Advanced Taxation · November 2022

(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