of Capital Gains Tax Act 2004 (as amended) are: i. Where any capital sum is derived by way of compensation for any loss of office or employment; ii. Where any capital sum is received under a policy of insurance and the risk of any kind of damage or injury to, or the loss or depreciation of, assets; 62

iii. Where any capital sum is received in return for forfeiture or surrender of rights, or for the refraining from exercising rights; and iv. Where any capital sum is received as consideration for use of exploitation of any asset.

(b) Computation of capital gains tax payable and when the tax due is to be paid to the relevant tax authority for each of the following transactions:

(i) Disposal of an option: The capital gain is the actual amount received from disposal of an option. This is N8,500,000 and capital gains tax payable is at the rate of 10%, which is N850,000 (see attached appendix I).

(ii) Acquisition of asset in exchange for debt and subsequent disposal of the asset: The amount of debt will be regarded as cost of acquisition. The capital gains derived is N4,250,000 and capital gains tax payable is N425,000 (see attached appendix II).

(iii) Disposal of a building in an estate: This is a case of full disposal as the cost of acquisition of the building is known. It is not a partial disposal. From appendix III, the capital gains is N33,500,000 and capital gains tax payable is N3,350,000 (see appendix III).

(iv) Disposal of old industrial plant, re-investment in new one and subsequent disposal: For re-investment in new plant within 12 months of disposal, the client is entitled to roll-over relief. Based on computation as shown in appendix IV, the company enjoyed full roll- over relief and no capital gains arose from the disposal of the old plant. Since the new plant purchased was resold, capital gains of N775,000 was realised and N77,500 is to be paid as capital gains tax. Thank you Julie Tosin 63 Appendix I N Sales proceeds 8,500,000 Capital gains 8,500,000 Capital gains tax @ 10% 850,000 Payment to be made by June 30, 2021 (see Section 2 of Finance Act 2020) Appendix N N Sales proceeds 18,000,000 Less: Value of debt (cost of acquisition) 13,500,000 Incidental expenses 250,000 13,750,000 Capital gains 4,250,000 Capital gains tax @ 10% 425,000 Payment to be made by June 30, 2021 (see Section 2 of Finance Act 2020) Appendix III N N Sales proceeds 110,000,000 Less: Cost of acquisition 75,000,000 Repairs 400,000 Professional valuers fee 1,100,000 76,500,000 Capital gains 33,500,000 Capital gains tax @ 10% 3,350,000 Payment to be made by December 31, 2021 (see Section 2 of Finance Act 2020) Appendix IV (Old plant) N Sales proceeds 6,000,000 Less: Cost of acquisition 4,500,000 Capital gains 1,500,000 Determination of roll-over relief Lower of: Amount re-invested in new plant 8,000,000 Or 64 Sales proceeds on disposal of old plant 6,000,000 Less: Cost of acquisition of old plant 4,500,000 Roll-over relief 1,500,000 Capital gains (as above) 1,500,000 Less: Roll-over relief 1,500,000 Net capital gains Nil Capital gains tax @ 10% Nil (Disposal of new plant) N N Sales proceeds 7,300,000 Less: Cost of acquisition 8,000,000 Roll-over relief 1,500,000 6,500,000 Incidental expenses 25,000 6,525,000 Capital gains 775,000 Capital gains tax @ 10% 77,500 Payment to be made by December 31, 2021 (see Section 2 of Finance Act 2020)

Examiner’s report The question tests candidates’ understanding of the principles of asset disposal and capital gains tax computations. About 80% of the candidates attempted the question and they showed a fair understanding of it, making the performance average. The commonest pitfall was the candidates’ inability to correctly compute capital gains tax liabilities arising from disposal of an option and acquisition of assets in exchange for debts. Candidates are advised to prepare adequately for future examinations by reading the Institute’s Study Text, other relevant textbooks and tax laws.

Marking guide Marks Marks (a) The principles of disposal as provided for in capital gains tax 1 mark for each principle of disposal, subject to a maximum of 3 points 3 65

(bi) Computation of capital gains tax payable in respect of disposal of an option in Ikeja branch Heading ½ Capital gains ½ Capital gains tax ½ Payment date ½ 2 (bii) Computation of capital gains tax payable in respect of acquisition of asset in exchange for debt in Calabar head office Marks Marks Sales proceeds ½ Value of the debt ½ Incidental expenses ½ Capital gains ½ Capital gains tax ½ Payment date ½ 3 (biii) Computation of capital gains tax payable in respect of disposal of a building in Abuja branch A case of full disposal ½ Sales proceeds ½ Cost of acquisition ½ Repairs ½ Professional valuers fee ½ Capital gains ½ Capital gains tax ½ Payment date ½ 4 (biv) Computation of capital gains tax payable in respect of disposal of industrial plants in Kano branch (old plant) Sales proceeds ½ Cost of acquisition ½ Capital gains ½ Amount re-invested in new plant ½ Sales proceeds on disposal of old plant ½ Cost of acquisition of old plant ½ Roll-over relief ½ Net capital gains ½ Capital gains tax ½ (New plant) Sales proceeds ½ Cost of acquisition ½ 66 Roll-over relief ½ Incidental expenses ½ Capital gains ½ Capital gains tax ½ Payment date ½ 8 Total 20

Colamrud & Co (Chartered Accountants) Lagos Road, Enugu INTERNAL MEMO Date: …… From: Manager (Tax Matters) To: Senior Partner (Tax Matters) Subject: Dutse Mines (Nigeria) Limited I refer to our client’s request on determination of tax liability for 2022 assessment year and advice on tax incentives for companies operating in the mining sector in Nigeria. I hereby present a report for your review before same is presented to the client.

(a) Determination of tax liabilities The Nigeria Minerals and Mining Act 2007 (as amended) treats exploration and processing expenditure costs as part of mining expenditure, which capital allowances have to be claimed. Hence, the treatment of the N60 million spent for exploration and processing as an item which was expensed during the accounting year is not in line with the provisions of the Act. Based on the detailed result as presented in attached appendices I and II, the client made an adjusted profit of N1,075,020,000; entitled to claim capital allowances of N77,000,000 resulting in total profit of N998,020,000. Companies income tax payable is N299,406,000 and tertiary education tax of N26,875,500. This gives a total tax liability of N326,281,500.

(b) Tax incentives available to a company in the mining of solid minerals sector in Nigeria are:

(i) Tax holiday for an initial period of 3 years from commencement of operations and renewable for additional 2 years. Any dividends paid during the tax holiday period will not suffer withholding tax;

(ii) Exporters of mineral products may be permitted to retain part of their foreign exchange earning in a domiciliary account for the purpose of acquiring spare parts and other mining inputs; 67

(iii) Exemption from customs and import duties in respect of plant, machinery equipment and accessories imported exclusively for mining operations. However, the plant and equipment can only be disposed of locally upon payment of the applicable customs and import duties;

(iv) For transferability of foreign currency through the CBN for the payment for servicing of certified loan and remittance of foreign capital in the event of sale or liquidation of the business;

(v) Grant of personal remittance quota for expatriate personnel, free from any tax imposed by any enactment for the transfer of external currency out of Nigeria;

(vi) Accelerated capital allowance on mining expenditure (95% initial allowance and retention of 5% until asset is disposed of)

(vii) Grant of investment allowance of 10% on qualifying plant and machinery;

(viii) All infrastructure costs provided by the mining company and approved by the Mining Cadastre Office (MCO) to be capitalised and capital allowance claimed at 95% in the first year of operations;

(ix) An additional rural investment allowance on infrastructure cost, depending on the location of the company and the type of infrastructure provided;

(x) New entrants to the mining sector may apply to the Minister of Mines to enjoy annual indexation of unutilised capital allowance carried forward by 5%, which lapsed in 2012. Such application, however, will be treated on a case by case basis; (xi) The Minister may grant a concession for the royalty payable on any mineral to be deferred by a number of years, subject to the approval of Federal Executive Council (FEC); and

(xii) Actual amount incurred out of reserves made for environmental protection, mine rehabilitation, reclamation and mine closure cost shall be tax deductible, subject to certification by an independent expert. The CITA also provides that:

(xiii) The profits earned by a mining company after the initial tax holiday period may continue to be exempted from income tax under the following circumstances: 68

• If the minerals are exported from Nigeria and the proceedss from such exports are repatriated to Nigeria and used exclusively for the purchase of raw materials, plants, equipment and spares;

• If the minerals produced are exclusive inputs for the manufacture of products for exports, provided the exporter gives a certificate of purchase of input to the company; and

• Potential full or partial exemption of interest on foreign loan from income tax, subject to the conditions stipulated under CITA.

(xiv) With implementation of Finance Act 2019, where a mining company makes a turnover of less than N25 million, no tax will be paid. Where turnover is between N25 million and less than N100 million, tax will be paid at 20%;

(xv) Any interest, rent, royalty or dividend received by a Nigerian company from abroad and brought into the country through any of the approved Nigerian banks will be exempted from companies income tax;

(xvi) Interest and/or gains received from bonds issued by any government or corporate body in Nigeria as well as from short term securities issued by the Federal Government, are exempt from income tax. This exemption is only applicable until 2022 financial year (2023 tax year). However, bonds issued by the Federal Government of Nigeria shall continue to enjoy this exemption; and

(xvii) The company may be entitled to employment tax relief (lower of the gross emoluments paid to qualifying employees or 5% of the assessable profits for the year); work experience acquisition programme relief (exempt income tax of 5% of the assessable profits); and infrastructure tax relief (20% of the public infrastructure provided). Thank you. Tomisin Oyewole 69 Appendix I- Computation of tax liabilities Dutse Mines (Nigeria) Limited Computation of tax liabilities for 2022 tax year N’000 N’000 Net profit as per accounts 752,270 Add back: Disallowable expenses: General allowance for doubtful debts 10,500 Loan to customers written off 5,000 Legal fees 750 Depreciation 70,000 Exploration and processing expenditure 60,000 Income tax provision 180,000 Education tax provision 5,000 331,250 1,083,520 Less: Profit on disposal of machine 8,500 Adjusted profit 1,075,020 Less: Capital allowances (appendix II) 77,000 Total profit 998,020 Companies income tax @ 30% 299,406 Tertiary education tax @ 2½% of adjusted profit 26,875.5 Total tax liabilities 326,281.5 Appendix II- Capital allowances Motor Vehicle Furniture & Fittings Mining Capital Allowances IA 50% AA 25% IA 25% AA 20% IA 95% AA Nil N N N N 2022 tax year TWDV 25,000,000 22,500,000 40,000,000 Additions - - 60,000,000 IA - - (57,000,000) 57,000,000 AA (12,500,000) (7,500,000) - 20,000,000 77,000,000 70

Workings:

(i) Annual allowance of motor vehicles AA = N25,000,000 4 - 2 years = N25,000,000 = N12,500,000 2 (ii) Annual allowance of furniture & fittings AA = N22,500,000 5 - 2 years = N25,000,000 = N7,500,000 3 (iii) Initial allowance of exploration and processing expenditure = 95% of N60,000,000 = N57,000,000

Examiner’s Report The question tests candidates’ understanding of tax incentives available to a company in the mining of solid minerals and companies income tax computations. About 60% of the candidates attempted the question, but majority of them lacked a good understanding of its requirements, hence their performance was below average. The major pitfall of the candidates was their inability to state correctly the tax incentives available to mining companies and poor treatment of certified exploration and processing expenditure in the computation of adjusted profit of the mining company. Candidates are advised to study extensively the Institute’s Study Text on mining taxation and other relevant tax laws.

Marking guide Marks Marks (a) Computation of the liabilities of the company for the relevant assessment year Heading ½ Treatment of exploration and processing expenditure (Memo) 1 Net profit as per accounts ½ General allowance for doubtful debts ½ Loan to customers written off ½ Legal fees ½ Depreciation ½ Exploration and processing expenditure ½ Income tax provision ½ 71 Education tax provision ½ Profit on disposal of machine ½ Adjusted profit ½ Capital allowance ½ Total profit ½ Companies income tax ½ Tertiary education tax ½ Total tax liabilities ½ Capital allowance computation: TWDV (Motor vehicle) ½ TWDV (Furniture & fittings) ½ TWDV (Mining) ½ Additions (Mining) ½ IA (Mining) ½ Capital allowance (N57 million) ½ AA (Motor vehicle) ½ AA (Furniture & fittings) ½ Capital allowance (N20 million) ½ Capital allowance (N77 million) ½ 14

(b) Comments on tax incentives available to a company in the mining of solid minerals in Nigeria 1 mark for each tax incentive discussed, subject to a maximum of 6 points 6 Total 20

(a) Ethical issues that arose from the tax engagement are:

(i) Conflicts of interest: Conflicts of interest that involve providing services to competing clients such that the interests of one client may be prejudiced;

(ii) Failure to liaise with the outgoing tax consultant to discuss whether or not to accept the engagement;

(iii) Poaching clients: Poaching or soliciting potential clients from other practitioners/ practices;

(iv) Fee setting: Basing the amount of the fee charged for tax services on the amount of tax saved/tax liability (that is, contingent fee setting);

(v) Prior years errors: Inaction by the tax practitioner in respect of a clear and significant error detected in a client’s prior year returns; 72

(vi) Tax authority’s error: Inaction by the tax practitioner in respect of a clear and significant mathematical or clerical mistake by the relevant tax authorities in favour of his client;

(vii) Reasonable enquiry: He failed to make reasonable enquiry where information or documents as furnished by the officers of his client (Odamo Nigeria Limited) appears to be inaccurate or incomplete;

(viii) Technical incompetence: The tax practitioner failed to maintain an appropriate level of professional competence, knowledge and skill in the execution of the assignment;

(ix) Continue to act: He continued to act for a client in circumstances where incorrect or misleading information is not corrected by the client;

(x) Professional judgment: Carrying out a client’s instructions which are inconsistent with the professional judgment of the tax practitioner;

(xi) Personal gain: Conflicts between opportunities for personal financial gain (or other personal benefit) and proper performance of a tax practitioner’s responsibilities;

(xii) Communication: Failure to communicate to client’s unfavourable as well as favourable information and professional opinions;

(xiii) Breach of objectivity: Olubami connecting with the officials of the Revenue Service to pay a lesser tax of N7 million instead of N12 million is an indication of bias and lack of objectivity; and

(xiv) Confidentiality: Failure to ensure confidentiality with regard to privileged client information. This is evidenced from the disclosure he made to Mr. Odamo that he assisted the company, which operates in the same sector as his, in doing the nefarious activities.

(b) Punitive measures put in place to ensure that accountants in practice adhere to legal and ethical issues when preparing tax returns are:

(i) Imposition of fines by the Institute (professional body), which the tax practitioner is a member; (ii) Suspension from membership of the Institute; (iii) Expulsion from membership of the Institute; (iv) Withdrawal of certificate and licence to practise; (v) Reprimand; and (vi) Payment of costs associated with the investigations and meetings. 73

Examiner’s report The question tests candidates’ knowledge of ethics and professionalism in tax engagements. About 70% of the candidates attempted the question. Candidates showed a good understanding of the requirements of the question and their performance was satisfactory. The major pitfall was the inability of some candidates to identify correctly and explain ethical issues that arose from the tax engagement. Candidates are advised to read the Institute’s Study Text and other relevant textbooks, as this will go a long way in assisting them to pass future examinations.

Marking Guide

(a) Ethical issues that arose from the tax engagement 1 mark for each discussion on possible legal and ethical issues, subject to a maximum of 10 points 10

(b) Punitive measures put in place to ensure that accountants in practice adhere to legal and ethical issues when preparing tax returns 1 mark for each discussion on implications for not adhering to legal and ethical issues in preparation of returns and in reporting subject to a maximum of 5 points 5 Total 15 74

ECOBAF Consult Services Plot 8, Ahmadu Road, Bauchi April 13, 2022 The Managing Director Maigona Agro Limited 99,Eyimba Road Bauchi Dear Sir RE: ADVICE ON TAX IMPLICATIONS OF PROFIT MADE BY BAM TEXTILE MILLS, UK We refer to our discussion of April 6, 2022 on the above subject-matter and our comments are as follows:

(a) Tax implications of the overseas branch- BAM Textile Mills, UK are:

i. The provisions of Nigerian tax laws as set out in the Companies Income Tax Act 2004 (as amended) on profit of an overseas branch of a Nigerian company is that such profit is deemed to be derived in Nigeria and is therefore liable to tax in Nigeria;

ii. Any foreign tax suffered is not allowable in determining the overseas profit;

iii. Assets in use in such a branch will be entitled to capital allowances claimed in Nigeria;

iv. Losses incurred from such a branch can be set off against profit in Nigeria provided the losses were incurred from the same source; and

v. Double taxation relief is available for any foreign tax suffered either based on bilateral agreement or based on tax relief available under the Commonwealth. Since it is a fact that BAM Textile Mills, UK is a branch of a Nigerian company, the above provisions of the Act are applicable and profit made is fully liable to tax in Nigeria.

(b) Computation of tax liabilities of the corporation

i. Following the provisions of the Act in respect of the status of BAM Textile Mills, the adjusted profit of N587.2 million from its operations is liable to tax in Nigeria. 75

ii. However, due to existing Commonwealth taxation relief between Nigeria and the UK, the profit is available for double taxation relief of N88.080 million (but restricted to actual tax paid in the UK, N72.2 million).

iii. The relief helps in reducing the companies income tax liability from N270.021 million to N197.821 million. All these computations are shown in the attached Appendix 1. Please do not hesitate to contact us if you need any further clarification on the above subject. Yours faithfully, Oluyemi Ukah Principal Partner for: ECOBAF Consult Services Appendix 1: Computation of tax liabilities of the corporation Maigona Agro Limited N’000 BAM Textile Mills N’000 Total N’000 Net profit as per accounts 339,270 367,700 706,970 Add: Disallowable expenses Depreciation 75,600 147,300 222,900 Income tax paid in the UK - 72,200 72,200 Adjusted profit 414,870 587,200 1,002,070 Less: Capital allowances (45,000) (57,000) (102,000) Total profit 369,870 530,200 900,070 Companies income tax @ 30% of N900,070 270,021 Less: Double taxation relief (W1) (72,200) Net Companies income tax payable 197,821 Tertiary education tax @ 2.5% 25,051.75 Total tax liabilities 222,872.75 76

Workings (1) Computation of double taxation relief Since BAM Textile Mills is a Nigerian company, the Commonwealth rate of tax is compared with ½ Nigerian rate of tax. CR = 35%; NR = 30%; and ½NR = 15% CR ≥ ½NR, therefore relief = ½NR Thus, double taxation relief = 15% of N587,200,000 = N88,080,000 However, the calculated double taxation relief is greater than the actual tax paid in the UK. Therefore, the amount of double taxation relief claimable will be restricted to the actual tax paid (N72,200,000).

Examiner’s Report The question tests candidates’ understanding of tax treatment of an overseas branch and companies income tax computations. About 70% of the candidates attempted the question and they showed a fair understanding of the question and performance was average. The commonest pitfall was the inability of the candidates to compute correctly double taxation relief on the foreign tax paid by the overseas branch. Candidates are advised to read the Institute’s Study Text and other relevant laws on taxation of non-resident companies when preparing for future examinations.

Marking Guide Marks Marks (a) Advice on tax implications of the oversees branch Heading 1 Tax implications of the overseas branch (Discussions on any 3 points at 1 mark each) 3 4

(b) Computation of tax liabilities Main body of the letter (Discussions on any 2 points at ½ mark each) 1 Appendix 1: Computation of tax liabilities Net profits as per accounts (Maigona) ½ Net profits as per accounts (BAM) ½ Net profits as per accounts (Total) ½ 77 Marks Marks Depreciation (Maigona) ½ Depreciation (BAM) ½ Depreciation (Total) ½ Income tax paid in UK (BAM) ½ Income tax paid in UK (Total) ½ Adjusted profit (Maigona) ½ Adjusted profit (BAM) ½ Adjusted profit (Total) ½ Capital allowances (Maigona) ½ Capital allowances (BAM) ½ Capital allowances(Total) ½ Global total profit (Total) ½ Companies income tax ½ Double taxation relief ½ Net Companies income tax payable ½ Tertiary education tax ½ Workings on double taxation relief ½ 11 Total 15

(a) Section 263(1) of Petroleum Industry Act 2021 provides that in computing the adjusted profit of a company in upstream petroleum operations related to crude oil for any accounting period, the following expenses are allowable:

(i) Rents incurred by the company for the period pursuant to a petroleum mining lease or petroleum prospecting licence;

(ii) All royalties the liability for which was incurred and were paid by the company during the period in respect of crude oil and associated gas and where a petroleum mining lease includes payment to the Federation Account related to production sharing, profit sharing, risk service contracts or other contractual features under a model contract and the company has incurred liability for such payments in kind or in cash;

(iii) Expenses directly incurred for repair of plant, machinery or fixtures employed for the purpose of the business;

(iv) An expenditure tangible or intangible directly incurred in connection with the drilling of the first exploration well and the first two appraisal wells in the same field;

(v) Any amount contributed to a fund, scheme or arrangement approved by the Commission for the purpose of decommissioning and abandonment, provided that the surplus or residue of the fund shall 78 be subject to tax under this Act at the end of the life of the field, where such surplus is returned to the lessee;

(vi) All sums the liability of which was incurred by the company to the Federal Government or any State or Local Government Council by way of levies, stamp duties and fees;

(vii) Costs of gas re-injection wells, which are re-injecting natural gas that otherwise would be flared, subject to ratification by the Commission; and

(viii) Any amount contributed to any fund, scheme or arrangement approved by the Commission pursuant to the establishment of host communities development trusts, Environmental Remediation Fund, Niger Delta Development Commission and other similar contributions.

(b) Implications of mergers and acquisitions in respect of a situation when a new company takes over an existing company are:

(i) Filing of annual returns: The new company that emerges from a merger process is expected to file the audited accounts and returns with the FIRS within 18 months from the date of its incorporation or not later than 6 months after the end of its first accounting period, whichever is earlier;

(ii) Basis of assessment: The commencement rules will apply to the new company;

(iii) Claim of capital allowances: No initial or investment allowance will be claimed on the transferred assets. The annual allowance claimable will be based on the tax written down value of the transferred assets;

(iv) Unabsorbed losses and capital allowance brought forward: The unrelieved losses and unabsorbed capital allowances of the individual merging companies will not be allowed to be carried forward and set off against the assessable profits of the new company after the merger. However, the unutilised capital allowances may be added to the tax written down value of the assets taken over for annual allowance purposes in the enlarged entity;

(v) Stamp duties: Stamp duty payment will arise on the share capital of the new company. If a merger also results in increase in share capital, stamp duty will be paid on the increase in share capital.

(vi) Merger cost: The FIRS may seek to disallow expenses (legal and professional fees) incurred in the process of merger on the basis that they are capital in nature and as such not tax deductible; 79

(vii) Value added tax and withholding tax: The fees paid to the professionals for services rendered in connection with the merger will attract value added tax and withholding tax at the appropriate rates;

(viii) Guarantee or security for payment of tax: The FIRS may require the new company to guarantee or give security to the satisfaction of the FIRS for the payment in full of all tax due or to become due by any of the ceased companies; and

(ix) End of service award: When companies merge, the services of some employees may no longer be needed. The new company may have to pay benefits such as gratuity, compensation for loss of employment and other retirement benefits. These expenses will be treated as allowable for the new company (but subject to statutory limit, for instance, for compensation for loss of employment is N100 million- Finance Act 2020).

Examiner’s Report The question tests candidates’ knowledge of expenses allowable in the computation of adjusted profit of a company in upstream petroleum operations and the implications of merger and acquisition of a new company with an existing company. About 50% of the candidates attempted the question. Candidates displayed good understanding of the question, and performance was above average. The major pitfall was the inability of some candidates to identify correctly some allowable expenses in line with the provisions of Petroleum Industry Act 2021. Candidates are advised to read the Institute’s Study Text, other relevant textbooks, and Petroleum Industry Act 2021, when preparing for future examinations.

Marking Guide (a) Expenses allowable in the computation of adjusted profit of a company in upstream petroleum operation 1 mark for each discussion on allowable expenses, subject to a maximum of 6 points 6

(b) Implications of mergers and acquisitions in respect of a situation where a new company takes over an existing company 1½ marks for each discussion on tax implications of merger and Acquisition when a new company takes over an existing company, subject to a maximum of 6 points 9 Total 15 THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA

(a) Owoeye Machine Tools Nigeria Limited Address ……………. INTERNAL MEMO Date: …………….… From: Tax Manager To: Managing Director RE: ADJUSTED PROFIT AND TAX LIABILITIES PAYABLE I refer to your request on computations of adjusted profit for the year ended March 31, 2021 and tax liabilities for 2021 and 2022 assessment years. I hereby present the report for your perusal.

(a) Determination of adjusted profit for the year ended March 31, 2021 The adjusted profit of the company for the year ended March 31, 2021 (the first year after the pioneer period), as shown in appendix 1 was N69,850,000. As a result of aggregate losses of N58,890,000 made during the pioneer period, which the adjusted profit of 2021 was used to relieve, the total profit produced a nil figure. No companies income tax is payable. Since 2021 assessment year is the first year of its new business and in line with the provisions of CITA 2004 (as amended), the company is exempted from paying minimum tax. Tertiary education tax of N1,045,000 only will be paid by the company. As for the 2022 assessment year, the company generated total profit of N29,097,000 (after utilisation of capital allowances). The company, therefore would pay companies income tax of N8,729,100 and tertiary education tax of N1,746,250. This gives total tax liabilities of N10,475,350. Attached herewith are appendices 1, 2, 3, 4 and 5, which contained all the computations in respect of adjusted profit and tax liabilities for the period under review. Thank you. Segge Danny 48 Appendix 1: Computation of adjusted profit For the year ended March 31, 2021 N’000 N’000 Net profit as per accounts 47,680 Add back: Disallowable expenses: Legal and professional fees 1,400 Depreciation 15,770 Allowance for doubtful debts 4,150 Administrative expenses 850 22,170 Adjusted profit 69,850

(b) Appendix 2: Computation of tax liabilities For 2021 and 2022 assessment years N’000 N’000 2021 assessment year Basis period: 1/4/19 – 31/3/20 Adjusted profit (given) 52,250 Less: Loss b/f from pioneer period 58,890 Relieved (52,250) (52,250) Unrelieved loss c/f 6,640 Capital allowance for the year 22,054 Utilised Nil Unutilised capital allowance c/f 22,054 Total profit NIL Companies income tax (minimum tax (appendix 5) (Exempted) NIL Tertiary education tax @ 2% of N52,250 1,045 Total tax liability payable 1,045 2022 assessment year Basis period: 1/4/20 – 31/3/21 Adjusted profit (appendix 1) 69,850 Less: Unrelieved loss b/f 6,640 Relieved (6,640) (6,640) Unrelieved loss c/f NIL ______ 63,210 Unutilised capital allowance b/f 22,054 Capital allowance for the year 12,059 Capital allowance available for utilisation 34,113 Utilised (34,113) (34,113) Unutilised capital allowance c/f NIL ______ Total profit 29,097 49 Companies income tax @ 30% of N29,097 8,729.1 Tertiary education tax @ 2½% of N69,850 1,746.25 Total tax liability payable 10,475.35 Appendix 3: Capital allowances Industrial Building Capital allowa nce Initial allowance 15% Annual allowance 10% Non- industrial building Motor vehicle Plant Furniture and fittings 25% 20% N’000 N’000 N’000 N’000 N’000 N’000 2021 A/Y Cost 23,800 11,600 6,200 10,400 5,800 IA (3,570) (1,740) (3,100) (5,200) (1,450) 15,060 AA (2,023) w1 (986) w2 (775) w3 (1,300) w4 (870) w5 5,954 Inv. allow - - - (1,040) - 1,040 22,054 2022 A/Y TWDV b/f 18,207 8,874 2,325 3,900 3,480 Additions - - 3,200 5,000 1,200 IA - - (1,600) (2,500) (300) 4,400 AA (2,023) (986) (1,175) w6 (1,925) w7 (1,050) w8 7,159 Inv. allow - - (500) - 500 12,059 TWDV c/f 16,184 7,888 2,750 4,475 3,330

Workings (1) Industrial building 2021 annual allowance = N23,800,000 – N3,570,000 = N2,023,000 10 (2) Non-industrial building 2021 annual allowance = N11,600,000 – N1,740,000 = N986,000 10 (3) Motor vehicle 2021 annual allowance = N6,200,000 – N3,100,000 = N775,000 4 (4) Plant 2021 annual allowance = N10,400,000 – N5,200,000 = N1,300,000 4 15% 50% 50% 10% 25% 25% 50 (5) Furniture and fittings 2021 annual allowance = N5,800,000 – N1,450,000 = N870,000 5 (6) Motor vehicle 2022 annual allowance Old: N2,325,000 = N775,000 4-1 New: N3,200,000 – N1,600,000 = 400,000 4 - 1 1,175,000 (7) Plant 2022 annual allowance Old: N3900,000 = N1,300,000 4-1 New: N5,000,000 – N2,500,000 = 625,000 4-1 1,925,000 (8) Furniture and fittings Old: N3,480,000 = N870,000 5-1 New: N1,200,000 – N300,000 = 180,000 5 1,050,000 Appendix 4: Statement of total profit or loss from pioneer business (Section 14 deductions) Accounting year Total profit/ (loss) N’000 1/4/16 – 31/3/17 (44,450) 1/4/17 – 31/3/18 (23,140) 1/4/18 – 31/3/19 8,700 Total (58,890) Appendix 5: Minimum tax computation for 2021 assessment year N’000 Gross turnover 312,450 Less: Franked investment income Nil 312,450 Minimum tax @ 0.25% 781.125 However, the company (having just commenced business operations) is exempted from paying minimum tax for the first 48 calendar months (2021, 2022, 2023 and 2024). 51

Examiner’s report The question tests the candidates’ understanding of the provisions of Companies Income Tax Act 2004 (as amended) regarding pioneer companies, computations of adjusted profit, and companies income tax. Being a compulsory question, all the candidates attempted the question. Candidates demonstrated a good understanding of the question and performance was above average. The commonest pitfall was the inability of some candidates to identify correctly the allowable and disallowable expenses in line with the provisions of Companies Income Tax Act 2004 (as amended). Candidates are advised to familiarise themselves with issues concerning pioneer legislation and computations of companies income tax by reading extensively the Institute’s Study Text, other relevant textbooks, and the Companies Income Tax Act 2004 (as amended).

Marking guide Marks Marks (a) Computation of adjusted profit Heading/address 1 Discussion (memo) 2 Appendix 1- adjusted profit: Net profit as per accounts ½ Legal and professional fees ½ Depreciation ½ Allowance for doubtful debts ½ Administrative expenses ½ Adjusted profit ½ 6

(b) Tax liabilities for 2021 and 2022 assessment years Appendix 2- Tax liabilities: 2021 assessment year Basis period ½ Adjusted profit ½ Less: Loss b/f from pioneer period ½ Relieved ½ Unrelieved loss c/f ½ Capital allowance for the year ½ Utilised ½ Unutilised capital allowance c/f ½ Total profit ½ Companies income tax ½ Tertiary education tax ½ 52 2022 assessment year Basis period ½ Adjusted profit ½ Less: Unrelieved Loss b/f ½ Relieved ½ Unrelieved loss c/f ½ Unutilised capital allowance b/f ½ Capital allowance for the year ½ Utilised capital allowance ½ Total profit ½ Companies income tax ½ Tertiary education tax ½ Appendix 3- Capital allowances: 2021 assessment year Cost (Industrial building) ¼ Cost (Non-industrial building) ¼ Cost (Motor vehicle) ¼ Cost (Plant) ¼ Cost (Furniture and fittings) ¼ IA (Industrial building) ¼ IA (Non-industrial building) ¼ IA (Motor vehicle) ¼ IA (Plant) ¼ IA (Furniture and fittings) ¼ Capital allowance (IA column) ¼ AA (Industrial building) ¼ AA (Non-industrial building) ¼ AA (Motor vehicle) ¼ AA (Plant) ¼ AA (Furniture and fittings) ¼ Capital allowance (AA column) ¼ Investment allowance (Plant) ¼ Capital allowance (Inv. allow column) ¼ Total capital allowances ¼ TWDV (Industrial building) ¼ TWDV (Non-industrial building) ¼ TWDV (Motor vehicle) ¼ TWDV (Plant) ¼ TWDV (Furniture and fittings) ¼ Additions (Motor vehicle) ¼ Additions (Plant) ¼ Additions (Furniture and fittings) ¼ IA (Motor vehicle) ¼ IA (Plant) ¼ IA (Furniture and fittings) ¼ 53 Capital allowances (IA column ¼ AA (Industrial building) ¼ AA (Non-industrial building) ¼ AA (Motor vehicle) ¼ AA (Plant) ¼ AA (Furniture and fittings) ¼ Capital allowance (AA column) ¼ Investment allowance (Plant) ¼ Capital allowance (Inv. allow column) ¼ Total capital allowances ¼ Opening balance: TWDV (Industrial building) ¼ TWDV (non-industrial building) ¼ TWDV (Motor vehicle) ¼ TWDV (Plant) ¼ TWDV (Furniture and fittings) ¼ Appendix 4 (Total losses from pioneer period) ½ Appendix 5 (Minimum tax computation) 1 24 30

Colamrud Petroleum (Nigeria) Limited Internal Memo Date: From: Assistant Tax Manager To: Tax Manager RE: REPORT ON THE COMPANY’s ADJUSTED PROFIT AND ASSESSABLE PROFIT FOR THE FIRST QUARTER OF 2022 AND COMMENTS ON COST-PRICE RATIO I refer to your request on computations of adjusted profit and assessable profit for the first quarter of 2022 and comments on the company’s cost-price ratio for the period under review. I hereby present a report for your perusal before same is presented at the next management committee meeting.

(a) Computation of adjusted profit and assessable profit The provisions of Section 262 (ascertainment of crude oil revenue, adjusted profit, assessable profit and chargeable profits), 263 (allowable deductions) and 264 (disallowable deductions) were complied with in the computations of adjusted profit and assessable profit of the company. Using two formats (as shown in appendices I and 2), the company’s adjusted profit revealed N941,350,000. When the unabsorbed loss of N35,000 was relieved, the assessable profit for the first quarter was N941,315,000. 54

(b) Comments on cost - price ratio The Petroleum Industry Act 2021 provides that all costs presented under Section 263 and under the Sixth Schedule to the Act in an accounting period, the sum of which is eligible for deduction under the hydrocarbon tax shall be subject to a cost-price ratio limit of 65% of gross revenue determined at the measurement points. However, certain costs such as rent, royalty and contributions to the environmental remediation fund, host community fund, Niger Delta Development Commission fund and other similar contributions are excluded from this provision. Any such cost not deductible shall be carried forward to subsequent years for deduction provided the amount to be deducted shall not exceed the total cost incurred. Thank you. Dipe Olu Appendix 1: Computation of adjusted profit and assessable profit for the first quarter 2022 (Format 1) N’000 N’000 Net profit as per accounts 645,420 Add back: Disallowable deductions (Section 264) Cost of drilling appraisal wells (1/3 of N24,000) 8,000 Head office shared costs 62,000 Repairs and maintenance (building improvement) 1,430 Customs duty on essentials 2,900 Depreciation 66,000 Interest on loans 4,400 Allowance for bad debts 34,000 Administrative expenses: Natural gas flare fees 10,000 Cost of obtaining information on oil 7,300 Bank charges 900 Miscellaneous expenses: Donation to widows and orphans 3,000 Income tax provision 90,000 Tertiary tax provision 6,000 295,930 Adjusted profit 941,350 Less: Unabsorbed losses b/f 35 Assessable profit 941,315 55 Appendix 2: Computation of adjusted profit and assessable profit for the first quarter 2022 (Format 2) N’000 N’000 Gross income 1,560,980 Less: Allowable expenses (Section 263 deductions) Production cost 210,730 Tangible drilling cost 18,800 Intangible drilling cost 17,600 Cost of gas reinjection wells 4,000 Cost of drilling appraisal wells (2/3 of N24,000) 16,000 Rent 13,000 Royalties: Export sales 69,300 Local sales 9,800 Salaries and wages 170,500 Repairs and maintenance (N8,930 – N1,430) 7,500 Administrative expenses (N13200 + N14,900 +N33,800) 61,900 Stamp duties on increase in share capital 1,000 Miscellaneous expenses (N22,500 – N3,000) 19,500 619,630 Adjusted profit 941,350 Less: Unabsorbed losses b/f 35 Assessable profit 941,315

Examiner’s report The question tests candidates’ knowledge of computations of adjusted profit, assessable profit, and cost-price ratio of a company in upstream petroleum operations, consistent with the provisions of Petroleum Industry Act 2021. About 70% of the candidates attempted the question, but majority of them lacked a good understanding of its requirements, hence their performance was below average. The major pitfall of the candidates was their inability to identify correctly the allowable and disallowable expenses relevant in the computations of cost-price ratio. Candidates are advised to study extensively the template provided by the Federal Inland Revenue Service on computations of hydrocarbon tax, Companies Income Tax, and relevant sections of the Petroleum Industry Act 2021. 56

Marking guide Format 1 Marks Marks (a) Determination of adjusted profit and assessable profit for the first quarter of 2022 Heading/title ½ Discussion (memo) ½ Net profit as per accounts 1 Cost of drilling appraisal wells 1 Head office shared costs 1 Repairs and maintenance (building improvement) 1 Customs duty on essentials 1 Depreciation 1 Interest on loans 1 Allowance for bad debts 1 Natural gas flare fees 1 Cost of obtaining information on oil 1 Bank charges 1 Donation to widows and orphans 1 Income tax provision 1 Tertiary tax provision 1 Adjusted profit 1 Unrelieved loss b/f 1 Assessable profit 1 18

(b) Comments on cost-price ratio (1 mark for each discussion of cost-price ratio, subject to a maximum of 2 points) 2 Total 20 Format 2 Marks Marks (a) Determination of adjusted profit and assessable profit for The first quarter of 2022 Heading/title ½ Discussion (memo) ½ Gross income 1 Production cost 1 Tangible drilling cost 1 Intangible drilling cost 1 Cost of gas reinjection wells 1 Cost of drilling appraisal wells 1 Rent 1 Royalties: export sales 1 57 Royalties: local sales 1 Salaries and wages 1 Repairs and maintenance 1 Administrative expenses 1 Stamp duties 1 Miscellaneous expenses 1 Adjusted profit 1 Unrelieved loss b/f 1 Assessable profit 1 18

(b) Comments on cost-price ratio (1 mark for each discussion of cost-price ratio, subject to a maximum of 2 points) 2 Total 20

Sunny & Co (Tax Consultants) Jaye Road, Mowe Date …… The Managing Director Yemmysea Beverages Limited Abeokuta Dear Sir RE: COMPUTATION OF CAPITAL GAINS TAX PAYABLE ON DISPOSAL OF ASSETS I refer to your request relating to advice on tax payable on disposal of assets made by the company; due date for filing of returns and tax implication of compensation for loss of office to staff who are to be relieved of their jobs. My comments are as follows:

a. (i) Disposal and subsequent acquisition of industrial building The capital gains made on disposal of asset on February 2021 was N38,462,000. But as a result of subsequent re-investment in new building for purposes of the business made in July 2021, the company was entitled to roll-over relief. The net capital gains, therefore, was N23,262,000 and capital gains tax payable was N2,326,200 (see appendix 1). 58

(ii) Disposal of plant and machinery There was a part disposal made in April 2021 and this generated capital gains of N9,249,828 and capital gains tax payable of N924,982.80. The second disposal made in August 2021 resulted in capital gains of N2,220,172 and capital gains tax payable of N222,017.20 (see attached appendix 2).

(iii) Disposal of factory equipment Factory equipment was disposed of in September 2021 to a friend to one of the directors for N160 million when the market value of the asset was N162.5 million. The tax authority, in line with the provisions of the Capital Gains Tax 2004 (as amended), would treat the disposal as made to a connected person. Hence, the market value of the asset would be used as the sales proceeds. This transaction generated a capital gains of N11,650,000 and capital gains tax of N1,165,000 (see attached appendix 3).

(b) Due dates for filing of self-assessment return and payment of the tax computed on each of the assets disposed of Section 2 of the Finance Act 2020 specifies that every person having disposed a chargeable asset shall, not later than June 30 and December 31 of that year, compute the capital gains tax, file self-assessment return, and pay the tax computed in respect of the chargeable assets disposed in the periods. In line with this provision of the Act, the disposals made by the company would be due for filing of self-assessment return and payment of capital gains tax as stated in appendix 4.

(c) Compensation for loss of office Section 4(a) of Finance Act 2020 states that sums obtained by way of compensation for loss of office, up to a maximum of N10 million shall not be chargeable gains and subject to tax; provided that any sum in excess of N10 million shall not be so exempt but the excess amount shall be chargeable gains and subject to tax accordingly. Section 4(b) further provides that any person who pays compensation for loss of office to an individual is required at the point of payment of such compensation to deduct and remit the tax due to the relevant tax authority. The tax so deducted shall be remitted within the time specified under the PAYE regulations. Following the provisions of the Act, compensation for loss of office to be paid to Mr. Bala would attract capital gains tax of N200,000 (10% of the excess of 59 N12 million over threshold of N10 million), which is to be paid to the tax authority by the recipient. Mr. Ekaite’s compensation for loss of office of N7.5 million (which is below the threshold of N10 million) will not attract any capital gains tax. Also, in remitting tax due on pay-as-you-earn to the State Internal Revenue Service, the amount of tax due on compensation for loss of office of both Mr. Bala and Mr. Ekaite should be computed and remitted to the tax office. We hope that this report adequately represents the mandate assigned to us. Should you need any further clarification on this, we will be glad to address it. Rosco Atanda Principal Consultant Appendix 1: Disposal and subsequent acquisition of industrial building N N Sales proceeds 123,900,000 Less: Cost of acquisition 85,000,000 Renovation expenses 288,000 Incidental cost 150,000 85,438,000 Capital gains 38,462,000 Roll-over relief computation Lower of: Sales proceeds 123,900,000 And Amount re-invested 100,200,000 Less: Cost of acquisition of old asset 85,000,000 Roll-over relief 15,200,000 Computation of capital gains tax N Capital gains 38,462,000 Less: Roll-over relief 15,200,000 Net capital gains 23,262,000 Capital gains tax (@ 10% of net capital gains) 2,326,200 60 Appendix 2: Disposal of plant and machinery Disposal in April 2021 Cost of part disposed = A x C A + B Where, A = sales proceeds = N80,000,000 B = market value of asset undisposed = N65,300,000 C = overall cost of asset = N128,500,000 Therefore, cost of part disposed = N80,000,000 x N128,500,000 N80,000,000+N65,300,000 = N70,750,172 Computation of capital gains tax N Sales proceeds 80,000,000 Less: Cost of acquisition 70,750,172 Capital gains 9,249,828 Capital gains tax (@ 10% of capital gains) 924,982.80 Disposal in July 2021 Cost of remaining assets = overall cost – cost of part disposed = N128,500,000 – N70,750,172 = N57,749,828 Computation of capital gains tax N N Sales proceeds 60,000,000 Less: Cost of acquisition 57,749,828 Incidental cost 30,000 57,779,828 Capital gains 2,220,172 Capital gains tax (@ 10% of capital gains) 222,017.20 61 Appendix 3: Disposal of factory equipment Computation of capital gains tax N N Sales proceeds 162,500,000 Less: Cost of acquisition 150,600,000 Refurbishment cost 250,000 150,850,000 Capital gains 11,650,000 Capital gains tax (@ 10% of capital gains) 1,165,000 Appendix 4: Due date for filing of returns and payment of capital gains tax Asset disposed

Examiner’s report The question tests candidates’ understanding of capital gains tax computations and treatment of compensation for loss of office paid to disengaged staff. About 80% of the candidates attempted the question. Candidates showed a good understanding of the requirements of the question, and their performance was satisfactory. The major pitfall was the inability of some candidates to identify correctly and explain the provisions of the Finance Act 2020 in respect of compensation for loss of office paid to staff disengaged by the company. Candidates are advised to read the Institute’s Study Text, other relevant textbooks and the Capital Gains Tax Act 2004 (as amended), as this will go a long way in assisting them to pass future examinations. Disposal date Due date for filing of returns and payment of capital gains tax Industrial building February 2021 but funds realised was re-invested in July 2021 June 30, 2021 Plant and machinery 1st disposal in April 2021 June 30, 2021 2nd disposal in August 2021 December 31, 2021 Factory equipment September 2021 December 31, 2021 62

Marking guide Marks Marks a(i) The capital gains tax (if any) and the capital gains tax payable on disposal and subsequent acquisition of industrial building Heading/title ½ Discussion (memo) ½ Sales proceeds ½ Cost of acquisition ½ Renovation expenses ½ Incidental cost ½ Roll-over: Sales proceeds ½ Amount re-invested ½ Cost of acquisition ½ Roll-over relief ½ Capital gains (computation of CGT) ½ Roll-over relief ½ Net capital gains ½ Capital gains tax ½ 7

(ii) The capital gains tax (if any) and the capital gains tax payable on disposal of plant and machinery Memo ½ Cost of part disposed (N70,750,172) ½ Sales proceeds ½ Cost of acquisition ½ Capital gains ½ Capital gains tax ½ Cost of remaining assets (July 2021) ½ Sales proceeds ½ Cost of acquisition ½ Incidental expenses ½ Capital gains ½ Capital gains tax ½ 6

(iii) The capital gains tax (if any) and the capital gains tax payable on disposal of factory equipment Memo ½ Sales proceeds ½ Cost of acquisition ½ Refurbishment expenses ½ Capital gains ½ Capital gains tax ½ 3 63

b. Due dates for filing of self-assessment return and payment of tax computed on each of the assets disposed of Industrial building (June 30, 2021) ½ Plant and machinery: 1st disposal (June 30, 2021) ½ 2nd disposal (December 31, 2021) ½ Factory equipment (December 31, 2021) ½ 2

c. Comments on the provisions of the Act in respect of compensation for loss of office to be paid to the two staff disengaged by the company Discussion of provisions of the law 1 Implications on compensation made to the relieved staff 1 2 Total 20 64

(a) The significance of transfer pricing to both the taxpayers and tax authorities include:

(i) They impact on the income and expenses as well as taxable profits of related companies in different tax jurisdictions in which the enterprises and multinationals operate; and

(ii) Transfer pricing mechanism is usually adopted by many companies to boost their head office profits which may be at the disadvantage of subsidiaries or associated companies which operate in other countries with different tax jurisdictions.

(b) In complying with arm’s length principle, the guiding actions which enterprise and multinationals must follow in dealings between them include:

(i) Where a connected person has entered into a transaction or series of transactions to which these regulations apply, the person shall ensure that the taxable profits resulting from the transactions are ascertained in a manner that is consistent with the arm’s length principle;

(ii) A controlled transaction is at arm’s length if the conditions of the transaction do not differ from the conditions that would have applied between independent persons in comparable transactions carried out under comparable circumstances; and

(iii) Where a connected person fails to comply with the provisions of transfer pricing regulations, the Service shall make adjustments, where necessary, in order to bring the taxable profits resulting from the transactions in conformity with the arm’s length principle.

(c) Ways which multinational companies adopt in financial dealings with their associated or subsidiary entities that are not consistent with the arm’s length principle include:

(i) Different pricing of goods/services at purchase cost: In any multinational group, a member of the group in one country may supply goods or services to another member in another country. By implications, the prices charged often create revenue for the company selling the goods or services, whilst its cost of purchase for the company buying the goods or services;

(ii) Tax avoidance: When companies operating under different jurisdictions belong to the same group, they may decide depending on what they want to achieve, under price or over price inter group transactions. The tax implication of the foregoing is that multinational transfer pricing can provide an avenue for tax avoidance; 65

(iii) Custom duties and tariff manipulation: Custom duties paid on imports and exports are usually based on transfer prices. For instance, if the transfer prices on imports into a country are low-priced, the import duties and other tariffs on the imports will equally be reduced;

(iv) Dividends manipulation: An instance of dividends manipulation is when a country A restricts an amount that can be paid as dividends to another company in country B, the company in country B may decide to overprice goods and services transferred to its subsidiary in country A. The implication of the foregoing is that more funds will be remittable to the other company in country B without any violation on restriction of dividend; and

(v) Imposition of excessive charges: The parent company can also impose excessive charges (e.g. royalties) on its foreign subsidiaries, associates, etc. in respect of the provision of intangibles, such as patents, licenses, trademarks, etc. and use these avenues to extract profits to a tax haven or jurisdiction with favourable tax requirement. Where the head office of the multinational or a member of the group incurs expenses which are for the benefits of all or many members of the group, the allocation of the joint costs to members of the group will certainly affect their profits and taxes.

(d) Fundamental areas to be noted and complied with by the taxpayers and tax practitioners as enshrined in Transfer Pricing Regulations 2018 are:

(i) Annual transfer pricing returns: A connected taxable person must submit transfer pricing document annually to FIRS not later than 6 months after the end of each accounting year or 18 months after the date of incorporation, whichever is earlier. Transfer pricing disclosure and declaration forms are to be attached to the annual tax returns;

(ii) Extension of filing annual transfer pricing returns: A connected person may apply in writing to the Service for an extension of the time within which to file returns and where the Service is satisfied with the reasons stated in the application made, it may grant the extension. Where the taxable person fails to meet the extended submission date granted by the Service, the administrative penalty shall apply as if no extension of period was granted; 66

(iii) Administrative procedures: Transfer Pricing Department of FIRS shall review transfer pricing documents submitted and carry out a review of transactions verifying the appropriateness of transfer pricing methods adopted; and

(iv) Burden of proof: Transfer pricing document must demonstrate sufficient information and analysis to verify consistency of the taxable profits derived from its controlled transactions with the arm’s length principle.

(e) Disputes that arise between the taxpayer and tax authorities under the Transfer Pricing Regulations 2018 are resolved through the following ways:

(i) A taxpayer who has any objection on assessment cannot approach the Decision Review Panel for a review of the assessment received from FIRS;

(ii) Taxpayers are now expected to lodge their complaints with the Head, FIRS Transfer Pricing Unit within 30 days after the date of receipt of the assessment notice; and

(iii) Effective March 12, 2018, the Head of Transfer Pricing Unit has the prerogative to decide whether or not to refer the taxpayer’s objection to the Decision Review Panel.

Examiner’s report The question tests the candidates’ knowledge of provisions of Income Tax (Transfer Pricing) Regulations, 2018, in respect of significance of transfer pricing to both taxpayers and tax authorities, principles of arm’s length, and administration of transfer pricing. About 50% of the candidates attempted the question, and they exhibited a clear understanding of its requirements. The performance was above average. The commonest pitfall was the inability of some candidates to identify correctly and explain the areas to be noted and complied with by taxpayers as well as tax practitioners in the administration of the Regulations. Candidates are advised to pay attention to transfer pricing by reading the Institute’s Study Text, other relevant textbooks and the Income Tax (Transfer Pricing) Regulations 2018. 67

Marking guide Marks Marks (a) Significance of transfer pricing to both the taxpayers and tax authorities 2 marks for the discussion of significance of transfer pricing to both the taxpayers and tax authorities, subject to a maximum of 1 point 2

(b) Guiding actions which enterprises and multinational companies must follow in dealings between them 1½ marks for each discussion of the guiding actions which enterprise and multinationals must follow in dealings between them, subject to a maximum of 2 points 3

(c) Ways which multinational companies adopt in financial dealings with their associated or subsidiary entities that are not consistent with the arm’s length principle ½ mark for each identification of financial dealings not consistent with the arm’s length principle, subject to a maximum of 4 points 2 1 mark for each discussion of financial dealings not consistent with the arm’s length principle, subject to a maximum of 4 points 4 6

d) Fundamental areas to be noted and complied with by taxpayers and tax practitioners in the administration of transfer pricing 2 marks for each discussion of fundamental areas to be noted and complied with by the taxpayers and tax practitioners in the administration of 2018 Regulations, subject to a maximum of 3 points 6

(e) How disputes that arise between a taxpayer and tax authorities are resolved under the Transfer Pricing Regulations 2018 1½ marks for each discussion of dispute resolution methods, subject to a maximum of 2 points 3 Total 20 68

Danny & Co (Tax Consultants) Tonadey Road, Abeokuta Date …… The Managing Director Yemmysea Beverages Limited Abeokuta Dear Sir RE: TAX IMPLICATIONS ON MERGER AND ACQUISITION ARRANGEMENTS AND POWERS OF FEDERAL INLAND REVENUE SERVICE I refer to your request on advice on tax implications on merger and acquisition under three different arrangements and powers of the FIRS on merger and acquisition issues. My comments are as follows:

(a) The tax implications when an existing company absorbs another existing company include:

(i) The company absorbed will be deemed to have ceased business and the cessation rules will apply to it;

(ii) The company that absorbs will not be deemed to have commenced a new business as far as the nature of business carried on by it before and after absorption is not different from that of the company absorbed or taken over. Therefore, commencement provisions will not apply to it and tax returns will be filed as an ongoing company;

(iii) The surviving company will not be entitled to investment allowance and initial allowance on the assets transferred to it through absorption. The annual allowance will be based on the tax written down values;

(iv) The unabsorbed losses and capital allowances of the individual merging companies may not be allowed to be carried forward and set off against assessable profits of the surviving company after the merger;

(v) Fees payable for professional services in connection with the merger will be subject to value added tax and withholding tax; and

(vi) Any increase in share capital as a result of a merger will attract payment of stamp duties. 69

(b) The tax implications when merger results in the cessation of business include:

(i) The cessation provisions will only apply to those companies which have ceased business permanently;

(ii) Any unrelieved capital allowances at cessation can be carried backward and set off against assessable profits of five years preceding the year of cessation;

(iii) Any unrelieved losses at cessation cannot be carried backward to be set off against the assessable profits of the preceding years of assessment; and

(iv) Any sum received or paid by the company, its receivers or liquidators after the date of cessation will be deemed to have been received or paid on the last day before such cessation occurred.

(c) The tax implications when a business is sold or transferred If a trade or business is sold or transferred to a Nigerian company together with any asset employed therein and the FIRS is satisfied that one of the companies has control over the other or that both are controlled by some other person or are members of a recognised group of companies, the FIRS may at its discretion direct that:

(i) The commencement and cessation provisions are not applied;

(ii) For capital allowances purpose, the assets sold or transferred shall be deemed to have been sold for an amount equal to the residue of qualifying capital expenditure thereon on the day following such sale or transfer;

(iii) The company acquiring the assets shall not be entitled to any initial allowance thereon and shall be deemed to have received all allowance already granted to the vendor company up to the date of the sale or transfer;

(iv) There is no reference to unutilised losses incurred in the old trade. Such losses cannot be transferred to the new business and may not be relieved in any other way; and

(v) In order to benefit from the unutilised losses incurred in the old trade, the company acquiring the old trade may leave some business in the old trade that will produce small profits annually which will gradually use up the losses over a number of years, before that part of the trade is transferred to the new trade. 70

(d) The powers of the Federal Inland Revenue Service on issues that concern mergers and acquisition of companies include:

(i) The consent of the FIRS, including clearance with respect to any capital gains tax that may be due and payable must be obtained before any merger, sales, takeover, transfer, or restructuring of a business carried on by a company can take place;

(ii) The CITA 2004 (as amended) gave the FIRS powers to the extent that no merger can be consummated without obtaining the consent or direction of the FIRS; and

(iii) Under CITA, no merger, takeover or transfer can take place without having obtained the FIRS’s direction and clearance with respect to any tax that may be due and payable. We hope this presentation satisfies your requirements. Should you still need any further clarification on this, please do not hesitate to contact us. Yours faithfully Akin Bode

Examiner’s report The question tests candidates’ understanding of tax treatments of merger or acquisition arrangements between entities in the same business line. About 60% of the candidates attempted the question, and they showed a fair understanding of the question and performance was average. The commonest pitfall was the inability of the candidates to state correctly the powers of the Federal Inland Revenue Service on issues that concern mergers or acquisition of companies. Candidates are advised to read the Institute’s Study Text and other relevant laws on the issues in respect of merger or acquisition arrangements when preparing for future examinations. 71

Marking guide Marks Marks (a) Tax implications when an existing company absorbs another existing company Heading/title 1 1 mark for each discussion on tax implications when an existing company absorbs another existing company, subject to a maximum of 4 points 4 5

(b) Tax implications when merger results in the cessation of business 1 mark for each discussion on tax implications when merger results in the cessation of the merging companies, subject to a maximum of 3 points 3

(c) Tax implications when a business is sold or transferred 1 mark for each discussion on tax implications when merger results in the cessation of the merging companies, subject to a maximum of 3 points 3

(d) Powers of the Federal Inland Revenue Service (FIRS) on issues that concern mergers and acquisition of Companies 2 marks for each discussion on powers of FIRS on merger and acquisition issues, subject to a maximum of 2 points 4 Total 15

(a) The main objective of double taxation agreement (DTA), as contained in the preamble to the agreements is the elimination of double taxation, without creating an opportunity for non-taxation or reduced taxation. Thus, a tax treaty does not primarily create exemption from taxation in the Source State. While the Resident State has an unlimited right to tax its residents, the Source State is allowed some taxing rights under the treaty in many instances, and on those occasions, it will have the prior right to tax, whereas the Resident State must eliminate double taxation in those instances. 72 Double taxation agreement (DTA) does not exempt a company from payment of tax on income or profit derived from a Source country, but gives the company opportunity to claim a credit (double taxation relief) in its home country in respect of double taxation suffered on its operation in another tax jurisdiction. In Nigeria, the provision where there is double taxation agreement is only applicable to a resident taxpayer. I disagree with the company because Singapura PTC Limited is a non-resident company that derives incomes from Nigeria. The company shall be liable to tax on incomes which are deemed to be derived from Nigeria, while the DTA between Nigeria and Singapore shall only be applicable to resident companies in Nigeria.

(b) A resident of Nigerian treaty partner may enjoy any of the following benefits, depending on the provisions of the DTA:

(i) Relief from double taxation (elimination of double taxation);

(ii) Reduced tax rates on income derived by airlines or shipping companies or exemption of their income from tax in Nigeria;

(iii) Reduced withholding tax rates on passive income or fees for technical service;

(iv) Requirement for permanent establishment (PE) before taxation in Nigeria;

(v) Access to mutual agreement procedure (MAP) for dispute resolution; and

(vi) Non-discrimination in taxation matters.

(c) A company registered in Singapore may be liable to tax in Nigeria under the DTA between Nigeria and Singapore where the company:

(i) Is also a resident of Nigeria (dual resident of both countries) and determined to be resident of Nigeria under the tie-breaker rule in Article 4(3) of the Agreement;

(ii) Derives business profit which is attributable to a permanent establishment it has in Nigeria;

(iii) Derives a passive income from Nigeria (dividend, interest, royalties);

(iv) Has an immovable property in Nigeria from which an income is derived

(v) Derives capital gains from Nigeria;

(vi) Carries on the business of international traffic (shipping or airline transportation) and derived income from Nigeria from that activity; and 73

(vii) Receives a payment or income in respect of a performance exercised in Nigeria by an entertainer or sportsperson.

Examiner’s report The question tests candidates’ understanding of tax implications on profit made by a non-resident company in line with the provisions of Companies Income Tax Act 2004 (as amended). About 60% of the candidates attempted the question, and they showed a fair understanding of it, hence the performance was average. The commonest pitfall was the candidates’ inability to identify correctly the benefits that are available to residents of Singapore under the double taxation agreement between Nigeria and Singapore. Candidates are advised to prepare adequately for future examinations by reading the Institute’s Study Text, other relevant textbooks and tax laws.

Marking guide

a. Qualification or otherwise of a company resident in Singapore for tax exemption in Nigeria 1 mark for each discussion of the qualification or otherwise of the company for tax exemption in Nigeria, subject to a maximum of 5 points 5

b. Benefits that may be available to a resident of Singapore under the double taxation agreement between Nigeria and Singapore 1 mark for each benefit available to a resident company with double taxation agreement between Nigeria and Singapore, subject to a maximum of 5 points 5

c. Circumstance under which a company registered in Singapore will be liable to tax in Nigeria 1 mark for each circumstance under which a company registered in Singapore will be liable to tax in Nigeria, subject to a maximum of 5 points 5 Total 15 74

AY& Co (Chartered Accountants) Coleng Road, Ibadan INTERNAL MEMO Date: ……………… From: Assistant Tax Manager To: Principal Partner RE: Report on Tax Liabilities and Deferred Tax Provisions of ICTREC Mining Company Limited I refer to our client’s request on computations of tax liabilities payable for 2021 assessment year and deferred tax provisions for the 2021 and 2022 assessment years. I hereby present a report for your review before same is presented to the client. The adjusted profit of the company for the assessment year under review was N34,210,000. The profit made was able to relieve unabsorbed loss brought forward of N2,800,000 as well as utilisation of the capital allowances for the year, N7,250,000. The total profit of N24,160,000 resulted thereof. The company is therefore liable to pay companies income tax of N7,248,000 and tertiary education tax of N855,250. This gives total tax liabilities of N8,103,250. These results are provided in attached appendix I. Appendix 2 shows how the deferred tax provisions for assessment years 2021 and 2022 were computed. The deferred tax provisions revealed N3,516,000 and N4,173,000 for 2021 and 2022 assessment years, respectively. Thank you. Ola Dejo 75 Appendix 1: Computation of tax liabilities N’000 N’000 Net profit as per accounts 30,320 Add back: Disallowable expenses: Depreciation (mining plant) 2,500 Depreciation (other non-current assets) 7,840 Loss on disposal of old mining plant 200 10,540 40,860 Less: Non-taxable income: Dividends 3,900 Interest on foreign deposit 2,750 6,650 Adjusted profit 34,210 Less: Unrelieved loss b/f 2,800 31,410 Less: Capital allowances for the year 7,250 Total profit 24,160 Companies income tax @ 30% 7,248 Tertiary education tax @ 2½% of adjusted profit of N34,210 855.25 Total tax liabilities payable 8,103.25

Note: The Finance Act 2021, is effective January 1, 2022. The internal circular issued by the Executive Chairman, FIRS, dated January 25, 2022, provides that financial statements with accounting years ended from July 1, 2021 to December 31, 2021, the tax returns of which are due for filing from January 1, 2022 to June 30, 2022, shall reflect the new tertiary education tax rate of 2½% of adjusted/assessable profit. 76 Appendix 2: Computation of deferred tax 2022 2021 N’000 N’000 N’000 N’000 N’000 N’000 TWDV 35,110 42,620 Less: Net book values 23,700 33,900 Deduct: Revaluation surplus 5,000 5,000 Depreciation (2,500)w1 (2,500) 21,200 (2,000) w2 (3,000) 30,900 Timing difference 13,910 11,720 Deferred tax @ 30% 4,173 3,516

Workings (1) Depreciation (2022) = N5,000,000 x 10% x 5 years = N2,500,000 (2) Depreciation (2021) = N5,000,000 x 10% x 4 years = N2,000,000

Examiner’s report The question tests candidates’ knowledge of computations of tax liabilities and deferred tax provisions. About 50% of the candidates attempted the question. Candidates displayed very poor understanding of the question, and performance was below average. The major pitfall was the inability of some candidates to correctly determine the value of depreciation, which was necessary in the computation of deferred tax provisions. Candidates are advised to read the Institute’s Study Text, and other relevant textbooks, when preparing for future examinations. 77

Marking guide Marks Marks (a) Computation of tax liabilities for the relevant year Assessment Heading/address ½ Discussion (memo) ½ Net profit as per account ½ Depreciation (mining plant) ½ Depreciation (other non-current assets) ½ Loss on disposal of old mining plant ½ Dividends ½ Interest on foreign deposit ½ Adjusted profit ½ Unrelieved loss b/f ½ Capital allowances for the year ½ Total profit ½ Companies income tax ½ Tertiary education tax ½ 7

(b) Computation of deferred tax provisions for 2021 and 2022 Deferred tax ½ 2022 ½ TWDV ½ Net book values ½ Revaluation surplus ½ Depreciation (N2,500) ½ (N2,500) ½ (N21,200) ½ Timing difference ½ Deferred tax provision ½ ½ 2021 ½ TWDV ½ Net book values ½ Revaluation surplus ½ Depreciation (N2,000) ½ (N3,000) ½ (N30,900) ½ Timing difference ½ Deferred tax provision ½ 8 Total 15 78 THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA