Advanced Taxation · November 2023

BFN & Co (Tax Consultants) 9, Alabata Road, Abeokuta Date: The Managing Director Paper World Nigeria Limited 2, Oyo-Ogbomoso Road Ibadan. Dear Sir, Re: Computation of adjusted profits, tax liabilities and other matters We hereby present a report in response to your request on computation of Company’s adjusted profits, tax liabilities and other tax matters.

a. Adjusted profits During the pioneer period (2018, 2019 and 2020), the company made a total adjusted loss of N45,720,000 (see attached Appendix 1). The adjusted profit for the year ended April 30, 2021, was N36,630,000 (see appendix 2).

b. Tax liabilities payable for 2022 assessment year With no total profit, the company is not liable to pay any companies income tax. However, payment of tertiary education tax, which is 2.5% of the assessable/adjusted profit, N915,750, is to be paid to the Federal Inland Revenue Service (FIRS). Given the fact that the company is not up to 48 calendar months in business, the company is exempted from paying minimum tax. The Management is advised to immediately file its annual tax returns and accompany it with a cheque of N915,750 in favour of FIRS.

c. Provisions of the Industrial Development (Income Tax Relief) Act 2007 (as amended) in respect of: i. Dividend payment

• Dividends can only be made out of profit.

• Dividends declared out of pioneer profit are not taxable (that is, free of withholding tax).

• Also, there is a limitation on a distribution of company’s dividends. No dividends may be distributed in excess of a certain balance on its profit and loss account. 52

ii. Losses made during the pioneer period

• The pioneer company shall be deemed to have set up and commenced a new trade or business on the day next following the end of its tax relief period.

• Thus, any losses made during the pioneer period and certified by the Federal Inland Revenue Service may be available for relief during the new trade. The practice of the Service is to restrict the relief to the first year of the new trade.

• Any unrelieved losses outstanding at the end of the first year of the new trade will be deemed to have been lost permanently.

iii. Capital allowances for qualifying capital expenditure (QCE) acquired during the pioneer period

• Any qualifying capital expenditure incurred during the pioneer period will be aggregated and assumed to have been incurred on the first day of the new trade.

• These QCEs will now qualify for both initial and annual allowances as from the first assessment year of the new trade. Please do not hesitate in contacting us if you need any further clarification on the above subject. Yours faithfully, Dan Owoeye Principal Partner Appendix 1: Adjusted profits during pioneer period (for the year ended April 30, 2018, 2019 and 2020) Year ended 30/4/2018 Year ended 30/4/2019 Year ended 30/4/2020 N’000 N’000 N’000 N’000 N’000 N’000 Net loss as per accounts (28,700) (25,500) (20,200) Add back: Depreciation 6,800 7,530 8,600 Donations 100 0 250 General allowance for doubtful debts 1,850 8,750 1,750 9,280 1,800 10,650 Adjusted profit/ (loss) (19,950) (16,220) (9,550) 53 Working 1: Total adjusted profit/(loss) during the pioneer period Year ended April 30 Amount N’000 2018 (19,950) 2019 (16,220) 2020 (9,550) (45,720) Appendix 2: Adjusted profit for the year ended April 30, 2021 N’000 N’000 Net profit as per accounts 14,930 Add back: Repairs and maintenance (improvement) 1,200 Depreciation 15,300 General and admin expenses (reserve) 1,300 Legal fees: Fine for late filing of returns 50 Expenses on new issue of shares 1,350 Allowance for doubtful debts (general prov) 3,700 22,900 37,830 Less: Income not taxable (dividends) 1,200 Adjusted profit 36,630 Appendix 3: Computation of tax liabilities N’000 N’000 Adjusted profit (from above) 36,630 Less: Loss brought forward 45,720 Loss relieved (36,630) (36,630) Unrelieved loss that lapse 9,090 Nil Capital allowances for the year (W2) 23,218 Recouped (Nil (Nil) Capital allowances c/f 23,218 Total profit Nil Companies income tax @ 30% Nil Tertiary education tax @ 2.5% of assessable profit 915.7 54

Workings 2: Capital allowances Non-ind building Industrial Manuf Building Ind. plant Capital allow IA 15% AA 10% IA 15% AA 10% IA 50% AA 25% IA 25% AA 20% IA 50% AA 25% N’000 N’000 N’000 N’000 N’000 N’000 2022 A/Y Cost 10,000 25,600 12,600 3,400 4,000 Additions 1200 - - 500 2,200 11,200 25,600 12,600 3,900 6,200 IA (1,680) (3,840) (6,300) (975) (3,100) 15,895 AA (952) (2,176) (1,575) (585) (775) 6,063 Inv. Allow - - (1,260) - - 1,260 23,218 2023 A/Y TWDV 8,568 19,584 4,725 2,340 2,325

Note 1: Any QCE bought during the pioneer period is assumed to be acquired on the first day of the new trade (May 1, 2020).

Note 2: Annual allowances for 2022 assessment year Non-industrial building = N11,200,000 – N1,680,000 = N952,000 10 Industrial building = N25,600,000 – N3,840,000 =- N2,176,000 10 Manufacturing industrial plant = N12,600,000 – N6,300,000 = N1,575,000 4 Furniture and fittings = N3,900,000 – N975,000 = N585,000 5 Motor vehicle = N6,200,000 – N3,100,000 = N775,000 4 Examiner’s report The question is divided into two parts. The first part tests the candidates’ understanding of the provisions of Companies Income Tax Act 2004 (as amended) in respect of computations of adjusted profit and companies’ income tax payable for the relevant assessment year. The second part tests the candidates’ knowledge of the provisions of the Industrial Development (Income Tax Relief) Act 2007 (as amended), in respect of a pioneer company’s dividend payment and losses made during the pioneer period. Being a compulsory question, all the candidates attempted the question. 55 Furniture and fittings Motor Vehicle 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 the Companies Income Tax Act 2004 (as amended). Candidates are advised to familiarise themselves with issues concerning 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 profits Memo (address or heading) ½ Memo (discussion of results) ½ Adjusted profits (30/4/2018): Net profit/(loss) ½ Depreciation ½ Donations ½ General provision for doubtful debts ½ Adjusted profit/(loss) ½ Adjusted profits (30/4/2019): Net profit/(loss) ½ Depreciation ½ General provision for doubtful debts ½ Adjusted profit/(loss) ½ Adjusted profits (30/4/2020): Net profit/(loss) ½ Depreciation ½ Donations ½ General provision for doubtful debts ½ Adjusted profit/(loss) ½ Total adjusted losses during the pioneer period ½ Adjusted profits (30/4/2021): Net profit as per accounts ½ Repairs and maintenance (improvement) ½ Depreciation ½ General and admin expenses (transfer to reserve) ½ Legal fees: Fine for late filing ½ 56 Expenses on new issue of shares ½ Allowance for doubtful debts (general prov) ½ Income not taxable (Dividends) ½ Adjusted profit ½ 13 b. Computation of tax liabilities Memo (discussion of results) 11/2 Losses b/f ½ Relieved ½ Losses that lapse ½ Capital allowances for the year ½ Total profit ½ Companies income tax ½ Tertiary education tax ½ Capital allowances computation: IA (Non-industrial building) ½ AA (Non-industrial building) ½ IA (Industrial building) ½ AA (Industrial building) ½ IA (Manufacturing industrial plants) ½ AA (Manufacturing industrial plants) ½ Investment allow (Manufacturing industrial plants) ½ IA (Furniture and fittings) ½ AA (Furniture and fittings) ½ IA (Motor vehicle) ½ AA (Motor vehicle) ½ Total capital allowances ½ 11 c. i. Provisions of the Act in respect of a pioneer company’s dividend payment 1 mark for the discussion of the provisions of the Act in respect of a pioneer company’s dividends payment, subject to a maximum of 2 points . 2

ii. Provisions of the Act in respect of a pioneer company’s losses made during the pioneer period 1 mark for the discussion of the provisions of the Act in respect of a pioneer company’s losses made during the pioneer period, subject to a maximum of 2 points. 2

iii. Provisions of the Act in respect of a pioneer company’s capital allowances for qualifying capital expenditure acquired during the pioneer period 1 mark for the discussion of the provisions of the Act in 57 respect of a pioneer company’s capital allowances for QCE acquired during the pioneer period, subject to a maximum of 2 points. _2_ Total 30

Baba Tee & Co (Chartered Accountants) Plot 5, Osara Road, Abeokuta INTERNAL MEMO Date: ……. From: Tax Manager To: Managing Director Subject: Computation of Hydrocarbon Tax and Companies Income Tax Liabilities Payable I refer to your directive on the above subject and a draft report for your review and further action is hereby presented.

a. Determination of hydrocarbon tax liabilities for the 2021 assessment year With losses relieved brought forward from last year and the grant of capital allowances and production allowances, the company made a chargeable profit of N150.622 billion. Hydrocarbon tax is at the rate of 15% of chargeable profit, which amounted to N22,593,300,000.

b. Determination of companies income tax liabilities for the 2022 assessment year The company made a total profit of N90.872 billion. Companies income tax is 30% of total profit and this gives N27,261,600,000. The company is also to pay 2.5% of assessable profit as tertiary education tax (N2,330,375,000). Thank you. Tobby Babatolu 58 Appendix 1: Hydrocarbon tax for the 2021 assessment year N’million N’million Revenue: Value of crude oil sold (6.2 million barrels x $72 x N425) 189,720 Value of condensate from associated gas sold (3.7 million barrels x $30 x N425) 47,175 Value of natural gas liquid from condensate gas sold (2.8 million barrels x $35 x N425) 41, 650 Gross Revenue 278,545 Balancing charge 32 Total gross revenue 278,577 Allowable deductions (section 263 of PIA) Production cost 106,470 Cost of gas reinjection wells 600 Drilling cost 4,360 Decommissioning and abandonment 1,900 Repairs and maintenance 5,750 Royalty cost paid 40,990 NDDC charge 250 Terminaling cost 1,380 Concession rentals 20,470 Host community fund 1,000 Local government municipal levy 100 Environmental remediation fund 1,420 Total allowable cost 184,690 Total costs subject to CPR limit (W1) (122,280) (122,280) Excess allowable cost carried forward 62,410 Adjusted profit 156,287 Less: Loss relief 655 Assessable profit 155,642 Less: Section 266 and 6th Schedule deductions: Capital allowances: Brought forward 320 For the current year 1400 1720 153, 922 Less: Production allowances 3,300 Chargeable profit 150,622 Hydrocarbon tax @15% of chargeable profit 22,593.3 59

Workings on Cost-Price-Ratio limit N’million N’million Gross revenue 278,545 Maximum allowable costs @65% 181, 054.25 Total operating cost incurred 184,690 Capital allowances 1,720 Total eligible costs 186, 410 Less: Exempted costs incurred (Section 263) Royalty paid 40,990 NDDC charge 250 Concession rentals 20,470 Host community fund 1,000 Environmental remediation fund 1,420 64,130 Net total costs to be subjected to CPR 122,280 Maximum allowable cost: The lower of: Net total costs to be subjected to CPR 122,280 And CPR @ 65% of gross income 181,054.25 Appendix 2: Companies income tax for 2022 assessment year N’million N’million Revenue: Value of crude oil sold 189,720 Value of condensate from associated gas sold 47, 175 Value of natural liquid from condensate 41,650 Gross revenue 278,545 Less: Allowable deductions (section 263 of PIA) Production cost 106,470 Cost of gas reinjection wells 600 Drilling cost 4,360 Decommissioning and abandonment 1,900 Repairs and maintenance 5,750 Royalty cost paid 40,990 NDDC charge 250 Terminalling cost 1,380 Concession rentals 20,470 Host community fund 1,000 Local government municipal levy 100 Environmental remediation fund 1,420 Total allowable cost 184,690 Less: CITA allowable deductions: 60 Bank charges (Finance cost) 510 Donations to recognised Charity home 130 640 185,330 Assessable profit 93,215 Add: Balancing charge 32 93,247 Less: Losses b/f 655 92,592 Less: Capital allowances: Brought forward 320 For the current year 1,400 1,720 Total profit 90,872 Companies income tax @ 30% of total profit 27,261.60 Tertiary education tax @ 2.5% of assessable profit 2,330.375 Total tax liabilities payable 29,591.975

Examiner’s report The question tests candidates’ knowledge of computations of hydrocarbon tax and companies income tax of a company that operated in both onshore and shallow water in line with the provisions of Petroleum Industry Act 2021. About 80% of the candidates attempted the question, but majority of them showed a fair understanding of its requirements, hence their performance was average. The major pitfall of the candidates was their inability to identify correctly the allowable and disallowable expenses relevant to 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, companies’ income tax and relevant sections of the Petroleum Industry Act 2021.

Marking guide Marks Marks a. Computation of Hydrocarbon tax Memo (Heading) ½ Memo (Discussion of result) 1 Value of crude oil sold ½ Value of condensate from associated gas sold ½ Value of natural gas liquid from condensate gas sold ½ Balancing charge ½ Allowable deductions (section 263 of PIA): 61 Production cost ½ Cost of gas reinjection wells ½ Drilling cost ½ Decommissioning and abandonment ½ Repairs and maintenance ½ Royalty cost paid ½ NDDC charge ½ Terminaling cost ½ Concession rentals ½ Host community fund ½ Local government municipal levy ½ Environmental remediation fund ½ Total allowable cost ½ Total cost subject to CPR limit (W1) ½ Excess allowable cost carried forward ½ Less: Loss relief ½ Total capital allowances ½ Production allowances ½ Chargeable profit ½ Hydrocarbon tax @ 15% of chargeable profit ½

Workings (CPR limit): Net total cost to be subjected to CPR (N122,280) ½ 14

b. Computation of income tax payable Memo (Discussion of result) ½ Gross revenue total (N278,545) ½ Section 263 allowable deductions total (N184,690) ½ Bank charges ½ Donations ½ Assessable profit ½ Balancing charge ½ Losses b/f ½ Capital allowances total (N1,720) ½ Total profit ½ Companies income tax ½ Tertiary education tax ½ 6 Total 20 62

a. The provisions of the Capital Gains Tax Act in respect of tax payable on disposal of assets situated outside Nigeria by a non-Nigerian company Section 4 of Capital Gains Tax Act 2004 (as amended) provides that Capital gains tax shall be charged on the amounts (if any) received or brought into Nigeria in respect of any chargeable gains, such amounts being treated as gains accruing when they are received or brought into Nigeria.

b. (i) Damaturu Nigeria Limited Computation of capital gains tax payable For 2022 assessment year Land Plant & equipment Factory building N’000 N’000 N’000 N’000 N’000 N’000 Sales proceeds 32,000 15,000 38,000 Less: Cost of acquisition 25,000 13,000 30,000 Incidental expenses: Legal (1%) of sale proceeds 320 150 380 Professional Valuers (3%) of sale proceeds 960 26,280 450 13,600 1,140 31,520 Capital gains record 5,720 1,400 6,480 Less: Roll-over relief (b)(ii) 3,000 1,400 Nil Net capital gains 2,720 Nil 6,480 Capital gains tax @ 10% 272 Nil 648 In line with the provisions of Section 2, Finance Act 2020, the expected due date of payment of the tax liability is December 31, 2022. 63

b. (ii) Roll-over relief Land Plant & equipment Factory building N’000 N’000 N’000 Lower of: Sales proceeds 32,000 15,000 38,000 And Amount re-invested 28,000 18,000 30,000 Less: Cost of acquisition of old asset 25,000 13,000 30,000 Roll-over relief 3,000 2,000 Nil NB: The roll-over relief in respect of plant & equipment is restricted to N1,400,000 (as in the capital gains record).

Examiner’s report The question tests candidates’ understanding of the provisions of Capital Gains Tax Act 2004 (as amended) in respect of disposal of assets situated outside Nigeria by a non-Nigerian company, capital gains tax computations, and roll-over relief. 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 correctly compute the roll- over relief. Candidates are advised to read the Institute’s Study Text and other relevant textbooks, when preparing for future examinations.

Marking guide Marks Marks a. Provisions of capital Tax Act in respect of tax payable on disposal of assets situated outside Nigeria by a non- Nigerian company 2 marks for discussing the provisions of the Act in respect of tax payable on disposal of assets situated outside Nigeria by a non-Nigerian company 2 b.i Computation of the capital gains tax payable as the date of payment of the tax date Heading ½ Land: Sales proceeds ½ 64 Land: Cost of acquisition ½ Land: Legal fees ½ Land: Professional valuers’ fees ½ Land: Capital gains record ½ Land: Less: roll-over relief ½ Land: Net capital gains ½ Land: Capital gains tax @ 10% ½ Plant & equipment: Sales proceeds ½ Plant & equipment: Cost of acquisition ½ Plant & equipment: Legal fees ½ Plant & equipment: Professional valuers’ fees ½ Plant & equipment: Capital gains record ½ Plant & equipment: Less: roll-over relief ½ Plant & equipment: Net capital gains ½ Plant & equipment: Capital gains tax @ 10% ½ Factory building: Sales proceeds ½ Factory building: Cost of acquisition ½ Factory building: Legal fees ½ Factory building: Professional valuers’ fees ½ Factory building: Capital gains record ½ Factory building: Less: roll-over relief ½ Factory building: Net capital gains ½ Factory building: Capital gains tax @ 10% ½ Due date of payment of tax 11/2 14

ii. Roll-over relief computation: Land: Sales proceeds ½ Land: Amount re-invested ½ Land: Cost of acquisition of old asset ½ Plant & equipment: Sales proceed ½ Plant & equipment: Amount re-invested ½ Plant & equipment: Cost of acquisition ½ Factory building: Sales proceeds ½ Factory building: Amount re-invested ½ 4 Total 20 65

Being a Paper on Nigerian Double Taxation Agreements and the United Kingdom

a. Provisions of double taxation agreement with the UK with regards to:

i. Income from immovable property may be taxed in the country in which the property is situated (Article 6);

ii. Business profits not arising through a permanent establishment are to be taxed only in the country of the taxpayer’s residence. Profits attributed to a permanent establishment may be taxed in the country in which the permanent establishment is situated (Article 7);

iii. Profits or gains arising from the operation of ships and aircraft in international traffic are to be taxed only in the country of residence of the operator (Article 8);

iv. Dividends derived by one company which is resident in one country from a company resident in another country may be taxed in that country in which the dividend is derived. The withholding tax applicable in Nigeria is reduced to 7.5%; and

v. Interest arising in one country and paid to a resident of the other country may be taxed in that other country. The rate of tax in the source country is, in general, not to exceed 12.5 per cent. However, interest arising in one country and paid to the government or any government agency of the other country is to be exempt in the country of source (Article 11).

b. Foreign incomes exempted from Nigerian tax With effect from January 1, 1988, investment incomes, namely; dividends, interests, royalties and rents, derived by a company from outside Nigeria, is exempted from Nigerian tax, provided that such income is brought into Nigeria through government approved channels. Government approved channels means the Central Bank of Nigeria, any bank or other corporate body appointed by the Minister as authorised dealers under the Second-tier Foreign Exchange Market, Act or any enactment replacing that Act. In such situations, there would not have been any double taxation and therefore there would be no need to grant any relief in form of tax credit. 66

c. Resolution of conflicts between double taxation agreements (DTAs) and Nigerian tax laws include: Where a resident of a contracting State considers that the action of one or both of the contracting States result or will result in taxation not in accordance with this agreement; The competent authority shall endeavour, if the objection appears to it to be justified and if it is not itself able to resolve the case by mutual agreement with the competent authority of the other contracting State. Then; The competent authorities of the contracting State shall endeavour to resolve by mutual agreement any difficulties or doubt arising as to the interpretation or application of the agreement; and The competent authorities of a contracting State may communicate with each other directly for the purpose of reaching an agreement in the sense of the preceding paragraphs.

d. Benefits of double taxation agreement include:

• Avoidance of double taxation;

• Clarification of taxing rights of each contracting State;

• Encouragement of economic cooperation between States;

• Prevention of fiscal evasion with anti-avoidance provision;

• Lowering of compliance cost;

• Promotion of bilateral investment between contracting States;

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

• Non-discrimination in taxation matters; and

• Encouragement of uninterrupted exchange of information between the contracting States.

Examiner’s report The question tests the candidates’ knowledge of the provisions of the Nigerian double taxation agreements with the United Kingdom. About 40% of the candidates attempted the question and they exhibited a fair understanding of its requirements. The performance was average. The commonest pitfall was the inability of some candidates to explain the resolution mechanisms being used by the Nigerian government to mitigate the effect of the conflicts between double taxation agreements and the Nigerian tax laws. Candidates are advised to read widely the Institute’s Study Text and other relevant textbooks, when preparing for future examinations. 67

Marking guide Marks a. i. Provision of the Nigerian double taxation agreements with the UK in respect of income arising from immovable properties 2 marks for discussing the provisions of the double taxation agreement with the UK in respect of income arising from immovable properties 2

ii. Provisions of the Nigerian double taxation agreements with the UK in respect of business profits not arising through a permanent establishment 2 marks for discussing the provisions of the double taxation agreement with the UK in respect of business profits not arising through a permanent establishment 2

iii. Provisions of the Nigerian double taxation agreements with the UK in respect of profits or gains arising from the operations of ships and aircraft in international traffic 2 marks for discussing the provisions of the double taxation agreement with the UK in respect of profits or gains arising from the operations of ships and aircraft in international traffic 2

iv. Provisions of the Nigerian double taxation agreements with the UK in respect of dividends derived by a company resident in one country from a company resident in another country. 2 marks for discussing the provisions of the double taxation agreement with the UK in respect of dividends derived by one company which is resident in one country from a company resident in another country 2

v. Provisions of the Nigerian double taxation agreements with the Uk in respect of interest arising in one country and paid to a resident of the other country 2 marks for discussing the provisions of the double taxation agreement with the UK in respect of interest arising in one country and paid to a resident of the other country 2

b. Foreign incomes exempted from Nigerian tax 1 mark for each item of foreign income exempted (interests, royalties, dividends and rents) from Nigerian tax, subject to a maximum of 3 items 3

c. Resolution mechanisms being used to mitigate the effect of the conflicts between double taxation agreements and Nigerian tax laws 1 mark for discussing each resolution of conflict mechanism, 68 Subject to a maximum of 3 points 3

d. Benefits of double taxation agreements 1 mark for discussing each benefit of double taxation agreement, subject to a maximum of 4 points 4 Total 20

SMAP & Co (Chartered Accountants) 67, Wheno Avenue, Badagry INTERNAL MEMO Date: From: Audit Senior To: Principal Partner Subject: Zola Nigeria Limited I refer to our client’s request on objectives of tax audits; stages of tax audit process and schedule of requirements required for Federal Inland Revenue Service tax audit. I hereby present a report for your consideration before same is presented to the client.

a. The objectives of a tax audit are to enable the tax inspectors determine that:

i. Adequate accounting books and records exist for the purpose of determining the taxable profits or loss of the taxpayer and consequently, the tax payable; ii. The tax computations submitted to the tax authority by the taxpayer agree with the underlying records; iii. All applicable tax legislations have been complied with; iv. There is provision of an avenue to educate taxpayers on various provisions of the tax law; v. Tax evasion is discouraged; vi. Accounting and/or arithmetical errors in tax returns are detected and corrected; vii. Feedback to the management on various provisions of the law and recommend possible changes; viii. Cases involving tax fraud and recommend them for investigation; ix. Taxable persons’ failure to render tax returns are captured; 69

x. Taxable persons’ rendering incomplete or in accurate returns are identified; and xi. Voluntary compliance (which is one of the strong reasons in support of the self-assessment scheme) is encouraged.

b. Stages in tax audit process include:

i. Selection of the taxpayer to be audited; ii. Preliminary review of the taxpayer’s file; iii. Notification of taxpayer; iv. Pre-audit meeting; v. Fieldwork; vi. Post-audit meeting; vii. Interim audit report; viii. Post-audit review by regional/headquarters’ audit unit; ix. Reconciliation meetings; and x. Final audit report.

c. List of required documents for FIRS tax audit include:

i. Audited accounts for the relevant years; ii. Management accounts; iii. Chart of accounts; iv. Year-end final trial balance; v. General ledgers/ledger printouts; vi. Back up documents for entries in the General Ledger; vii. Audit adjustment journals; viii. Relevant schedules; ix. Sales invoice file; x. Purchases invoice file; xi. Payment vouchers for bank and petty cash payments; xii. Import documents; xiii. Export documents (where applicable); xiv. Fixed assets register/schedules; xv. Value added tax file(s); xvi. Evidences of Input VAT claimed; xvii. Evidences of VAT deducted at source (if any); xviii. Evidence of zero rated/exempted VAT items; xix. Withholding tax file(s); xx. Capital gains tax records; 70

xxi. Schedule of bankers and the bank statements for each of the period of audit coverage; xxii. Minutes of Board’s meetings; xxiii. Inventory count records; xxiv. Schedule of contracts executed, contract agreements/offer letters and valuation certificate for company engaged in construction; xxv. Rent agreements; and xxvi. Any other documents required for the audit, as the documents stated above are not exhaustive. Thank you. Sunny Posu

Examiner’s report The question tests candidates’ understanding of the objectives of tax audits; stages in a typical tax audit process; and schedule of requirements for Federal Inland Revenue Service (FIRS) tax audit. About 60% of the candidates attempted the question and they showed a good understanding of the question and performance was above average. The commonest pitfall was the inability of the candidates to state correctly the schedule of requirements for FIRS tax audit. Candidates are advised to read the Institute’s Study Text and other relevant textbooks on tax audits and investigation when preparing for future examinations.

Marking guide Marks Marks a. Objectives of tax audits Memo (address) ½ Memo (heading) ½ ½ mark for each objective of tax audit, subject to a maximum of 8 points 4 5

b. Stages in a typical tax audit process ½ mark for each stage in a typical tax process, subject to a maximum 8 points 4 71

c. Schedule of documents required for FIRS tax audit ½ mark for each schedule of requirements for FIRS tax audit, subject to a maximum of 12 points _6_ Total 15

a. Guiding principles of Nigeria tax system According to the National tax policy 2017, all existing and future taxes are expected to align with the following fundamental features:

i. Equity and fairness: Nigeria tax system should be fair and equitable, devoid of discrimination. Taxpayers should be required to pay according to their ability;

ii. Simplicity, certainty and clarity: Tax laws and administrative processes should be simple, clear and easy to understand;

iii. Convenience: The time and manner for the fulfillment of tax obligations shall take into account the convenience of taxpayers and avoid undue difficulties;

iv. Low compliance cost: The financial and economic costs of compliance to the taxpayer should be kept to the barest minimum;

v. Low cost of administration: Tax administration in Nigeria should be efficient and cost-effective in line with international best practices;

vi. Flexibility: Taxation should be flexible and dynamic to respond to changing circumstances in the economy in a manner that does not retard economic activities; and

vii. Sustainability: The tax system should promote sustainable revenue, economic growth and development. There should be a synergy between tax policies and other economic policies of government.

b. The fundamental principles and guidance for accountants (IESBA codes) The fundamental principles of ethics as specified by the International Ethics Standards Board for Accountants (IESBA) are:

i. Integrity; ii. Objectivity; iii. Professional competence and due care; iv. Confidentiality; and v. Professional behaviour. 72

i. Integrity

• A professional accountant shall comply with the principle of integrity, which requires an accountant to be straightforward and honest in all professional and business relationships. Integrity implies fair dealing and truthfulness.

• A professional accountant shall not knowingly be associated with reports, returns, communications or other information where the accountant believes that the information contains materially false or misleading statements.

ii. Objectivity

• A professional accountant shall comply with the principle of objectivity, which requires an accountant not to compromise professional or business judgment because of bias, conflict of interest or undue influence of others.

• A professional accountant shall not undertake a professional activity if a circumstance or relationship unduly influences the accountant’s professional judgment regarding the activity.

iii. Professional competence and due care A professional accountant shall comply with the principle of professional competence and due care. This requires an accountant to attain and maintain professional knowledge and skill at the level required to ensure that a client or employing organisation receives competent professional service, based on current technical and professional standards and relevant legislation and act diligently and in accordance with applicable technical and professional standards.

iv. Confidentiality A professional accountant shall comply with the principle of confidentiality, which requires an accountant to respect the confidentiality of information acquired as a result of professional and business relationships. The principle of confidentiality imposes an obligation on all professional accountants to refrain from:

• Disclosing outside the firm or employing organisation confidential information acquired as a result of professional and business relationships without proper and specific authority or unless there is a legal or professional right or duty to disclose; and

• Using confidential information acquired as a result of professional and business relationships to their personal advantage or the advantage of third parties. 73

v. Professional behaviour

• A professional accountant shall comply with the principle of professional behaviour, which requires an accountant to comply with relevant laws and regulations and avoid any conduct that the accountant knows or should know might discredit the profession.

• A professional accountant shall not knowingly engage in any business, occupation or activity that impairs or might impair the integrity, objectivity or good reputation of the profession, and as a result would be incompatible with the fundamental principles.

Examiner’s report The question tests candidates’ understanding of the fundamental features provided for in the Nigerian Tax Policy 2017, which existing and future taxes are expected to align with and the principles and guidance of accountants as specified in the International Ethics Standards Board for Accountants (IESBA) codes. About 70% of the candidates attempted the question. Candidates showed a fair 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 principles and guidance for accountants as specified in the IESBA codes. Candidates are advised to read the Institute’s Study Text, Institute of Chartered Accountants of Nigeria Act, and other relevant textbooks, as this will go a long way in assisting them to pass future examinations.

Marking guide Marks Marks a. Fundamental features as provided for in the NTP 2017, which the existing and future taxes are expected to align with 1 mark for each discussion on fundamental features as provided for in the NTP 2017, which the existing and future taxes are expected to align with, subject to a maximum of 5 points 5

b. Principles and guidance of accountants as specified in the IESBA codes ½ mark for each identification of principles and guidance for accountants as specified in the IESBA codes, subject to a maximum of 4 points 2 2 marks for each discussion on principles and guidance of accountants as specified in the IESBA codes, subject to a maximum of 4 points 8 10 Total 15 74

EPS & Co (Tax Consultants) 15, Enugu Road, Udi Town Date: The Managing Director Udi Nigeria Limited 15, Enugu Road Udi Town Dear Sir, Re: Computation of Tax Liabilities for 2022 Assessment Year and Tax Neutralities I refer to your requests on the computation of the company’s tax liabilities for 2022 assessment year and explanation of the concept of tax neutralities. I hereby present a report for your consideration.

a. Computation of tax liabilities for 2022 assessment year In line with the provisions of Companies Income Tax Act 2004 (as amended), the companies income tax liability payable for 2022 assessment year is N18,213,000 (that is 30% of total profit). The company is also liable to pay tertiary education tax at the rate of 2.5% of assessable profit and this amounted to N20,022,750. The company is hereby advised to urgently file its self-assessment annual returns with the Federal Inland Revenue Service and accompany it with a cheque of the sum of N20,235,750, being the amount of total tax liabilities payable for the 2022 assessment year.

b. The concept of tax neutrality

i. The primary purpose of the tax system is to raise the revenue needed to pay for government spending. As such, the goal is to raise this revenue without distorting the decisions that individuals and firms would otherwise make for purely economic reasons.

ii. Non-neutralities in the tax system lead people and firms to devote more socially wasteful effort to transforming the form or substance of their activities to reduce their tax payments, for example, by hiring accountants to structure financial transactions in a manner that minimizes tax liability.

iii. In some cases, deviations from a neutral tax system are unavoidable. It is widely agreed that tax payment should increase with some measure of well-being, like income, consumption or wages.

iv. One inevitable consequence of this agreement is that the market consumption of goods and services will be taxed, either directly (as in a 75 consumption tax) or indirectly (as in an income or employment tax, both of which tax the money used to purchase consumption goods). In other cases, deviations from a neutral tax system reflect the goals of policy makers. Applications of neutrality to specific policy issues

i. Overall tax reform: A broader base and lower rates One of the traditional mantras of tax reform is to "broaden the base and lower the rates”. This involves two objectives:

• Broadening the base helps make the tax code more neutral between different activities by including more types of income in the definition of income and allowing fewer deductions and credits for specified activities; and

• Lowering tax rates makes the tax code more neutral about the choice between working and not working.

ii. Using the tax code to encourage desired behaviour: Credits instead of deductions In some cases, policy makers may want to encourage desired activities like home ownership or a college education. In these cases, it is worth examining whether the specific goal could be better accomplished through a spending program or through the tax code. In many cases, a spending program can be more effectively targeted and delivered to serve the goal in question. In some cases, subsidising these activities through the tax code may be more efficient.

iii. Discouraging undesired activity Just as it can sometimes be appropriate to introduce non-neutralities into the tax system to encourage desired activities, it can also be appropriate to use the tax system to discourage undesirable ones like smoking, drinking alcohol, or emitting carbon. This can lead businesses and consumers to take the social costs of their actions into account, helping to ensure that the outcome of decentralised decisions and market competition leads to overall social efficiency. Please do not hesitate in contacting us if you need any further clarification on the above subject. Yours faithfully, Paulo Ojeaga Senior Partner for: EPS & Co (Tax Consultants) 76 Appendix 1: Tax liabilities computation N’000 N’000 Net profit as per accounts 50,810 Add back: Depreciation 15,400 Allowance for bad debts 6,200 Repairs and maintenance 1,500 Certified exploration expenditure 4,500 Development and processing expenditure 2,500 30,100 Adjusted/assessable profit 80,910 Less: Capital allowances (Note 1) 20,200 Total profit 60,710 Companies income tax @ 30% 18,213 Tertiary education tax @ 2.5% of assessable profit 2,022.75 Total tax liabilities payable 20,235.75 Capital allowances of new acquisitions Certified exploration Development Capital and allowances processing IA 95% IA 95% IA25% AA Nil Nil AA 20% N’000 N’000 N’000 N’000 2022 A/Y Cost 4,500 2,500 1,500 IA (4,275) (2,375) (375) 7,025 AA (0) (0) (225) 225 7,250 2023 A/Y TWDV 225 125 900

Note 1: capital allowances claimable: N’000 Brought forward 750 Current year (without additions during the year) 12,200 Current year additions 7,250 Total 20,200 Furniture and fitting 77

Examiner’s report The question tests the candidates’ understanding of the concept of tax neutralities and the provisions of the Nigerian Minerals and Mining Act 2007 (as amended), in respect of computations of tax liabilities of a mining company. About 70% 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 the allowable and disallowable expenses in the determination of adjusted profit and the tax liabilities. 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 mining operations in Nigeria.

Marking guide Marks Marks a. Computation of tax liabilities Memo (heading) ½ Memo (discussion of results) 1 Net profit as per accounts ½ Depreciation ½ Repairs and maintenance ½ Certified exploration expenditure ½ Development and processing expenditure ½ Adjusted/assessable profit ½ Capital allowances ½ Total profit ½ Companies income tax ½ Tertiary education tax ½ Capital allowance computation: IA (Development and processing expenditure) ½ IA (Certified exploration expenditure) ½ IA (Furniture and fittings) ½ AA (Furniture and fittings) ½ Total capital allowances ½ 9 b. Concept of tax neutralities and its applications to specific policy issues 1 mark for each discussion on the concept of tax neutralities, subject to a maximum of 3 points 3 1½ marks for each discussion on applications of neutrality to specific policy issues, subject to a maximum of 2 points 3 6 Total 15 78 THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA