Advanced Taxation · May 2023

Action & Co (Tax Consultants) 2, Ojo Road, Eco City Date: ….. The Managing Director Hyland Nigeria Limited Lagos Re: Computation of adjusted profit, tax liabilities and other matters We refer to your request on computation of adjusted profit and tax liabilities for the financial year end of December 31, 2021, professional advice on implications of dividends received by the shareholders and the company, and tax benefits to a reconstituted company. We hereby present a report for your review.

(a) Adjusted profit The company made a net profit of N26.4 million during the period under review. Following the provisions of the Companies Income Tax Act 2004 (as amended) some adjustments were made on the financial statements to get the adjusted profit of N51.28 million (see attached appendix 1).

(b) Tax liabilities The company inherited loss of N55.9 million from the foreign company as well as unutilised capital allowances of N16.155 million. The adjusted profit was used to relieve part of the loss and balance of N4.62 million will be carried to 2023 assessment year. The capital allowance for the year (N7.534 million) and the one inherited from the acquired foreign company could not be utilised in the current year and therefore carried forward to next year (2023 assessment year). This amounted to N7.550,155 million. The company has zero total profit, but will be liable to pay a minimum tax of N1.402 million and 2.5% of the adjusted (assessable) profit as tertiary education tax of N1.282 million. The total tax liabilities payable amounted to N2.684 million. The company is advised to file its annual tax returns and accompany it with cheque of N2.684 million in favour of Federal Inland Revenue urgently. 59 Appendix 1: Computation of adjusted profit N’000 N’000 Net profit as per accounts 26,400 Add back: Depreciation 7,500 Subscription and donations (Royal Elites) 100 Allowance for doubtful debts (General prov.) 12,500 Repairs and maintenance: Improvement to industrial building 1,400 Legal –reacquisition of lease 630 Embezzlement by cashiers 500 Christmas/Eid Kabir gifts to customers 3,100 Other operating expenses: Increase in share capital 2500 Fines for traffic offence 250 28,480 54,880 Less: Non-taxable incomes: Dividend received (net) 3,600 Adjusted profit 51,280 Appendix 2: Computation of tax liabilities N’000 N’000 Adjusted/assessable profit 51,280 Less: Loss b/f 55,900 Relieved (51,280) (51,280) Unrelieved loss c/f 4,620 Less: Capital allowances: Nil Unutilised brought forward 16,155 For the year (see Wk 1) 7,534, Total available for utilisation 23,689 Utilised Nil (Nil) Unutilised c/f 23,689 Total profit Nil Higher of: Companies income tax @ 30% total profit and Nil Minimum tax (Wk. 2) 1,402 1,402 Tertiary education tax @ 2.5% of assessable profit 1,282 Total tax payable 2,684 60

Workings 1: Capital allowances Industrial building Manufacturing plants Capital Allowance IA 15% AA 10% Non- industrial building IA 15% IA 50% IA 50% IA 25% AA 10% AA 25% AA 25% AA 20% N’000 N’000 N’000 N’000 N’000 N’000 2022 A/Y TWDV 4,200 5,400 3,600 2,500 1,800 Additions 1,400 1,200 1,400 900 IA (210) (600) (700) (225) 1,735 AA (819) (900) (1,950) (1,425) (585) 5,679 Inv allow (120) 120 7,534 2023 A/Y TWDV 4,571 4,500 2,250 1,775 1,890

Notes on annual allowances for 2022 assessment year

(i) Industrial building Old asset (unexpired tax life = 10 – 4 = 6years) N AA = N4,200,000/6 = 700,000 AA (New asset) = N1,400,000 – N210,000 = 119,000 10 819,000 (ii) Non-industrial building Old asset (unexpired tax life = 10 – 4 = 6 years) AA = N5,400,000/6 = N900,000 (iii) Manufacturing plants Old asset (unexpired tax life = 4 – 2 = 2 years) N AA = N3,600,000/2 = 1,800,000 AA (New asset) = N1,200,000 – N600,000 = 4 150,000 1,950,00 (iv) Motor Vehicles N Old asset (unexpired tax life = 4 – 2 = 2 years) AA = N2,500,000/2 = 1,250,000 AA (New asset) = N1,400,000 – N700,000 = 4 175,000 1,425,000 61 Motor vehicles Furniture and fittings

(v) Furniture and fittings Old asset (unexpired tax life = 5 – 1 = 4 years) N AA = N1,800,000/4 = 450,000 AA (New asset) = N900,000 – N225,000 = 5 135,000 585,000

Workings 2 : Minimum tax computation N’000 Gross turnover 278,500 Gross dividend (N3,600,000) 0.9 4,000 Other operating income 1,800 284,300 Less: Franked investment income Gross turnover for minimum tax computation (4,000) 280,300 Minimum tax @ 0.5% 1,402

Note: Expense incurred on Christmas/Eid Kabir gifts to customers was disallowed because the gifts were not promotional in nature (not branded gifts).

(c) Tax implications of the dividends received by the company and its shareholders include:

i. The dividends received on equity in a Nigerian listed company (N3.6 million) under the Companies Income Tax Act 2004 (as amended) is regarded as franked investment income (FII);

ii. The tax the company has suffered, N400,000 (that is N4 million – N3.6 million) is the final tax and therefore such income should be excluded from the total profit as it is not liable to further tax;

iii. Since the company is redistributing the entire dividends to the shareholders, the shareholders will have to suffer 10% withholding tax of N360,000; and

iv. But the company is to recoup the 10% (N400,000) it suffered from the withheld deduction made by the Nigerian listed company. 62

(d) Tax benefits/incentives applicable to a reconstituted company in Nigeria include:

i. There will be no application of either the commencement or cessation rules; ii. All the qualifying capital expenditure transferred are deemed to have been made at their tax written down value; iii. In the computation of capital allowance, no initial allowance may be computed while the annual allowance would be based on the un- expired tax life of the qualifying capital expenditure; iv. Any unutilised capital allowances transferred are deemed to have been transferred prior to the sale; and v. Any unrelieved losses transferred are deemed to have been incurred on the first day of the reconstitution. Such a loss is then available for relief against the taxable profit of the year of reconstitution and the three subsequent tax years. We hope that this report adequately represents the mandate given to us. Should you need further clarification on this, we will be glad to address it. Yours faithfully, Larry Oyedele Senior Partner For: Action & Co (Chartered Accountants)

Examiner’s report The question tests the candidates’ understanding of the provisions of Companies Income Tax Act 2004 (as amended) in respect of computations of adjusted profit; companies income tax; tax implications of dividends received by the company on its shareholders and benefits/incentives applicable to a reconstituted company in Nigeria. 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 identify correctly the allowable and disallowable expenses in line with the provisions of Companies Income Tax Act 2004 (as amended) and state the incentives applicable to a reconstituted company in Nigeria. Candidates are advised to familiarise themselves with issues concerning computations of companies income tax and incentives applicable to a reconstituted company in Nigeria by reading extensively the Institute’s Study Text, other relevant textbooks, and the Companies Income Tax Act 2004 (as amended). 63

Marking guide Marks Marks (a) Computation of adjusted profit Memo (heading) ½ Memo (discussion of result) ½ Net profit as per accounts ½ Depreciation ½ Subscription and donations (Royal Elites) ½ Allowance for doubtful debts (general provision) ½ Improvement to industrial building ½ Legal –reacquisition of lease ½ Embezzlements by cashiers ½ Christmas/ Eid Kabir gifts ½ Increase in share capital ½ Fines for traffic offence ½ Dividends received (net) ½ Adjusted profit ½ 7 (b) Computation of tax liabilities: Memo (discussion of results) 1 Losses b/f 1 Relieved 1 Unutilised capital allowances c/f 1 Capital allowances for the year 1 Capital allowances: utilized 1 Total profit 1 Companies income tax ½ Minimum tax 1 Tertiary education tax 1 Capital allowances computation for 2022 A/Y: Additions (Industrial building) ¼ Additions (manufacturing plants) ¼ Additions (motor vehicles) ¼ Additions (furniture and fittings) ¼ IA (Industrial building ¼ IA (manufacturing plants) ¼ IA (motor vehicles) ¼ IA (furniture and fittings) ¼ Capital allowance (IA column ¼ AA (industrial building) ¼ AA (non-industrial building) ¼ AA (manufacturing plants) ¼ AA (motor vehicles) ¼ AA (furniture and fittings) ¼ Capital allowance (AA column) ¼ Investment allowance (manufacturing plants) ¼ 64 Capital allowance (Investment allowance column) ¼ Total capital allowances ¼ 14 (c) Tax implications of the dividends received by the company and its shareholders 2 marks for each discussion on tax implications of the dividends received by the company and its shareholders, subject to a maximum of 3 points 6 (d) Comment on tax benefits/incentives applicable to a reconstituted company in line with the provisions of CITA (2004) 1 mark for each discussion on the tax benefits/incentives applicable to a reconstituted company, subject to a maximum of 3 points 3 Total 30

Colends & Co (Chartered Accountants) Colmas Road, Abeokuta INTERNAL MEMO Date: ………. From: Audit Manager To: Senior Partner Subject: In-house training programme - paper on risk and role of technology in accounting/tax practice I refer to your directive that I should prepare a paper on the above- named topic for presentation at the upcoming in-house training for our newly-employed audit officers. I hereby present a paper for your review before same is presented at the training programme.

(a) The risks of running professional tax practice in Nigeria include:

(i) Lack of expertise Inadequate experience or knowledge of practitioners could lead to errors when they advise clients on technical matters. Examples include giving wrong professional opinions on tax matters, advice of tax implications of business arrangements and re-organisations or restructuring; 65

(ii) Lack of attention to details This may lead to errors that could have been avoided if there had been procedures and controls not in place. This includes late filing of tax returns, the penalties of which are high for clients;

(iii) Lack of documentation This is the failure to maintain evidence of client engagement terms or tax filing positions in working paper files. This could result in non- detection of the client’s non-compliance with certain tax laws; and

(iv) Unpredictable income for owners Owner’s income can be unpredictable. Owners are responsible for the financial well-being of their employees and the last person to get paid is the owners. While others can mentally “check out” at the end of the work day, owner’s brain is typically plugged into business.

(b) Measures to mitigate the risks include the following:

(i) Only take on work within your circle of competence: Tax practitioners can avoid many of these risks by only accepting work for which they have either adequate experience or the ability to outsource the work to qualified tax specialists;

(ii) Implement quality control systems in professional tax practice: Quality control systems can only help avoid common pitfalls and manage risk, they can also help you improve your practice effectiveness;

(iii) Use checklists: A best practice is to create general tax preparation and review checklists for all of your staff to use;

(iv) Implementation of a task and deadline tracking system: A task tracking system can help tax practitioner monitor client filings and meet their due dates;

(v) Follow client acceptance practices: Before taking on new clients, it’s wise to determine their past filing history and any issues encountered with the relevant tax authorities and their past tax advisors;

(v) Invest in education: The Nigerian tax system is becoming complex and constantly changing, so the practice should continually invest in staff training;

(vii) Document all material advice in writing: When tax practitioners give their clients material verbal advice, they should also document a summary of the discussion in case an issue arises later; and

(viii) Obtain professional valuations: When related parties transact with each other in significant transactions including reorganisations, professional valuations should be obtained to avoid the significant risks associated with an unreasonable valuation. If the client doesn’t want to obtain a valuation, tax practitioners should decide on whether 66 the work should be done at all. At a minimum, the risks should be communicated and documented in their working paper files.

(c) Roles of technology in tax practice include:

(i) With the use of technology applications, such as cloud accounting, the tax practices are able to take advantage of powerful taxation software and services based on remote servers. This enhances the ability of the practice to share financial data with team members regardless of location or time zone;

(ii) Cloud accounting and other technology-driven tax solutions deliver a wide range of benefits to tax practice regardless of size. The primary benefit offered by cloud accounting is the ability to automate otherwise time-consuming tasks;

(iii) Modern tax technology is able to assist with the complex nature of crypto currency tax reporting. Major crypto currency exchanges can work to keep customer data extremely secure and private, which can make it difficult to track trades for capital gains or income tax reporting. By providing crypto currency - specific tools, cloud-based taxation technology establishes a future-proof foundation for crypto currency adoption and tax strategy; and

(iv) Cloud-based tax practice keeps data safe with enterprise-scale security, eliminating the threat of data breaches. Data breaches are extremely costly for practice of all sizes. Both large and small-scale tax practice are often the target of hackers that attempt to steal sensitive client’s data. Therefore, to cope with continuous changes in tax landscape, tax practice firm needs to invest heavily in technology to enhance their services offering to their clients.

(d) The benefits of adopting technology by professionals in accounting firm and/or tax practice include:

(i) Winning more clients: It is obvious that majority of clients would prefer to hire tax practice firms that are adaptive to technology changes;

(ii) Retaining more clients: Adoption and adaptation of modern technologies would make practising firms to render the much needed valuable and improved services which make clients retain them;

(iii) Cross-selling services: Technology provides platforms to enable practising firms make their services more visible to many clients; (iv) Adding greater value: Firms that adopt new technologies are able to automate most of the routine and labour-intensive tasks. This makes it possible for such firms to focus their attention on tasks that generate greater values for their clients; (v) Timely delivery of services to clients; 67

(vi) It promotes ease of filing returns and paying taxes by the clients; and

(vii) It leads to a better productivity on the part of the tax practitioners and administrators. The challenges of adopting technology by professionals in accounting firm and/or tax practice include:

(i) Low computer literacy level; (ii) Poor internet facility; (iii) Possible cyber threat; (iv) High implementation cost; (v) Lack of technical know-how; (vi) Challenge of data validation- garbage-in; garbage-out; and (vii) Resistance from the management and other users. In-house resistance to adoption and implementation of the technological-driven tools. Thank you. Nuru Odeogbo

Examiner’s report The question tests the candidates’ knowledge of risks and roles of technology in running a contemporary accounting/tax practice. About 70% 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 explain the measures to mitigate the identified risks in running professional accounting firm and/or tax practice in Nigeria. Candidates are advised to pay attention to risks and role of technology in running professional accounting firm and/or tax practice by reading the Institute’s Study Text and other relevant textbooks. 68

Marking guide Marks Marks a) Risks of running professional accounting firm and/or tax practice Memo (address) ½ Memo (heading) ½ 1 mark for each discussion of risks of running professional accounting firm and/or tax practice, subject to maximum of 3 points 3 4 b) Measures to mitigate the identified risks 1 mark for each discussion of measures to mitigate the identified risks, subject to a maximum of 5 points 5 c) Roles of technology in running a contemporary accounts/tax practice 1 mark for each discussion of the roles of technology in running a contemporary accounting/tax practice, subject to a maximum of 3 points 3 d) Benefits and challenges of adopting technology by professionals in accounting firm and/or tax practice 1 mark for each discussion of benefits of adopting technology by professionals in accounting firm and/or tax practice, subject to a maximum of 4 points 4 1 mark for each discussion of challenges of adopting technology by professionals in accounting firm and/or tax practice, subject to a maximum of 4 points 4 8 Total 20 69

Level Up & Co (Chartered Accountants) 2, Jega Road, BirniKebbi Date: ….. The Managing Director PROMOT Link Sokoto Dear Sir, RE: TRANSFER PRICING DOCUMENTATION AND ARM’S LENGTH COMPARABILITY FACTORS I refer to our discussion of October 10, 2022 on the request by NADA Incorporation for advice on Nigerian transfer pricing documentation and arm’s length comparability factors. I hereby present a report for your review before same is forwarded to the Group Operating Officer, NADA Incorporated, Canada.

(a) Transfer pricing compliance report stipulates the following:

(i) The documentation retained by a connected person shall be adequate to enable the Service verify that the controlled transaction is consistent with the arm’s length principle; (ii) The burden of proof that the conditions of the controlled transactions are consistent with the arm’s length principle shall be that of the taxable person; and (iii) The taxable person will be regarded as satisfying this burden of proof if it provides documentation consistent with this regulation to support compliance with the arm’s length principle of the taxable profits derived from its controlled transactions.

(b) Transfer pricing declaration form to be submitted to FIRS The Federal Inland Revenue Service expects all taxpayers to develop appropriate transfer pricing policy and provide relevant information to be stated in transfer pricing declaration form that contains the following:

(i) Particulars of reporting company or entity; (ii) Particulars of immediate parent company; (iii) Particulars of directors of reporting company; (iv) Particulars of major shareholders of reporting company and related parties; (v) Ownership, structure of reporting entity and related parties; (vi) Particulars of subsidiaries and other connected persons; (vii) Particulars of external auditors of reporting entity; (viii) Particulars of tax consultant of the reporting entity; (ix) Particulars of company secretary of the reporting entity; (x) Particulars of the person making the declaration; and (xi) Declaration. 70

(c) Transfer pricing disclosure form to be submitted to FIRS The Federal Inland Revenue Service expects all taxpayers to develop appropriate transfer pricing policy and provide relevant information to be stated in transfer pricing disclosure form that contains the following:

(i) Particulars of reporting company or entity; (ii) Income from controlled transactions; (iii) Costs of controlled transactions; (iv) Summary of controlled transactions with connected persons; (v) Transfer pricing method and documentation; (vi) Basic financial information for reporting entity and the group; (vii) Particulars of person making the disclosure; and (viii) Declaration.

(d) Arm’s length comparability factors in transfer pricing The Federal Inland Revenue Service (FIRS), in determining whether a transaction has been conducted at arm’s length will consider the following on a comparative basis:

(i) The similarity or identical nature of the transaction to that entered into by an unconnected taxable person; (ii) The facts and circumstances of the transactions per economic relevance; (iii) The characteristics of the goods, property or services transferred or supplied; (iv) The functions undertaken by the person entering into the transaction per resources and the risk expended and the risks assured; (v) The contractual terms of the transactions; (vi) The economic circumstances in which the transactions take place; and (vii) The business strategies pursued by the connected taxable persons to the controlled transaction. We hope that this report adequately represents the mandate given to us. Should you need further clarification on this, we will be glad to address it. Yours faithfully, Kemmy Adesanya Senior Partner For: Level Up & Co (Chartered Accountants)

Examiner’s report The question tests candidates’ understanding of transfer pricing regulation and practices in Nigeria, with particular emphases on issues involving transfer pricing compliance report; transfer pricing declaration form and disclosure form to be submitted to the Federal Inland Revenue Service; and arm’s length comparability factors in transfer pricing. 71 About 80% 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 transfer pricing disclosure form to be submitted to the Federal Inland Revenue Service. Candidates are advised to read the Institute’s Study Text, the Nigerian Income Tax (Transfer Pricing) Regulations 2018 and other relevant textbooks on transfer pricing when preparing for future examinations.

Marking guide Marks Marks a) Transfer pricing compliance report Memo (address) ½ Memo (heading) ½ 1 mark for each discussion of transfer pricing compliant report, subject to maximum of 2 points 2 3 Transfer pricing documentation report b) Transfer pricing documentation report 1 mark for each discussion of transfer pricing declaration Form to be submitted to FIRS, subject to a maximum of 6 points 6 c) Transfer pricing disclosure form to be submitted to FIRS 1 mark for each discussion of transfer pricing disclosure form to be submitted to FIRS, subject to a maximum of 6 points 6 d) Arm’s length comparability factors in transfer pricing 1 mark for each discussion of arm’s length comparability Factors in transfer pricing, subject to a maximum of 5 points 5 Total 20 72

(a) Jaga Petroleum Limited Computation of hydrocarbon tax liability For 2022 assessment year N’million N’million Revenue: Value of crude oil sold: Bonny light (7.5m barrels x $77 x N440) 254,100 Forcados medium (5.2m barrels x $70 x N440) 160,160 Value of condensate from associated gas sold(4m barrels x $55 x N440) 96,800 Value of gas liquid from associated gas sold(3.8m barrels x $50 x N440) 83,600 Gross revenue 594,660 Balancing charge Nil Total gross income 594,660 Allowable deductions (Section 263): Royalty incurred and paid for 118,900 Production cost 112,660 Concession rentals 25,200 Repairs of plant, machinery and fixtures 2,680 First exploration well 2,770 Repairs of production implement utensils 1,850 Cost of gas reinjection wells 1,250 NDDC charge 200 Purchase of information (N305 – N85) 220 First two appraisal wells cost 3,900 Decommissioning and abandonment 1,500 Environmental remediation fund 1,800 State government ground rent levy 22 Host community costs 1,400 Miscellaneous (N1,129 – N720 – N132 – N90) 187 Total allowable cost 274,539 Total costs subject to CPR limit (Wk 1) (131,539) (131,539) Excess allowable cost carried forward 143,000 Adjusted profit 463,121 Less: Loss relief Nil Assessable profit 463,121 Less: Section 266 and 6th Schedule deductions: Capital allowances 4,500 458,621 Less: Production allowances: Onshore operations 800 Shallow water operations 1,100 1,900 Chargeable profit 456,721 73

Workings on cost price ratio N’million N’million Gross revenue 594,660

(i) Maximum allowable @ 65% 386,529 Total operating cost 274,539 Capital allowances 4,500 Total eligible costs 279,039 Less: Exempted costs incurred (Section 263): Royalty paid 118,900 NDDC charge 200 Concession rentals 25,200 Host community funds 1,400 Environmental remediation fund 1,800 147,500 (ii) Net total costs to be subject to CPR 131,539 Maximum allowable cost is the lower of (i) and (ii), which is N131,539

(b) Jaga Petroleum Limited Companies income tax liabilities For 2022 assessment year N’million N’million Gross total income 594,660 Less: Section 263 allowable deductions CITA allowable deductions: 274,539 Administrative cost 1,980 Finance costs 25 Donations to orphanage 132 2,137 276,676 Assessable profit 317,984 Add: Balancing charge Nil 317,984 Less: Loss relief Nil 317,984 Less: Capital allowances 4,500 Total profit 313,484 Companies income tax @ 30% of total profit 94,045.20 Tertiary education tax @ 2.5% of assessable profit 7,949.60 Total tax payable 101,994.80 74

Examiner’s report The question tests candidates’ knowledge of computations of hydrocarbon tax and companies income tax of a company in upstream petroleum operations in line with the provisions of Petroleum Industry Act 2021. About 50% 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, hydrocarbon tax and companies income tax. Candidates are advised to study extensively the template provided by the Federal Inland Revenue Service on computations of hydrocarbon tax and companies income tax and relevant sections of the Petroleum Industry Act 2021.

Marking guide (a) Computation of hydrocarbon tax: Marks Marks Value of crude oil sold (Bonny) ½ Value of crude oil sold (Forcados) ½ Value of condensate from associated gas sold ½ Value of gas liquid from associated gas sold ½ Royalty incurred and paid for ½ Production cost ½ Concession rentals ½ Repairs of plant, machinery and fixtures ½ First exploration well ½ Repairs of production implement utensils ½ Cost of gas reinjection wells ½ NDDC charge ½ First two appraisal wells cost ½ Decommissioning and abandonment ½ Purchase of information ½ Environmental remediation fund ½ State government ground rent levy ½ Host community costs ½ Miscellaneous ½ Total costs subject to CPR limit (Wk 1) ½ Excess allowable cost carried forward ½ Adjusted profit ½ Assessable profit ½ Capital allowances ½ Production allowances (onshore) ½ Production allowances (shallow water) ½ Chargeable profit ½ Hydrocarbon tax @ 30% ½ 75

Workings on CPR: Total operating cost ½ Capital allowances ½ Net total costs to be subject to CPR ½ Max allowable cost ½ 16

(b) Computation of companies income tax: Administrative cost ½ Finance costs ½ Donations to orphanage homes ½ Assessable profit ½ Capital allowances ½ Total profit ½ Companies income tax ½ Tertiary education tax ½ 4 Total 20

(a) Fashion Stitches Limited Computation of capital gains tax For 2022 assessment year Property N N Sales proceeds 65,100,000 Deduct: Cost of acquisition 18,220,000 Incidental cost of disposal: Estate valuers’ fee 1,627,500 Renovation expenses 1,800,000 Advertisement cost 250,000 21,897,500 Capital gains record 43,202,500 Less: Roll-over relief ((B)(i)) 43,202,500 Net capital gains Nil Capital gains tax @ 10% Nil Sewing machine and other tailoring equipment N Sales proceeds 2,800,000 Deduct: Cost of acquisition 3,300,000 Capital loss (500,000) 76 Generating set N Sales proceeds 1,900,000 Deduct: cost of acquisition 1,500,000 Capital gains record 400,000 Less: Roll-over relief ((b)(iii)) 400,000 Net capital gains Nil Capital gains tax @ 10% Nil

(b) Computation of roll-over relief Property N The lower of: Sales proceeds 65,100,000 And amount re-invested 80,000,000 Less: Cost of old asset 18,220,000 Roll-over relief 46,880,000 This is restricted to the capital gains record of N43,202,500 Sewing machine and other tailoring equipment No roll-over relief is available for asset that has a capital loss Generating set N The lower of: Sales proceeds 1,900,000 And amount re-invested 2,450,000 Less: Cost of old asset 1,500,000 Roll-over relief 400,000

(c) Costs at which capital allowances will be granted on the newly acquired assets. This is the cost of acquisition of each of the newly acquired assets, as indicated below: Property: N80,000,000 Sewing machine and other tailoring equipment: N7,130,000. Generating set: N2,450,000 77

Examiner’s report The question tests candidates’ understanding of capital gains tax computations. About 90% 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 the costs at which capital allowances will be granted to the company by the tax authorities in line with the provisions of Capital Gains Tax 2004 (as amended). 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.

Marking guide Marks Marks (a) Computation of capital gains tax: Property: Sales proceeds ½ Cost of acquisition ½ Estate valuers’ fee ½ Renovation expenses ½ Advertisement cost ½ Net capital gains ½ Capital gains tax ½ Sewing machine and other tailoring equipment: Sales proceeds ½ Cost of acquisition ½ Capital loss ½ Generating set: Sales proceeds ½ Cost of acquisition ½ Net capital gains ½ Capital gains tax ½ 7

(b) Computation of roll-over relief: Property: Sales proceeds ½ Amount re-invested ½ Less: Cost of old asset ½ Roll-over relief ½ Sewing machine and other tailoring equipment: No roll-over relief 1 Generating set: Sales proceeds ½ Amount re-invested ½ Less: Cost of old asset ½ 78 Roll-over relief ½ 5

(c) Costs at which capital allowances will be granted: Property: N80,000,000 1 Sewing machine and other equipment: N7,130,000 1 Generating set: N2,450,000 1 3 Total 15

(a) Concept of thin capitalisation A company is said to be thinly capitalised when its capital is made up of a much greater proportion of debt than equity, that is, its gearing, or leverage, is too high. This is perceived to create problems for two classes of people. These are the:

(i) Creditors who bear the solvency risk of the company, which has to repay the bulk of its capital with interest; (ii) Tax authorities, who are concerned about abuse by excessive interest deductions.

(b) Provisions of Finance Act, 2019 on thin capitalisation

(i) Prior to the commencement of Finance Act, 2019, there were no thin capitalisation rules in Nigeria. However, in practice, FIRS sometimes seeks to disallow interest deductions considered excessive, which in most cases are usually done arbitrarily. (ii) The Finance Act, 2019 now introduces a specific benchmark of thirty percent (30%) of earnings before interest, taxes, depreciation and amortisation (EBITDA) in a year as the limit for interest deduction on loans by a foreign ’connected person’.

(iii) Where there is excess interest, such is considered as a disallowable deduction in that year.

(iv) Any unclaimed interest as a result of the restriction can be claimed within 5 years, after which it is lost. The Act exempts Nigerian subsidiaries of foreign companies engaged in banking and insurance from this rule.

(c) Non-tax factors The tax regime that applies in a specific location is generally an important consideration of a holding company and usually plays a role in the decision of where the company should be established. However, non-tax factors cannot be undermined as they are key to the success of the investment that is undertaken. The more important non-tax factors include: 79

(i) Economic and political stability: A tax jurisdiction that is not stable economically and politically will not attract foreign investors and will also lose its local investment to other tax jurisdictions with fair or stable economy;

(iii) Adequate physical, business, accounting and legal infrastructure: Availability of infrastructures that support business, accounting, and legal operation in a country is an encouraging factor usually considered by some entities in citing a fixed base in a country;

(iv) The absence (or limited presence) of bureaucratic obstacles: Little or no bureaucratic bottle-necks give confidence to investors in locating their business entities in a tax jurisdiction;

(v) Adequate communication channels: Availability of information source, reliable medium of communication, security of information and adequate communication channels play vital role in affecting the choice of an entity in citing its holding company in a country;

(vi) The availability of an adequate dispute resolution mechanism: A tax jurisdiction with an independent and effective dispute resolution process and procedures is often considered ahead of countries without such process in citing of business entity and holding company;

(vii) Effective banking system: A country with a standard and reliable system of banking operation and financial sector shall be deemed suitable for facilitating financial transactions if the holding company or branch of the entity is present in such tax jurisdiction;

(vii) Ability to repatriate profit freely;

(viii) The social, economic and political stability, and risks within different countries are major considerations in the decision-making, especially where the need for raising of finance is important;

(ix) A factor that supplements the social, economic and political stability is the functionality of the country’s legal system and rule of law. Thus, not only should the legal system be suitable for transacting business, but it should also be possible for legal subjects to enforce their legal rights;

(x) Alternative dispute resolution as a legal process is normally an expedient and cheap alternative to the often lengthy legal processes. Where available, it should also be reliable. The country’s government should also respect the rule of law and ideally have an enshrined constitution that protects the rights of the country’s subjects; 80

(xi) The commercial language of the host country is also important. It is important that the language used is the same as the language of the investor (or at least a common language such as English or French);

(xii) Linked to the prevailing commercial language, are reliable communication channels such as telecommunication, fax and email, without which the performance of various roles would be impaired; and

(xiii) Business deals with control and management (including investment management) and the discharging of such services requires a few highly skilled people in the areas of law, financing and financing structures, economics, accounting and auditing. Most holding companies do not necessarily require large numbers of employees to be stationed in the host country.

Examiner’s report The question tests candidates’ knowledge of thin capitalisation concept and rules as provided for in Finance Act 2019; and non-tax factors, which may affect the choice of location of a corporate entity by a holding company in another tax jurisdiction. About 70% of the candidates attempted the question. Candidates displayed fair understanding of the question, and performance was average. The major pitfall was the inability of some candidates to correctly explain the thin capitalisation rules put in place by the Federal Government via the provisions of the Finance Act 2019. Candidates are advised to read the Institute’s Study Text, and other relevant textbooks, when preparing for future examinations.

Marking guide Marks Marks a) Concept of thin capitalisation and the problems it may create to both creditors and tax authorities 1 mark for explanation of the concept of thin capitalisation 1 2 marks for discussion of problems of thin capitalisation to the creditors. 2 2 marks for discussion of problems of thin capitalisation to the tax authorities. 2 5 b) Thin capitalisation rules put in place by the Federal Government via the provisions of Finance Act 2019 4 2 marks for each discussion of thin capitalisation rules put in place by the Federal Government in Finance Act 2019, subject to a maximum of 2 points

c) Important non-tax factors, which may affect the choice of location of a corporate entity by a holding company in another tax jurisdiction 1 mark for each discussion of important non-tax factors which may affect the choice of location of a corporate entity by a holding company in another tax jurisdiction, subject to a maximum of 6 points 6 Total 15

Colphys & Co (Chartered Accountants) Ore-Benin City Road, Okada INTERNAL MEMO Date: …….. From: Tax Manager To: Principal Partner Subject: TAX INCENTIVES IN SPECIFIC SECTORS I refer to our client’s request for professional advice in respect of tax incentives available to businesses in the mining, gas utilisation (downstream operations) and a company that is eligible for road infrastructure tax credit scheme. I hereby present a report for your review before same is presented to our client.

(a) Mining incentives The key incentives available to companies engaged in mining operations under the Mining Act are summarised below:

(i) Tax holiday for an initial period of 3 years from commencement of operations and renewable for additional 2years. Any dividend recorded during the tax holiday period will not be subject to withholding tax upon distribution to shareholders;

(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;

(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) Free transferability of foreign currency through the Central Bank of Nigeria (CBN) for the following:

• Payment for servicing of certified foreign loan; and

• Remittance of foreign capital in 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);

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

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

(ix) A company may also be entitled to claim an additional rural investment allowance on its infrastructure cost, depending on the location of the company and the type of infrastructure provided;

(x) Annual indexation of unutilised capital allowance carried forward by 5% for mines that commenced production within five (5) years from the date of enactment of the Act. Whilst the period for new companies to enjoy this incentive lapsed in 2012, new producers may apply to the Minister of Finance, through the Minister of Mines and Steel Development, to enjoy this incentive. Such application may be considered on a case by case basis; and

(xi) The Minister may grant a concession for the royalty payable on any mineral to be deferred for a number of years, subject to the approval of the Federal Executive Council.

(b) Incentives for gas utilisation (downstream operations) as provided under the Companies Income Tax Act (CITA)- Section 39 of CITA A company engaged in gas utilisation (downstream operations) shall be granted the following incentives:

(i) An initial tax free period of three years which may be subject to the satisfactory performance of the business, be renewed for an additional period of two years. This tax free period shall start on the day the company commences production as certified by the Ministry of Petroleum Resources;

(ii) As an alternative to the initial tax free period granted under (a) above, an additional investment allowance of 35 percent which shall not reduce the value of the asset. However, a company that claims this shall not be entitled to claim investment allowance of 15 percent;

(iii) Accelerated capital allowance after the tax relief period as follows:

• An annual allowance of 90 percent with 10 percent retention for investment in plant and machinery; and

• An additional investment allowance of 15 percent which shall not reduce the value of the asset;

(iv) Tax free dividend during the tax free period where:

• The investment for the business is in foreign currency; and

• The introduction of imported plant and machinery during the period was not less than 30 percent of the equity share capital of the company; and

(v) Interest payable on loan obtained with the prior approval of the Minister for a gas project shall be deductible. Provisions of Finance Act, 2020 on Incentives for gas utilisation are:

(vi) The Finance Act, 2020 amended section 39(1) of CITA (as amended) to grant the incentives only to companies whose trade or business involves gas utilisation in downstream operations. The mere consumption of gas does not qualify for the claim of this incentive;

(vii) The tax-free period is to start on the day the trade or business commences production as certified by the Ministry of Petroleum Resources (MPR);

(viii) A company which had claimed incentive for the trade or business of gas utilisation under any law including the former PPTA and IDITRA is barred from claiming this incentive; and

(ix) The erstwhile restriction based on intention to claim this incentive has now been removed.

(c) The Executive order 007- Companies Income Tax (Road Infrastructure Development and Refurbishment Investment Tax Credit Scheme) Order 2019 provides that:

(i) The Scheme is a public-private partnership, which enables private companies fund the construction and refurbishment of eligible roads in Nigeria. In return, participants in the Scheme are entitled to recover the project funds by way of tax credits, claimable against Companies Income Tax (CIT) payable;

(ii) The Scheme will be implemented and administered by a special management committee (the Committee), consisting of representatives from relevant Ministries and Agencies, including Federal Inland Revenue Service (FIRS) and chaired by the Minister of Finance;

(iii) The Scheme is open to Nigerian companies (other than corporation sole), institutional investors and a pool of companies operating through a special purpose vehicle set up as an infrastructure fund. Eligible road refers to any road approved by the President as eligible for the Scheme on the recommendation of the Minister of Finance and as duly notified to participants;

(iv) The primary benefit of this Scheme to participants is the ability to recover the project cost as tax credit against CIT payable. This credit is represented by the Road Infrastructure Tax Credit (RITC). RITC covers:

• Project cost (any expenditure wholly, reasonably, exclusively and necessarily incurred by a participant for the construction or refurbishment of an eligible road as quoted by the participant in its project cost bid and as certified by the Committee); and

• A single uplift (similar to interest), which is equivalent to the prevailing monetary policy rate (MPR) of the Central Bank of Nigeria (CBN), plus 2% of the project cost. The uplift (income) would not constitute taxable income in the hands of a participant. and

(v) The Scheme will be in force for a period of 10 years from the date of commencement in January 2019 to 2029. Thank you. Debby Ogunmade

Examiner’s report The question tests candidates’ understanding of tax incentives available to companies in the mining sector in line with the provisions of Minerals and Mining Act 2007 (as amended); gas utilisation (downstream operations); and those that are eligible for road infrastructure tax credit scheme. 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 identify correctly and explain the incentives available for a company that is eligible for road infrastructure tax credit scheme. Candidates are advised to prepare adequately for future examinations by reading the Institute’s Study Text, other relevant textbooks and tax laws in respect of tax incentives in Nigeria.

Marking guide Marks Marks a. Tax incentives available to a mining business under the Minerals and Mining Act 2007 Memo (address) ½ Memo (heading) ½ 1 mark for each discussion of tax incentives available to a mining business, subject to a maximum of 5 points 5 6 b. Tax incentives available to a gas utilisation (downstream operations) business 1 mark for each discussion of tax incentives available to a gas utilisation (downstream operations) business, subject to a maximum of 5 points 5 c. Tax incentives available to a company that is eligible for road infrastructure tax credit scheme 1 mark for each discussion of tax incentives available to a company that is eligible for road infrastructure tax credit scheme, subject to a maximum of 4 points 4 Total 15 THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA