Advanced Taxation · 2024

DEBBY TAX CONSULTANTS BENIN-CITY Date: The Managing Director Soft Farm andAgro-Allied Limited Benin-City Dear Sir, RE: TREATMENT OF EXCESS AMOUNT OF DEDUCTIBLE INTEREST PAID AND COMPUTATIONS OF ADJUSTED PROFIT AND TAX LIABILITIES We refer to your request on the treatment of amount of deductible interest paid, computations of adjusted profit, and tax liabilities in respect of the company’s financial activities for the relevant assessment years. Our comments are as follows:

(a) Treatment of excess amount of deductible interest paid on foreign loan In line with the loan agreement, the company is expected to pay by the end of December 31, 2022, the sum of N12million, being the interest due on the N100 million facilities obtained from the parent company. The N12million loan payment was correctly captured by the Financial Accountant in the financial report. However, by the provision of paragraph 2 of the 7th Schedule to the Finance Act 2019, there is a limit on allowable deductible interest paid on foreign loan. Any amount beyond the limit is considered to be excess interest and this shall be a disallowable deduction for the purpose of determination of tax liability. The excess interest, as provided in paragraph 2, means an amount of total interest paid or payable in excess of 30% of earnings before interest, taxes, depreciation and amortisation of the Nigerian company in that accounting period. As shown in the attached appendix 1, the interest paid on the foreign loan is N12million (12% of N100million).This is less than the 30% threshold (N54.54million), hence the interest deductible rule did not affect the company.

(b) Adjusted profit for the year ended December 31, 2022 As revealed in the attached appendix 2, the adjusted profit of the company for the year ended December 31, 2022 is N178,520,000.

(c) Tax liabilities for the relevant assessment years Appendix 3 presents the report of the companies income tax and tertiary education tax payable for 2018 through 2023 assessment years. 61 We hope this report adequately represents the mandate given to us. Should you require any further clarification, we will be glad to address it. Yours faithfully, For: DEBBY TAX CONSULTANTS Deborah Oguns Principal Partner Appendix 1: Computation of excess deductible interest paid Loan amount = N100 million Interest rate = 12% per annum Interest paid = 12% of N100 million = N12 million Excess deductible interest = 30% of earnings before interest, taxes, depreciation and amortisation N’000 N’000 Net profit 104,560 Add: Interest 15,600 Depreciation 38,240 Income tax 23,400 77,240 EBIT 181,800 Maximum allowable interest deduction = 30% of N181,800,000 = N54,540,000 Since, the interest paid (N12million) is less than the 30% threshold (N54,540,000), the company is not affected by the interest deductivity rule. Appendix 2: Adjusted profit N’000 N’000 Net profit as per accounts 104,560 Add back: Repairs and maintenance: Expansion to warehouse 3,700 Depreciation 38,240 Legal cost: Income tax appeal 850 Acquisition of new lease 1,700 Allowance for doubtful debts: 62 General provisions 7,870 Donations (Women society) 1,000 Income tax provisions 23,400 General expenses: Wedding gift 350 Fine for traffic offense 150 77,260 181,820 Less: Non-taxable income Dividends received 2,700 Profit on disposal of non-current asset 600 3,300 Adjusted profit 178,520 Appendix 3: Tax liabilities for the relevant assessment years 2018 assessment year: (Basis Period: 1/1/18 – 31/12/18) N’000 N’000 Adjusted profit/assessable profit 78,750 Deduct: Capital allowances for the year (see note 1) 15,155 Capital allowances utilised (15,155) (15,155) Unutiised capital allowances c/f Nil Total profit 63,595 Companies income tax @ 30% of N63,595 19,078.5 Tertiary education tax @ 2% of N78,750 1,575 2019 assessment year Basis Period: 1/1/18 – 31/12/18) N’000 N’000 Adjusted profit/assessable profit 78,750 Capital allowances for the year Nil Total profit 78,750 Companies income tax @ 30% of N78,750 23,625 Tertiary education tax @ 2% of N78,750 1,575 ]] 63 2020 assessment year (Basis Period: 1/1/19 – 31/12/19) N’000 N’000 Adjusted profit/assessable profit 95,120 Deduct: Capital allowances for the year (see note 1) 3,060 Capital allowances utilised (3,060) (3,060) Unutilised capital allowances c/f Nil Total profit 92,060 Companies income tax @ 30% of N92,060 27,618 Tertiary education tax @ 2% of N95,120 1,902.4 2021 assessment year (Basis Period: 1/1/20 – 31/12/20) N’000 N’000 Adjusted profit/assessable profit 142,800 Deduct: Capital allowances for the year (see note 1) 3,060 Capital allowances utilised (3,060) (3,060) Unutilised capital allowances c/f Nil Total profit 139,740 Companies income tax @ 30% of N139,740 41,922 Tertiary education tax @ 2% of N142,800 2,856 2022 assessment year (Basis Period: 1/1/21 – 31/12/21) N’000 N’000 Adjusted profit/assessable profit 166,900 Deduct: Capital allowances for the year (see note 1) 6,559.97 Capital allowances utilised (6,559.97) (6,559.97) Unutilised capital allowances c/f Nil Total profit 160,340.03 Companies income tax @ 30% of N160,340.03 48,102,009 Tertiary education tax @ 2% of N166,900 3,338 64 2023 assessment year (Basis Period: 1/1/22 – 31/12/22) N’000 N’000 Adjusted profit/assessable profit 178,520 Deduct: Capital allowances for the year (see note 1) 11,029.4 Capital allowances utilised (11,029.4) 11,029.4 Unutilised capital allowances c/f Nil Total profit 167,490.60 Companies income tax @ 30% of N167,490.6 50,247.18 Tertiary education tax @ 2.5% of N178,520 4,463

Note 1: Capital allowances Plant equipm ent C/A IA 95% AA Nil Indust. Building Non-ind Building Motor Vehicle Furniture & fittings Research & dev IA 15% IA 15% IA 50% IA 25% IA 95% AA 10% AA 10% AA 25% AA 20% AA Nil N’000 N’000 N’000 N’000 N’000 N’000 2018 A/Y Cost 4,600 12,000 9,000 8,400 1,500 - IA (4,370) (1,800) (1,350) (4,200) (375) - 12,095 AA - (1,020) W(i) (765) (1,050) (225) - 3,060 15,155 2019 A/Y TWDV 230 9,180 6,885 3,150 900 - AA - - - - - - - 2020 A/Y TWDV 230 9,180 6,885 3,150 900 - AA - (1,020) (765) (1,050) (225) - 3,060 3,060 2021 A/Y TWDV 230 8,160 6,120 2,100 675 - AA - (1,020) (765) (1,050) (225) - 3,060 3,060 2022 A/Y TWDV 230 7,140 5,355 1,050 450 Additions - - - 5,600 - - IA - - - (2,800) - 2,800 AA - (1,020) (765) (1,749.97 (225) - 3,759.97 W(ii) 6,559.97 65 2023 A/Y TWDV 230 6,120 4,590 2,100.03 225 - Additions - 3,700 - 2,000 7,000 IA - (555) - (500) (6,650) 7,705 AA - (1,334.5) (765) (700) (524.9) - 3,324.4 11,029.4 TWDV 230 7,936.5 3,825 1,400.03 1,200.1 350

Workings

i. 2018 A/Y (Industrial building) IA = 15% of N12,000,000 = N1,800,000 AA = (N12,000,000 – N1,800,000)/10 = N1,020,000

ii. 2022 A/Y (Motor vehicle) AA (old) = N1,050,000 – N30 (for 3 items disposed) = N1,049,970 AA (new) = (N5,600,000 – N2,800,000)/4 = 700,000 1,749,970

Examiner’s report The question is divided into three parts. The first part tests the candidates’ understanding of the provisions of Companies Income Tax Act (CITA) 2004 (as amended) in respect of treatment of excess amount of deductible interest payable by a company to its foreign (parent) company. The second part tests the candidates’ knowledge of computations of adjusted profit. The third part tests candidates’ knowledge of computations of tax liabilities, in line with the provisions of CITA 2004 (as amended) and Finance Act 2019. 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 basis periods for determination of assessable profits and capital allowances of a company that commenced operations in 2018 in line with the provisions of Finance Act 2019. 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, the CITA 2004 (as amended), and relevant Finance Acts. 66

Marking guide Marks Marks a. Treatment of excess deductible interest Memo (address) ½ Memo (heading) ½ 1 mark for correct discussion of the treatment as presented in the memo, subject to a maximum of 2 points 2 Appendix 1: Net profit ½ Interest ½ Depreciation ½ Income tax ½ Maximum interest allowed ½ Excess interest disallowed ½ 6

b. Computation of adjusted profit Appendix 2: Net profit as per accounts ½ Expansion to warehouse ½ Depreciation ½ Legal cost (Income tax appeal) ½ Legal cost (Acquisition of new lease) ½ Allowance for doubtful debts (general provisions) ½ Donations (Women society) ½ Income tax provisions ½ General expenses (wedding gift) ½ General expenses (fine for traffic offense) ½ Non-taxable income (dividends received) ½ Non-taxable income (profit on disposal of asset) ½ Adjusted profit 1 7

c. Computation of tax liabilities Appendix 3: 2018 assessment year: Adjusted profit ¼ Capital allowances for the year ¼ Total profit ¼ Companies income tax ¼ Tertiary education tax ¼ 2019 assessment year: Adjusted profit ¼ Capital allowances for the year ¼ Total profit ¼ 67 Companies income tax ¼ Tertiary education tax ¼ 2020 assessment year: Adjusted profit ¼ Capital allowances for the year ¼ Unutilised capital allowances c/f ¼ Total profit ¼ Companies income tax ¼ Tertiary education tax ¼ 2021 assessment year: Adjusted profit ¼ Capital allowances for the year ¼ Unutilised capital allowances c/f ¼ Total profit ¼ Companies income tax ¼ Tertiary education tax ¼ 2022 assessment year: Adjusted profit ¼ Capital allowances for the year ¼ Unutilised capital allowances c/f ¼ Total profit ¼ Companies income tax ¼ Tertiary education tax ¼ 2023 assessment year: Adjusted profit ¼ Capital allowances for the year ½ Unutilised capital allowances c/f ¼ Total profit ¼ Companies income tax ¼ Tertiary education tax ¼

Note 1 (Capital allowances): 2018 assessment year: IA (plantation equipment) ¼ IA (industrial building) ¼ IA (non-industrial building) ¼ IA (motor vehicle) ¼ IA (furniture and fittings) ¼ AA (industrial building) ¼ AA (non-industrial building) ¼ AA (motor vehicle) ¼ 68 AA (furniture and fittings) ¼ 2019 assessment year: IA (plantation equipment) ¼ IA (industrial building) ¼ IA (non-industrial building) ¼ IA (motor vehicle) ¼ IA (furniture and fittings) ¼ 2020 assessment year: AA (industrial building) ¼ AA (non-industrial building) ¼ AA (motor vehicle) ¼ AA (furniture and fittings) ¼ 2021 assessment year: AA (industrial building) ¼ AA (non-industrial building) ¼ AA (motor vehicle) ¼ AA (furniture and fittings) ¼ 2022 assessment year: IA (furniture and fittings) ¼ AA (industrial building) ¼ AA (non-industrial building) ¼ AA (motor vehicle) ¼ AA (furniture and fittings) ¼ 2023 assessment year: IA (industrial building) ¼ IA (furniture and fittings) ¼ IA (research and development) ¼ AA (industrial building) ¼ AA (non-industrial building) ¼ AA (motor vehicle) ¼ AA (furniture and fittings) ¼ 17 Total 30 69

a. New Rain Petroleum Company Limited Computation of hydrocarbon tax For the year ended December 31, 2023 N’ million N’ million Income/Revenue: Value of crude oil sold (5.25m barrels x $72 x N520) 196,560 Value of condensate from associated gas sold (3.61m barrels x $45 x N520) 84,474 Value of natural gas liquid from associated gas sold (2.8m barrels x $40 x N520) 58,240 Gross revenue 339,274 Balancing charge 1.5 Total gross income 339,275.5 Allowable deductions (Section 263): Royalty incurred and paid 86,200 First exploration wells cost 6,800 First two appraisal wells cost 18,700 Joint cost-terminalling 12,000 Gas reinjection wells cost 3,420 NDDC charge 125 Concessional rents 60,430 Host community trust fund contribution 4,800 Stamp duty 16 Decommissioning and abandonment 1,300 Environment remediation fund contribution 1,250 General expenses- State government levy 110 Total allowable costs 195,151 Total costs subject to CPR limit (W1) (44,618) (44,618) Excess allowable cost carried forward 150,533 Adjusted profit 294,657.5 Less: Loss relief Nil Assessable profit 294,657.5 Less: Section 66 and 6th Schedule deduction Capital allowances: Brought forward 167 For the year 2,105 2,272 292,385.5 Less: Production allowances: Onshore operations 900 Shallow water operations 1,700 2,600 70 Chargeable profit 289,785.5 Hydrocarbon tax @ 30% of N289,785.5 86,935.65

Workings 1: Cost-profit-ratio (CPR) N’ million N’ million Gross revenue 339,274

(i) Maximum allowable @ 65% of gross revenue 220,528.10 Total operating cost 195,151 Capital allowances 2,272 Total eligible costs 197,423 Less: Exempted cost incurred (Section 263): Royalty paid 86,200 NDDC charge 125 Concessional rentals 60,430 Host community fund 4,800 Environment remediation fund 1,250 152,805 (ii) Net total costs to be subject to CPR 44,618 Maximum allowable cost is the lower of (i) and (ii), which is N44,618 million.

b. The tax implications on the profit/activities of the company, if it invests in deep offshore areas are:

(i) Hydrocarbon tax will not apply to companies with investments in the deep offshore areas; and

(ii) The company will need to incorporate a separate company to take care of the deep offshore activities. This means that onshore/shallow water operations cannot be merged with deep offshore activities.

Examiner’s report The question tests candidates’ knowledge of computations of hydrocarbon tax of a company that operates in both onshore and shallow water areas in line with the provisions of Petroleum Industry Act 2021. About 90% of the candidates attempted the question and majority of them showed a good understanding of its requirements, hence their performance was above 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 and hydrocarbon tax. 71 Candidates are advised to study extensively the template provided by the Federal Inland Revenue Service on computations of hydrocarbon tax and relevant sections of the Petroleum Industry Act 2021 for better performance in future examination.

Marking guide Marks Marks a. Computation of hydrocarbon tax Value of crude oil sold ½ Value of condensate from associated gas sold ½ Value of natural gas liquid from associated gas sold ½ Gross revenue ½ Balancing charge ½ Total gross income ½ Royalty incurred and paid ½ First exploration wells cost ½ First two appraisal wells cost ½ Joint cost-terminalling ½ Gas reinjection wells cost ½ NDDC charge ½ Concessional rents ½ Host community trust fund contribution ½ Stamp duty ½ Decommissioning and abandonment ½ Environment remediation fund contribution ½ General expenses- State government levy ½ Total allowable costs ½ Total costs subject to CPR limit ½ Excess allowable cost carried forward ½ Adjusted profit ½ Assessable profit ½ Total capital allowances ½ Total production allowances ½ Chargeable profit ½ Hydrocarbon tax ½

Workings on CPR: Maximum allowable @ 65% ½ Total operating costs ½ Capital allowances ½ Royalty paid ½ NDDC charge ½ Concessional rentals ½ Host community fund ½ Environment remediation fund ½ Net total costs to be subject to CPR ½ 18 72 b, Tax implications if the company involves in deep offshore activities 1 mark for each discussion of the tax implications if the company involves in deep offshore activities, subject to a maximum of 2 points 2 Total 20 73

a. Computation of double taxation relief Adjusted profit of the foreign company (KuramoIncorp) N’000 N’000 Net profit as per accounts 74,250 Add back: Depreciation 8,750 Foreign tax paid 18,900 27,650 Adjusted profit 101,900 Deduct: Capital allowances 9,900 Total profit 92,000 Commonwealth rate of tax (CR) = N18,900,000 x 100 N92,000,000 = 20.54% CR = 20.54% Nigerian rate of tax (NR) = 30% ½NR = 30%/2 = 15% Since CR is greater than ½NR, then relief = ½NR Double taxation relief = 15% of N92,000,000 = N13,800,000

b. Tax liabilities of the Nigerian company Lagode Nigeria Limited Computation of adjusted profit For the year ended December 31, 2022 N’000 N’000 Net profit as per accounts (N52,690 + N74,250) 126,940 Add back: Depreciation (N5,760 + N8,750) 14,510 Foreign tax paid 18,900 33,410 Adjusted profit/ assessable profit 160,350 74 Lagode Nigeria Limited Computation of tax liabilities For the 2023 assessment year N’000 Adjusted profit/assessable profit 160,350 Less: Capital allowances (N6,800 + N9,900) 16,700 Total profit 143,650 Companies income tax @ 30% of N143,650 43,095 Less: Double taxation relief (as above) 13,800 Net (final) companies income tax payable 29,295 Tertiary education tax @ 2.5% of N160,350 4,008.75

c. Implications of double taxation agreement on withholding tax deductions by a company resident in a country:

i) With no double taxation agreement with Nigeria It will suffer withholding tax deduction at the rate of 10% of the value of the revenue from dividends, interest and royalties.

ii) With double taxation agreement with Nigeria It will suffer withholding tax deduction at the rate of 7.5% of the value of the revenue from dividends, interest and royalties.

Examiner’s report The question tests candidates’ understanding of the provisions of the Companies Income Tax Act 2004 (as amended) on double taxation relief available to a Nigerian company with a branch in a foreign country. 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 state the implications of double taxation agreement on withholding tax deductions by a company resident in a country with, and without taxation treaty with Nigeria. Candidates are advised to read the Institute’s Study Text, Pathfinder, and other relevant textbooks when preparing for future examinations. 75

Marking guide Marks Marks a. Computation of double taxation relief Net profit as per accounts 1 Depreciation 1 Foreign tax paid 1 Adjusted profit 1 Capital allowances 1 Total profit 1 Commonwealth rate of tax 1 Relief = ½NR 1 Double taxation relief 1 9

b. Advise on tax liabilities Net profit as per accounts 1 Depreciation 1 Foreign tax paid 1 Adjusted profit 1 Capital allowances 1 Total profit 1 Companies income tax 1 Net (final) companies income tax 1 Tertiary education tax 1 9

c. (i) Implications of double taxation agreement on withholding tax deductions by a company resident in a country with no taxation agreement with Nigeria 1 mark for correct discussion on tax implications 1

(ii) Implications of double taxation agreement on withholding tax deductions by a company resident in a country with taxation agreement with Nigeria 1 mark for correct discussion on tax implications 1 Total 20 76

“Ethics and professionalism in tax management in Nigeria”, being a paper presented at a workshop organised for newly employed audit officers and tax consultants This paper addresses the following thematic areas: a. Categories of threats that may pose a challenge to compliance with fundamental principles of accounting profession include:

(i) Self-interest: The threat that a financial or other interest will inappropriately influence the professional accountant’s judgment or behaviour. For instance, a firm having undue dependence on total fees from a client;

(iii) Self-review: The threat that a professional accountant will not appropriately evaluate the results of a previous judgment made or service performed by the professional accountant, or by another individual within the professional accountant’s firm or employing organisation, on which the accountant will rely when forming a judgment as part of providing a current service;

(iv) Advocacy: The threat that a professional accountant will promote a client’s or employer’s position to the point that the professional accountant’s objectivity is compromised;

(v) Familiarity: The threat that due to a long or close relationship with a client or employer, a professional accountant will be too sympathetic to their interests or to accepting their work; and

(vi) Intimidation: The threat that a professional accountant will be deterred from acting objectively because of actual or perceived pressures, including attempts to exercise undue influence over the professional accountant. For instance, a firm being threatened with dismissal from a client engagement.

b. Safeguards that can be used to eliminate or reduce the identified threats include:

(i) Safeguards created by the profession, legislation or regulation, such as:

• Continue professional development requirement;

• Professional standards; and

• Corporate governance regulations; and 77

(ii) Safeguards in the work environment, such as:

• Leadership and transparency;

• Recruitment procedures for high caliber staff; and

• Continue professional development requirement.

c. Some specific legal and ethical issues that could arise from tax engagements are:

(i) Technical competence: Failure of tax practitioners to maintain an appropriate level of professional competence due to lack of knowledge and skills in carrying out the engagement;

(ii) Reasonable enquiry: Failure to make reasonable enquiries where information or documentation as furnished by a client appears to be inaccurate or incomplete;

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

(iv) Tax avoidance: Conflicts which arise in distinguishing between legitimate tax planning/tax minimisation arrangements and tax avoidance activities/schemes;

(v) Supervision of tax audit: Failure to carefully plan for or otherwise supervise on behalf of the client, audit activities carried out by tax authorities;

(vi) Tax loopholes: Loopholes seeking to deliberately test the boundaries of the tax law;

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

(viii) Aggressive interpretation: Adoption of overly aggressive interpretations of questionable issues and reporting positions on the basis that detection of the issue by the tax authorities is unlikely;

(ix) Misleading advice: Provision of inadequate or misleading advice to clients as to the potential risks and consequences of adopting various reporting positions and tax arrangements;

(x) Misrepresentation: Misrepresenting or concealing limitations in a tax practitioner’s competence or skills to perform particular tax services; 78

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

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

(xiii) Documentation: Preparing and signing a tax return without seeing full documentation;

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

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

(xvi) Reporting position: Determining whether the client or the tax practitioner should make the final reporting decisions for contentious or ambiguous items;

(xvii) Public responsibility: Failure to acknowledge a public responsibility to contribute to the improvement of the tax laws and their administration (for example, reporting blatant tax avoidance arrangements; (xviii) Professional judgment: Carrying out a client’s instructions which are inconsistent with the professional judgment of the tax practitioner (professional judgment);

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

(xx) Authority: Dealing with a client’s funds without client authority;

(xxi) Tax audit: Structuring a transaction, or the preparation of a tax return in such a way as to reduce the chances of a tax audit;

(xxii) Research: Failure to conduct adequate research on a problem as a reasonable basis for identifying issues and forming carefully considered conclusions and recommendations; 79 (xxiii) Prior years errors: Inaction by the tax practitioner in respect of a clear and significant error detected in a client’s prior year return(s);

(xxiv) Confidentiality: Failure to ensure confidentiality with regard to privileged

(xxv) Taxminimisation: Keeping a client informed of current tax minimisation arrangements which have no real commercial or family purpose.

d. The powers available to the Institute of Chartered Accountants of Nigeria (ICAN) in enforcing the ethical standards of its members

(i) The power of the Institute to enforce ethical standards is derived from ICAN Act 1965. The power is conferred on the Accountants Disciplinary Tribunal. The Tribunal in this respect is independent of Council.

(ii) The Investigating Panel considers complaints against the conduct of members, and is empowered to initiate disciplinary action by referring appropriate cases to the Disciplinary Tribunal for adjudication.

(iii) Where a complaint is against the conduct of a firm having more than a partner, the complaint shall be deemed to have been made against each and every member who was partner in the said firm at the material time the engagement was carried out.

(iv) Any failure to follow the guidance in fundamental principles or in the statements shall also be taken into account by the Committee of the Institute responsible for regulating the work of members and member firms.

Examiner’s report The question tests the candidates’ knowledge of the rules of the Institute of Chartered Accountants of Nigeria (ICAN) and other professional bodies on ethics and professionalism in tax management. About 60% 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 safeguards that are applicable to mitigate identified threats that could arise from tax engagements. 80 Candidates are advised to read widely the Institute’s Study Text, ICAN Code of Ethics and other relevant textbooks, when preparing for future examinations.

Marking guide Marks Marks a. Categories of threats that may pose a challenge to compliance with fundamental principles of accounting profession 1 mark for discussion of the threats that may posea challenge to compliance with fundamental principles of accounting profession, subject to a maximum of 3 points 3 b. Safeguards that can be used to eliminate or reduce the identified threats 1 mark for safeguards created by the profession, legislation or regulation 1 1 mark for an example of safeguards created by the profession, legislation or regulation 1 1 mark for safeguards in the work environment 1 1 mark for an example of safeguards in the work environment 1 4 c. Specific legal and ethical issues that could arise from tax engagements 1 mark for discussion of the specific legal and ethical issues that could arise from tax engagements, subject to a maximum of 7 points 7 d. Powers available to ICAN in enforcing the ethical standards of its members 2 marks for discussion of powers available to ICAN in enforcing the ethical standards of its members, subject to a maximum of 3 points 6 Total 20

a. The vision, mission and objectives of the Nigeria Extractive Industries Initiative (NEITI) Vision The vision of NEITI is to build a NEITI that is accountable, effective, well- resourced and result oriented. 81 Mission The mission is to cultivate a culture of transparency, accountability, due process and zero-tolerance for corruption in Nigeria’s extractive industries, for the benefit of the citizenry. The primary objectives of the NEITI are to:

• Ensure due process and transparency in the payments made by all extractive industry companies to the Federal government and statutory recipients;

• Monitor and ensure accountability in the revenue receipts of the Federal Government from extractive industry companies;

• Eliminate all forms of corrupt practices in the determination, payment, receipts and posting of revenue accruing to the Federal Government from extractive industry companies;

• Ensure transparency and accountability by government in the application of resources from payments received from extractive industry companies; and

• Ensure conformity with the principles of global Extractive Industries Transparency Initiative (EITI).

b. Responsibilities of the under listed stakeholders

(i) The government All levels and arms of government; ministries, extra-ministerial departments and agencies where applicable shall:

• Implement and regularly review tax policies and laws;

• Provide information on all revenue collected on a quarterly basis;

• Ensure adequate funding, administrative and operational autonomy of tax authorities; and

• Ensure a reasonable transition period of between three and six months before implementation of a new tax.

(ii) The taxpayer A taxpayer is a person, group of persons or an entity that pays or is liable to tax. The taxpayer is the most critical stakeholder and primary focus of the tax system. The taxpayer shall consider tax responsibilities as a civic obligation and constant duty that must be discharged as and when due. The taxpayer shall be entitled to:

• Relevant information for the discharge of tax obligations;

• Receive prompt, courteous and professional assistance in dealing with tax authorities; 82

• Raise objection to decisions and assessments and receive response within a reasonable time;

• A fair and impartial appeal; and

• Self-representation or by any agent of choice, provided an agent acting for financial reward shall be an accredited tax practitioner.

(iii) Revenue agencies Any agencies responsible for the collection and administration of revenue shall:

• Treat the taxpayer as a customer;

• Ensure efficient implementation of tax policies, laws and international treaties;

• Facilitate inter-agency co-operation and exchange of information;

• Undertake timely audits and investigations;

• Undertake tax awareness and taxpayers’ education; and

• Establish a robust process to prevent, detect and punish corrupt tax officials.

Examiner’s report The question tests candidates’ understanding of the vision, mission, and objectives of the Nigeria Extractive Industries Transparency Initiative (NEITI) and the responsibilities of specified stakeholders as provided for in the National Tax Policy (NTP), 2017. About 40% of the candidates attempted the question and they showed a poor understanding of the requirements of the question. Therefore, their performance was below average. The commonest pitfall was the inability of the candidates to explain the vision and mission of NEITI. Candidates are advised to read the Institute’s Study Text and other relevant textbooks on the operations of NEITI and responsibilities of various stakeholders as enshrined in the NTP, 2017 when preparing for future examinations. 83

Marking guide Marks Marks a. Vision, mission and objectives of NEITI 1 mark for discussion of the vision of NEITI 1 1 mark for discussion of the mission of NEITI 1 1 mark for discussion of the objectives of NEITI, subject to a maximum of 4 points 4 6 b. i Responsibilities of the government as provided for in the National Tax Policy 2017 1 mark for discussion of the responsibilities of the government, subject to a maximum of 3 points 3 ii. Responsibilities of the taxpayer as provided for in the National ax Policy 2017 1 mark for discussion of the responsibilities of the taxpayer, subject to a maximum of 3 points 3 iii. Responsibilities of the revenue agencies as provided for in the National Tax Policy 2017 1 mark for discussion of the responsibilities of the revenue agencies, subject to a maximum of 3 points 3 Total 15

ECO& Co (Chartered Accountants) Zaria Road, Kaduna Date: The General Manager Kanadu Nigeria Limited Kaduna Dear Sir, RE: TAX MATTERS We refer to your request on the computation of capital gains tax payable, cost of undisposed property, roll-over relief and due date(s) for the payment of the tax liabilities in respect of some transactions embarked upon by the company. Our comments are as follows:

a. Capital gains tax payable As shown in the attached appendix 1, the company made a chargeable gain ofN10,200,000 on the disposal of part of its land. In line with the provisions of Capital Gains Tax Cap C1 LFN 2004 (as amended), the company will pay 84 tax at the rate of 10% and this gives N1,020,000. This should be paid to the Federal Inland Revenue Service integrated office in Kaduna.

b. New cost of undisposed property This is arrived at by deducting the cost of the part (land) disposed from the total cost of the property. That is, N75,000,000 – N15,300,000 = N59,700,000.

c. Roll-over relief The company utilised the whole proceeds derived from the disposal of land (N25,500,000) in acquiring another land in the State Capital for the purpose of the business. However, the re-acquisition of the new land took place more than 12 months from the date of the disposal (May 2022 – July 2023). The Capital Gains Tax Act 2004 (as amended) specifies as part of conditions for grant of roll-over relief, that re-acquisition of a new asset must take place within 12 months of disposal. In view of this provision of the Act, the company does not qualify for any roll-over relief.

d. Due date(s) for the payment of tax liabilities The disposal of the land took place in May 2022. In line with the provisions of Section 2, Finance Act 2020), the due date for the payment of the capital gains tax is June 30, 2022. We hope this report adequately represents the mandate given to us. Should you require further clarification, we will be glad to address it. Yours faithfully, For: ECO & Co (Chartered Accountants) Tunji Ojo Principal Partner Appendix 1: Determination of capital gains tax N’000 Cost of land 8,500 Sand filling 1,500 Factory cost 65,000 Total cost of the factory 75,000 N’000 Sales proceeds 25,500 Less: Cost of acquisition (W1) 15,300 Chargeable gain 10,200 Capital gains tax @ 10% of N10,200 1,020 85

Workings 1: Cost of part disposed Cost = A x C A + B Where, A = Sales proceeds = N25,500,000 B = Market value of part undisposed = N99,500,000 C = Overall cost of the asset = N75,000,000 Therefore, Cost = N25,500,000 N25,500,000 + N99,500,000 𝑥 N75,000,000 = N25,500,000 N125,000,000 𝑥 N75,000,000 = N15,300,000

Examiner’s report The question tests candidates’ understanding of the provisions of Capital Gains Tax Act 2004 (as amended) in respect of tax computations and roll-over relief. 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 apply the relevant provisions of the Act in respect of time lag between the date of disposal of old asset and acquisition of new asset in the determination of roll-over relief. Candidates are advised to read the Institute’s Study Text and other relevant textbooks, as this would go a long way in assisting them to perform better in future examinations.

Marking guide Marks Marks a. Memo (address) ½ Memo (heading) ½ Computation of capital gains tax payable Cost of land 1 Sand filling 1 Factory cost 1 Total cost of the property 1 Sales proceeds 1 Cost of acquisition 1 Chargeable gain 1 Capital gains tax 1 Workings on cost of acquisition 1 10 86

b. New cost of undisposed property Correct computation (N59,700,000) 2 c. Roll-over relief 1 mark for disclosing the fact that the re- acquisitiontook place after 12 months 1 1 mark for the recommendation that the companydoes not qualify for roll-over relief 1 2 d. Due date(s) for payment of tax liabilities June 30, 2022 1 Total 15

ACC& Co (Chartered Accountants) Lagos INTERNAL MEMO Date: From: Senior Tax Consultant To: Principal Partner RE: TREATY SHOPPING AND ECOWAS COMMON EXTERNAL TARIFF Sequel to your directive in respect of the request of our client for advise on concept and practice of “treaty shopping”, strategies being employed to curb treaty shopping; features of ECOWAS common external tariff and the trade defense measures put in place to guide the operations of the common external tariff, my comments are as follows:

a. Concept and practice of “treaty shopping” Concept

(i) Treaty shopping is a situation where a person, who is resident in one country (say the “home” country) and earns income or capital gains from another country (say the “source” country), is able to benefit from a tax treaty between the source country and yet another country (say the “third’ country).

(ii) The situation often arises where a person is resident in the home country but the home country does not have a tax treaty with the source country.

(iii) Treaty shopping is an analysis of tax treaty provision by non-treaty party to structure an international transaction or operation so as to gain or take advantage of a particular treaty benefit. Practice (i) A resident of a state that is not a party to the double taxation treaty establishes an entity within a state that is party to the treaty in order to take advantage of its provision.

(ii) Consider a situation that there is double taxation treaty between country A and country B. Instead of a company resident in country C (which does not have a tax treaty with country A) investing directly in country A, it establishes a legal entity in country B through which it invests in country A in order to take advantage of country A/country B tax treaty to minimise its tax liability. Meanwhile, since there is no tax treaty between country C and the treaty countries (that is, countries A and B), resident of country A and B will not receive equal tax treatment with respect to income derived from country C. Therefore the principle of reciprocity is breached.

b. The strategies being employed by various countries in mitigating the menace of treaty shopping in international transactions

(i) The problem of treaty shopping could be tackled through anti-treaty shopping provisions despite the fact that it is one of the most complex international tax rules.

(ii) Some countries have also tackled the problem of treaty shopping by includingin their tax treaties, specific provision referred to as “limitation on benefit” or “LOB”. These provisions limit the benefits under the treaties in certain circumstances.

(iii) Companies which are not bona fide residents of the treaty countries or which are set up for treaty shopping purpose may be denied the treaty benefits.

c. Features of ECOWAS Common External Tariff (CET)

(i) The ECOWAS common external tariff is one of the principal instruments for harmonising ECOWAS member states and strengthening its common market.

(ii) To this end, the ECOWAS authority of heads of State and government established an ECOWAS customs necessitating the formulation of a common external tariff with a common nomenclature so that customs procedures are transparent, readily followed and delays at borders decreased, is a key stone in achieving this union.

(iii) In January 2006 in Niamey, the Authority of Heads of State and Government of ECOWAS adopted a decision establishing the ECOWAS- CET which draws on the basic UEMOA CET composed of four tariff bands, or rates of customs duty. Below is a table depicting the four tariff bands: Category Percentage of duties

(iv) The ECOWAS tariff nomenclature has been migrated from 2007 to the 2012 version (HS2012) introduced by the World Customs Organisation (WCO).

(v) On 25th October 2013, ECOWAS member states adopted the ECOWAS Common External Tariff with the 5-tariff band structure.

(vi) Application of uniform tariff rate - CET is the application of the same customs duties, import quotas and preferences by a group of countries in a custom union.

(vii) The CET is one of the major characteristics of a custom union, which is a type of trade bloc formed through a trade agreement between governments of multiple tax jurisdictions. Good description 0 0% Essential social goods 1 5% Goods of primary necessity, raw materials and specific inputs 2 10% Intermediate goods 3 20% Final consumption goods Category Percentage of duties Good description 0 0% Essential social goods 1 5% Goods of primary necessity, raw materials and capital goods 2 10% Intermediate goods and inputs 3 20% Final consumption goods or finished goods 4 35% Specific goods for economic development

d. The trade defense measures put in place in guiding the operations of the common external tariff include:

(i) Safeguard measures; especially in the protection of local industries; (ii) Anti-dumping measures, through prohibition of certain items; (iii) Anti-subsidy and countervailing measures; and (viii) Supplementary protection measures. Thank you. Owo Ruh Senior Tax Consultant

Examiner’s report The question tests the candidates’ understanding of the concept and practice of treaty shopping and features of Economic Community of West African States (ECOWAS) common external tariff framework. About 30% of the candidates attempted the question, and they showed a poor understanding of it, resulting in below average performance. The commonest pitfall was the candidates’ inability to identify correctly the trade defense measures put in place to guide the operations of the common external tariff framework. 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 regional integration and trade blocs.

Marking guide Marks Marks a. Memo (address) ½ Memo (heading) ½ Concept of treaty shopping 1 mark for discussion of the concept of treaty shopping, subject to a maximum of 2 points 2 Practice of treaty shopping 1½ marks for discussion of the practice of treaty shopping, subject to a maximum of 2 points 3 6 b. Strategies being employed by various countries in curbing treaty shopping in international transactions 1 mark for discussion of the strategies being employed in curbing treaty shopping, subject to a maximum of 2 points 2

c. Features of ECOWAS common external tariff 1 mark for discussion of the features of ECOWAS common external tariff, subject to a maximum of 4 points 4 d. Trade defense measures put in place to guide The operations of ECOWAS common external Tariff 1 mark for discussion of the trade defense measures put in place to guide the operations of ECOWAS common external tariff, subject to a maximum of 3 points 3 Total 15 ICAN/241/V/C3 Examination No....................... THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA PROFESSIONAL LEVEL EXAMINATION – MAY 2024 STRATEGIC FINANCIAL MANAGEMENT EXAMINATION INSTRUCTIONS PLEASE READ THESE INSTRUCTIONS BEFORE THE COMMENCEMENT OF THE PAPER

1. Check your pockets, purse, mathematical set, etc. to ensure that you do not have prohibited items such as telephone handset, electronic storage device, programmable devices, wristwatches or any form of written material on you in the examination hall. You will be stopped from continuing with the examination and liable to further disciplinary actions including cancellation of examination result if caught.

2. Write your EXAMINATION NUMBER in the space provided above.

3. Do NOT write anything on your question paper EXCEPT your examination number.

4. Do NOT write anything on your docket.

5. Read all instructions in each section of the question paper carefully before answering the questions.

6. Do NOT answer more than the number of questions required in each section, otherwise, you will be penalised.

7. All solutions should be written in BLUE or BLACK INK. Any solution written in PENCIL or RED INK will not be marked.

8. A formula sheet and discount tables are provided with this examination paper. THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA

CODAD Tax Consultants, Abeokuta February 1, 2023 The Managing Director Colanim Nigeria Limited Abeokuta Dear Sir, Re: Computation of Adjusted Profit, Tax Liabilities and Other Related Matters We refer to your request on computation of adjusted profit and tax liabilities for the financial year ended December 31, 2022; professional advice on treatment of donations declared in 2018 and 2021; and the implications on the company’s pioneer status and tax liabilities as a result of production and sale of an unapproved product during the pioneer period. We hereby present a report for your review.

a. Adjusted profit As shown in appendix 1, the adjusted profit of the company for the year ended December 31, 2022 was N36, 615,000.

b. Tax liabilities for the relevant assessment years Appendix 2 provides the computations of the companies income tax and tertiary education tax payable for 2020, 2021, 2022 and 2023 assessment years.

c. Status of gross dividends declared for financial years 2018 and 2021

(i) The Companies Income Tax Act 2004 (as amended) provides that dividends declared and payable out of profits made during the pioneer years do not attract withholding tax. Therefore, the shareholders will not suffer any withholding tax (WHT) on dividends declared and received in the financial year ended December 31, 2018.

(ii) However, a new business was deemed to have commenced with effect from January 1, 2019. Thus, dividends declared and paid to the shareholders will suffer WHT of 10%. For the dividends declared in 2021, 10% (that is, N216,000 will be deducted as WHT and remitted to the relevant tax authority. The net balance, N1,944,000 (that is, N2,160,000 – N216,000) will be paid to the shareholders.

d. The implications on the pioneer status and tax liabilities if the investigation on production and sales of yeast in 2018 is validated include:

(i) Cancellation of the pioneer certificate; (ii) The effective date of cancellation is December 31, 2017; (iii) Commencement rule for new businesses will be used, starting from January 1, 2018; and 63

(iv) Profit made during the financial year ended December 31, 2018 will be subjected to companies income tax and tertiary education tax. We hope that this report adequately represents the mandate given to us. Should you need any further clarification on this, we will be glad to address it. Yours faithfully, For: CODAD Tax Consultants Show Wande Appendix 1: Adjusted profit For the year ended December 31, 2022 (Year 2023 assessment) N’000 N’000 Net profit as per accounts 29,730 Add back: Depreciation 5,900 Preliminary expenses written off 1,050 Legal (reacquisition of office lease) 950 Allowance for doubtful debts (general prov.) 400 Penalty for late filing of returns 25 8,325 38,055 Less: Non- taxable income Dividends received (net) 1,440 Adjusted profit 36,615 Appendix 2: Tax liabilities for 2020; 2021; 2022; and 2023 assessment years 2020 assessment year N’000 N’000 Adjusted/assessable profit 16,250 Less: Losses b/f (see W1) 23,070 Losses relieved (16,250) (16,250) Unrelieved losses that lapsed 6,820 Capital allowances for the year 25,025 Capital allowances utilised Nil Unrecouped capital allowances c/f 25,025 _______ Total profit Nil Companies income tax @ 20% Nil Tertiary education tax @ 2% of N16,250 325 64 2021 assessment year N’000 N’000 Adjusted/assessable profit 18,150 Capital allowances for the year 10,395 Unrecouped capital allowances b/f 25,025 Capital allowances available for utilisation 35,420 Capital allowance utilised (18,150) (18,150) Unrecouped capital allowances c/f 17,270 _______ Total profit Nil Companies income tax @ 20% Nil Tertiary education tax @ 2% of N18,150 363 2022 assessment year N’000 N’000 Adjusted/assessable profit 20,200 Capital allowances for the year 19,383 Unrecouped capital allowances b/f 17,270 Capital allowances available for utilisation 36,653 Capital allowance utilised (20,200) (20,200) Unrecouped capital allowances c/f 16,453 Total profit Nil Companies income tax @ 20% Nil Tertiary education tax @ 2% of N20,200 404 2023 assessment year N’000 N’000 Adjusted/assessable profit 36,615 Capital allowances for the year 9,854.97 Unrecouped capital allowances b/f 16,453 Capital allowances available for utilisation 26,307.97 Capital allowance utilised 26,307.97 (26,307.97) Unrecouped capital allowances c/f Nil Total profit 10,307.03 Companies income tax @ 30% of N10,307.03 3,092.109 Tertiary education tax @ 2½% of N36,615 915.375 65

Workings (1) Balance of adjusted profits/ (losses) for the pioneer period Year ended Adjusted profit/(losses) N’ 000 December 31, 2016 (14,700) December 31, 2017 (12,200) December 31, 2018 3,830 Total (23,070) (2) Capital allowances Non-ind building Ind. Plant Furniture building & fittings Capital allowance 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 2020 A/Y Cost 15,000 12,000 6,200 1,800 4,800 Additions 7,400 4,000 5,600 IA (2,250) (1,800) (6,800) (1,450) (5200) 17,500 AA (1,275) (1,020) (1,700) (870) (1,300) 6,165 Inv. Allow (10%) (1,360) 1,360 25,025 2021 A/Y TWDV 11,475 9,180 5,100 3,480 3,900 Additions 18,000 IA (2,700) 2,700 AA (1,275) (2,550) (1,700) (870) (1,300) 7,695 10,395 2022 A/Y TWDV 10,200 21,930 3,400 2,610 2,600 Additions 8,880 8,400 IA (4,440) (4,200) 8,640 AA (1,275) (2,550) (2,810) (870) (2,350) 9,855 Inv. Allow (10%) (888) 888 19383 2023 A/Y TWDV 8,925 19,380 5,030 1,740 4,450 AA (1,275) (2,550) (2,809.99) (870) (2,349.98) 9,854.97 66 Motor vehicle Working notes: 2020 assessment year Non-building expenditure IA = 15% of N15,000,000 = N2,250,000 AA = cost – IA n where n = 100%/AA% = 100%/10% = 10 Therefore, AA = N15,000,000 – N2,250,000 = N1,275,000 10 Furniture and fittings The cost = N2,400,000 – N600,000 (part disposed) =N1,800,000 2021 assessment year Industrial building expenditure AA of old asset = N1,020,000 AA of new asset = N18,000,000 – N2,700,000 = 1,530,000 10 Total AA = 2,550,000 2022 assessment year Plant expenditure AA of old asset = N1,700,000 AA of new asset = N8,880,000 –N4,440,000 = 1,110,000 4 Total AA = 2,810,000 2023 assessment year Plant AA = N2,810,000 – N10 (retained in the books in respect of the item with expired tax life)= N2,809,990 Motor vehicle AA = N2,350,000 - N20 (retained in the books in respect of the 2 items with expired tax life)= N2,349,980 67

Examiner’s report The question is divided into four parts. The first part tests the candidates’ understanding of the provisions of Companies Income Tax Act Cap C21 LFN (CITA) 2004 (as amended) in respect of computations of adjusted profit. The second part tests the candidates’ knowledge of computations of tax liabilities. The third part tests candidates’ understanding of the treatment of gross dividends declared during the pre- and post- pioneer periods. The fourth part tests the candidates’ knowledge of the tax implications of companies operating outside of the pioneer status. Being a compulsory question, all the candidates attempted the question. Candidates demonstrated a fair understanding of the question and performance was average. The common pitfall was the inability of some candidates to identify correctly the allowable and disallowable expenses in the computations of adjusted profit and tax liabilities of a company. 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, the CITA 2004 (as amended), and relevant Finance Acts.

Marking guide Marks Marks a) Memo (address) 1 Computation of adjusted profit Net profit as per accounts ½ Depreciation ½ Preliminary expenses written off ½ Legal (reacquisition of office lease) ½ Allowance for doubtful debts (general prov.) ½ Penalty for late filing of returns ½ Dividends received (net) ½ Adjusted profit ½ 5

b) Computation of tax liabilities 2020 Y/A Adjusted profit ½ Losses relieved ½ Total profit ½ Companies income tax ½ Tertiary education tax ½ 2021 Y/A Adjusted profit ½ Capital allowances utilised ½ 68 Total profit ½ Companies income tax ½ Tertiary education tax ½ 2022 Y/A Adjusted profit ½ Capital allowances utilised ½ Total profit ½ Companies income tax ½ Tertiary education tax ½ 2023 Y/A Adjusted profit ½ Capital allowances utilised ½ Unrecouped capital allowance c/f ½ Total profit ½ Companies income tax ½ Tertiary education tax ½ Workings 1 (balance of adjusted profit/(losses) ½ Workings 2 (Capital allowances): 2020 Y/A: IA (non-industrial building) ¼ IA (industrial building) ¼ IA (plant) ¼ IA (furniture and fittings) ¼ IA (motor vehicle) ¼ AA (non-industrial building) ¼ AA (industrial building) ¼ AA (plant) ¼ AA (furniture and fittings) ¼ AA (motor vehicle) ¼ Investment allowance (plant) ¼ Total capital allowance ¼ 2021 Y/A: IA (industrial building) ¼ AA (non-industrial building) ¼ AA (industrial building) ¼ AA (plant) ¼ AA (furniture and fittings) ¼ AA (motor vehicle) ¼ Total capital allowance ¼ 2022 Y/A: 69 IA (plant) ¼ IA (motor vehicle) ¼ AA (non-industrial building) ¼ AA (industrial building) ¼ AA (plant) ¼ AA (furniture and fittings) ¼ AA (motor vehicle) ¼ Investment allowance (plant) ¼ Total capital allowance ¼ 2023 Y/A: ¼ AA (non-industrial building) ¼ AA (industrial building) ¼ AA (plant) ¼ AA (furniture and fittings) ¼ AA (motor vehicle ¼ Total capital allowance ¼ 20

c) Comments on gross dividends declared in 2018 and 2021 1 mark for discussion of dividends declared In 2018 (pioneer period) 1 1 mark for discussion of dividends declared In 2021 (new business) _1_ 2

d) Implications on the pioneer status and tax liabilities if the investigation turned out to be validated 1 mark for discussion of the implications on the pioneer status and tax liabilities, subject to a maximum of 3 points 3 Total 30 70

a. YELE Limited Computation of adjusted profit For the year ended December 31, 2022 N’000 N’000 Gross turnover (£2 million x N1,200) 2,400,000 Less: Expenses Cost of direct materials and inputs 815,600 Expatiates personnel costs 416,200 Domestic employees’ emoluments 580,300 Administrative: Management fees (70% ofN35,000) 24,500 Power cost 4,000 Travelling 20,300 1,860,900 Adjusted profit 539,100 YELE Limited Computation of tax liabilities For 2023 assessment year N’000 Adjusted profit 539,100 Less: Capital allowances 34,250 Total profit 504,850 Companies income tax @ 30% of N504,850 151,455.00 Tertiary education tax @ 2.5% of N539,100 13,477.50 Total tax payable 164,932.50 Minimum tax computations N’000 Gross turnover 2,400,000 Add: Other income Nil 2,400,000 Less: Franked investment income Nil Turnover for minimum tax computation 2,400,000 Minimum tax @ 0.5% of N2,400,000 12,000 71 Since the companies income tax computed above is greater than the minimum tax, the company is expected to pay the companies income tax of N151,455,000 as well as the tertiary education tax of N13,477,500. This gives total tax liabilities of N164,932,500.

b. (i) Tax implications on the profit of the Nigerian company if it has its “place of management” in the UK company

• The tax authorities will treat the Nigerian company (YELE Limited) as a resident company on the basis of the place of incorporation, hence, profits made on the basis of its operation in Nigeria will be assessable to tax in Nigeria.

• Relatedly, the tax authority of the other country (Eco Group, UK in this instance) would regard the Nigerian company as resident in UK on the basis of “place of management.

• The Nigerian tax treaties (where applicable) govern the treatment of this case and affected companies can claim tax credit for the Nigerian tax in their home countries (Eco Group, UK in this instance) to avoid double taxation.

(ii) The tax implications on the profit of the Nigerian company if it is a subsidiary of the UK company include:

• A subsidiary (YELE Limited) is expected to be incorporated in Nigeria to operate as a separate legal entity from the parent company (Eco Group, UK in this instance). Thus, profits made by YELE Limited is liable for tax assessment in Nigeria;

• Even if the foreign equity-participation is 100%, such equity-ownership or the control will not affect the residence status in Nigeria once it has been incorporated in Nigeria;

• The claim by the parent company (Eco Group, UK in this instance) may raise the issues of dual residence;

• The Nigerian model double taxation agreement (DTA), in Article 4, spells out the mode of resolving the problem of dual residence between Nigeria and a treaty-country; and

• The DTA provides for the criterion of “place of incorporation” as basis of resolving dual residence. Where this fails, the problem is to be resolved by “mutual agreement”.

c. The provisions of the Finance Act 2019 in respect of taxation of non- resident companies in Nigeria are:

i) Withholding tax shall be the final tax for technical, management, consultancy or professional fees earned by non-resident companies; 72

ii) A new clause imposing tax on profits of foreign companies for online and/or electronic commercial activities, if they are deemed to have significant economic presence (SEP) in Nigeria. The SEP is to be determined by the Minister of Finance; and

iii) Non-resident companies are to file corporate tax returns with the FIRS.

Examiner’s report The question tests candidates’ understanding of the provisions of the Companies Income Tax Act 2004 (as amended) and the Finance Act 2019 in respect of computations of tax liabilities of a Nigerian subsidiary company with a foreign parent company. About 70% of the candidates attempted the question. Candidates showed a good understanding of the requirements of the question and their performance was above average. The common pitfall was the inability of some candidates to correctly state the provisions of Finance Act, 2019 in respect of taxation of non-resident companies operating in Nigeria. Candidates are advised to read the Institute’s Study Text, Pathfinders, and other relevant textbooks when preparing for future examination. 73

Marking guide Marks Marks a) Computation of tax payable Adjusted profit computation: Gross turnover 1 Cost of direct materials and inputs 1 Expatiates personnel costs 1 Domestic employees’ emoluments 1 Management fees 1 Power cost 1 Travelling 1 Adjusted profit 1 Tax liabilities computation: Capital allowances ½ Total profit 1 Companies income tax ½ Tertiary education tax ½ Minimum tax computation: Gross income ½ Turnover for minimum tax computation ½ Minimum tax _½_ 12

b) i. Tax implications if the Nigerian company has its “place of management” in the UK company 1 mark for each discussion on the tax implications, subject to a maximum of 2 points 2 ii. Tax implications if the Nigerian company is a subsidiary of the UK company 1 mark for each discussion on the tax implications, subject to a maximum of 4 points 4

c) The provisions of the Finance Act 2019 in respect of taxation of non-resident companies in Nigeria 1 mark for discussion of the provisions of the Act In respect of non-resident companies in Nigeria, subject to a maximum of 2 points 2 Total 20 74

Larrex Petroleum Nigeria Limited INTERNAL MEMO Date: From: Tax Manager To: Managing Director Re: Hydrocarbon Tax Computation and Timeframe for Incorporation of Host Communities Development Trust I refer to your request on computation of hydrocarbon tax payable for the 2022 assessment year and information on timeline for incorporation of host communities development trust in line with the provisions of Petroleum Industry Act 2021. I hereby present a report for your perusal.

a. Computation of hydrocarbon tax payable As revealed in the attached appendix 1, the company made a chargeable profit of N114,422.58 million in 2022 assessment year. With hydrocarbon tax rate of 30%, the company is expected to pay hydrocarbon tax of N34,326.774 million.

b. Timeframe for incorporation of the company’s host communities development trust and its financing This is provided for in section 236 of Petroleum Industry Act 2021 and it states that the settlor or operator on behalf of collective settlors must incorporate and be responsible for a trust overseen by a board of trustees for the benefit of host communities. The timeframe for incorporation of the trust

(i) The trust should be incorporated with the Corporate Affairs Commission (CAC) within 12 months from the effective date of the Act; or (ii) Prior to commencement of commercial operations for new licensees. Mode of financing the trust (i) This is by an annual contribution of 3% of actual operating expenditure of the preceding financial year of the upstream companies; and (ii) The fund can also be funded through donations, gifts, grants or honoraria and any profits or interests accruing to the reserve of the fund.

c. The penalty for not incorporating host communities development trust Failure to incorporate a trust will lead to revocation of licence or the lease. Thank you. Oye Dele Tax Manager 75 Appendix 1: Hydrocarbon tax N’ million N’ million Revenue: Value of crude oil sold (2.5 million barrels x $80 x N510) 102,000 Value of condensate from associated gas sold (1.6 million barrels x $65 x N510) 53,040 Value of natural gas liquid from associated gas sold (1.2 million barrels x $50 x N510) 30,600 Gross revenue 185,640 Balancing charge 0.58 Total revenue 185,640.58 Allowable deductions (Section 263): Royalties paid 60,150 Other operating cost 23,500 Repairs of plant and machinery 280 Repairs of fixture 40 Concessional rentals 20,900 First two appraisal wells cost 31,600 Decommissioning and abandonment fund 11,400 Levies and fees 150 Environmental remediation fund 1,255 NDDC fund 70 Gas re-injection wells 1,950 Purchase of information 420 Total allowable cost 151,715 Total costs subject to CPR limit (W1) (79,571.5) (79,571.5) Excess allowable cost carried forward 72,143.5 Adjusted profit 106,069.08 Less: Loss relief Nil Assessable profit 106,069.08 Less: Section 266 and 6th Schedule deductions: Capital allowance (brought forward) 12.9 Capital allowance (current year) 218.6 231.5 105,837.58 Less: Production allowances 1,415 Chargeable profit 104,422.58 Hydrocarbon tax @ 30% of chargeable profit 31,326.774 76

Workings 1: Cost price ratio (CPR) computation N’ million N’ million Gross revenue 185,640 (i) Maximum allowable @ 65% 120,666 Total operating cost 151,715 Capital allowances 231.5 Total eligible costs 151,946.5 Less: Exempted costs incurred -Section 263(1): Royalty incurred and paid 60,150 NDDC fund 70 Concessional rentals 10,900 Environmental remediation fund 1,255 72,375 (ii) Net total costs to be subject to CPR 79,571.5 Maximum allowable cost is the lower of (i) and (ii), which is N79,571.5 million.

Examiner’s report The question tests candidates’ knowledge of computations of hydrocarbon tax of a company that operates in both onshore and shallow water areas in line with the provisions of Petroleum Industry Act, 2021. About 90% of the candidates attempted the question, and majority of them showed a good understanding of its requirements, hence their performance was above average. The common pitfall of the candidates was their inability to identify correctly the allowable and disallowable expenses relevant to the computations of cost-price ratio and hydrocarbon tax. Candidates are advised to study extensively the template provided by the Federal Inland Revenue Service on computations of hydrocarbon tax and relevant sections of the Petroleum Industry Act, 2021. 77

Marking guide Marks Marks a. Memo (address) ½ Memo (Heading) ½ Computation of hydrocarbon tax Value of crude oil sold ½ Value of condensate from associated gas sold ½ Value of natural gas liquid from associated gas sold ½ Gross revenue ½ Balancing charge ½ Total revenue ½ Royalties paid ½ Other operating cost ½ Repairs of plant and machinery ½ Repairs of fixture ½ Concessional rentals ½ First two appraisal wells cost ½ Decommissioning and abandonment fund ½ Levies and fees ½ Environmental remediation fund ½ NDDC fund ½ Gas re-injection wells ½ Purchase of information ½ Total allowable cost ½ Total costs subject to CPR limit ½ Excess allowable cost carried forward ½ Adjusted profit ½ Assessable profit ½ Total capital allowance ½ Production allowances ½ Chargeable profit ½ Hydrocarbon tax ½

Workings 1: Cost price ratio: Maximum allowable @ 65% ¼ Total operating cost ¼ Capital allowances ¼ Total eligible costs ¼ Royalty paid ¼ NDDC fund ¼ Concessional rentals ¼ Environmental remediation fund ¼ Net total costs to be subject to CPR ¼ Maximum allowable cost ¼ 17 78

b. Timeframe for incorporation and funding of host communities development trust 1 mark for discussion of timeframe for incorporation of host communities development trust, subject to a maximum of 1 point 1 1 mark for discussion of timeframe for incorporation of host communities development trust, subject to a maximum of 1 point 1 2

c. Penalty for non-incorporation of a trust 1 mark for correct discussion on the penalty for non-Compliance 1 Total 20

AAAA & Co (Chartered Accountants) INTERNAL MEMO Date: From: Senior Tax Consultant To: Principal Partner Re: Engagement by BFN Limited I refer to your request in respect of our new client, BFN Limited, with regard to documentation / information to be maintained / provided by clients; documentation / information to be maintained by tax consultants; circumstances where information of the client may be disclosed to a third party; and potential risks in the new engagement and how they can be mitigated. My opinions are as follows:

a. Documentation/information to be maintained/provided by clients include:

(i) Certificate of incorporation; (ii) Certified true copies (CTC) of memorandum and articles of association; (iii) CTC of forms on directors; allotment of shares; appointment of secretary; and notice of registration; (iv) Certificate of increase in share capital including stamp duties, registration fees, board resolution, etc.; (v) Contracts, rents and its agreements; (vi) Financial matters, such as:

* Signed audited financial statements; * Books of account, ledgers, trial balance (hard and soft copies); * Non-current assets register and the documents; * Accounts and procedural manual; * Payment vouchers, receipts, etc; 79

* Banking and cash transaction documents; and * Monthly payroll and directors’ emoluments; (vii) Correspondence with tax authorities and other third parties; and (viii) Minutes of board of directors’ and annual general meetings.

b. Documentation/information to be maintained by the tax consultants include:

(i) Certified true copy (CTC) of incorporation documents (that is, Certificate of incorporation, details of directors, shareholders, secretary, share capital details, etc; (ii) Engagement letter; (iii) Company auditors, if different from the tax consultant; (iv) Audited financial statements, capital allowances, income tax; education tax and other computations; (v) Trial balance, detailed analysis and schedules on the financial statements; (vi) Correspondence with the client, tax authorities and third parties; (vii) Registration documents in respect of income tax, valued added tax, PAYE, withholding tax and other levies; (viii) Records of billings and outstanding; and (ix) Other documents, financials and non-financials.

c. Circumstances where a tax consultant may disclose information on a taxpayer to a third party when:

(i) Disclosure is permitted by law, such as:

* Production of documents or other provision of evidence in the course of legal proceedings; or * Disclosure to the appropriate public authorities of infringements of the law that come to light.

(ii) Disclosure is authorised by the client, that is, the taxpayer;

(iii) There is a professional duty or right to disclose, when not prohibited by law, for example: * To respond to an inquiry or investigation by a member body or regulatory body such as ICAN, CITN, etc,; * To protect the professional interests of a professional body, that is, ICAN, CITN, etc in legal proceedings; and * To comply with technical standards and ethics requirements. 80

d. Potential risks in handling this engagement and what can be done by the tax consultants to mitigate those risks Potential risks in handling this engagement include: (i) Non-notification of the appointment of tax consultants to the tax authorities: Failure by the client to inform the tax authorities of the appointment of the audit firm as the new tax consultants will hinder the performance of the audit firm;

(i) Communication with former tax consultants and auditors: Non- communication with the former tax consultants since their appointment is considered to be unethical and a threat to the new assignment. The communication with the former will be helpful in determining the course of the assignment; and (ii) Improper documentations and fraudulent activities of the client: This is perhaps the greatest source of threat the new tax consultants will grapple with during the course of the assignment. If this is not properly handled, the integrity of the tax consultants may be impaired. What can be done by the tax consultants in mitigating those risks include:

(i) Once the acceptance of offer to act as tax consultants has been concluded and the fees agreed, the next step is for the client to formally introduce the tax consultants to the relevant tax authorities. The audit firm needs to inform the client to do the needful by notifying the relevant tax authorities as failure to do this, will definitely have negative impact on their engagement. If this is not done, then the audit firm should terminate the offer; (ii) Communication with former tax consultants and auditors To satisfy professional ethics, a new or an incoming tax consultant is required to liaise with the former consultant and auditors in charge of the client’s tax matters. This is particularly important in this engagement as having 3 different tax consultants to the company in fifteen months looks suspicious. The new consultant will also need to: * Confirm whether or not there exists any professional reason(s) why the engagement should not be accepted; * Obtain relevant documents, audited accounts, tax computations and background information on the new assignment; and * Plan the assignment; and

(iii) The attention of the client should be drawn to its improper documentations and unprofessional practice of falsifying or suppressing vital records/information necessary for tax purposes. The implications of this act should be well documented. Also, during the course of the engagement, if the tax consultants come across any of this unprofessional act that resulted in loss of revenue to the government, the 81 client should be made to pay the difference to the tax authorities, otherwise the engagement should be dropped. Thank you. Akin Bode Senior Tax Consultant

Examiner’s report The question tests the candidates’ knowledge of the documents to be provided by new clients and what the tax consultant should maintain in his file; the circumstances in which a tax consultant may disclose information on a taxpayer to a third party; and the potential risks in handling tax engagement of a new client and what can be done to mitigate those risks. About 70% of the candidates attempted the question and they exhibited a fair understanding of its requirements. The performance was average. The common pitfall was the inability of some candidates to explain the potential risks in handling tax engagement of a new client. Candidates are advised to read widely the Institute’s Study Text, ICAN Code of Ethics, and other relevant textbooks, when preparing for future examination.

Marking guide Marks Marks a. Memo (address) ½ Memo (heading) ½ Documentation/information to be maintained/ provided by clients 1 mark for discussion of documentation/information to be maintained/provided by clients, subject to a maximum of 4 points 4 5

b. Documentation/information to be maintained/ by the tax consultants 1 mark for discussion of documentation/information to be maintained by tax consultants, subject to a maximum of 5 points 5

c. Conditions when information on taxpayers may be disclosed to a third party 2½ marks for discussion of conditions when information on taxpayers may be disclosed to a third party, subject to a maximum of 2 points 5 82

d. Potential risks in handling this engagement and what can be done by the tax consultants to mitigate those risks 1 mark for discussion of potential risks in handling the engagement, subject to a maximum of 2 points 2 1½ marks for discussion of what can be done to mitigate those risks, subject to a maximum of 2 points 3 5 Total 20

Dare & Co (Tax Consultants) 90, Benin-Abuja Road, Benin-City INTERNAL MEMO Date: From: Manager (Tax Compliance) To: Senior Partner Re: MULTIPLICITY OF TAXES, CALL FOR GLOBAL COOPERATION, AND ASSISTANCE ON TAX RELATED MATTERS Sequel to your directive, I hereby present a policy paper which addresses the issues of multiplicity of taxes and the call for global cooperation and assistance on tax related matters.

a. Causes of multiplicity of taxes in Nigeria include:

(i) The listing of 20 items in Taxes and Levies (Approved List for Collection) Act Cap T2 LFN 2004 (as amended) in favour of the local government perhaps may be one of the factors that motivates them into the inordinate drive for revenue through those items;

(ii) Administratively, most of the States Internal Revenue Service are plagued with various problems, including poor funding, lack of infrastructure, poor working condition and lack of highly skilled professionals;

(iii) Some of the State governments deliberately deny their local governments the revenue due to them and in some cases have even usurped the taxes assigned to the local governments. Consequently, the local governments, as a way of survival desperately and aggressively focus on anything that will generate revenue for them;

(iv) All the tiers of government usually fail to adequately fund their departments and agencies. This makes them to embark on aggressive 83 revenue drive even illegally in the name of increasing their internally generated revenue; and

(v) Lack of tax information and data.

b. Impact of multiplicity of taxes on tax compliance and revenue yield This is addressed from the angles of the problems arising from multiplicity of taxes and feasible solutions to the menace. Some of the problems of multiplicity of taxes include:

(i) It comes with a lot of uncertainties in the investment environment. The investors are not sure of the extent to which their incomes would be taxed. This has basically led to large corporate entities moving their operations out of some States or from Nigeria to neighbouring countries on account of multiplicity of taxes and other relevant factors; and

(ii) Tax yield is very low as a result of numerous taxes that bring in little but with high cost of administration. Some of the feasible solutions that can be applied to address the issue of multiplicity of taxes include:

(i) Streamlining the number of taxes in Nigeria in view of the low yields of many of the taxes. This will involve the review of current tax laws;

(ii) Reviewing and possible acceptance of the recommendations of the 2003 Study Group which state that all the existing taxes in Nigeria should be abolished and replaced by only two taxes imposed at the rate of 10% as follows- income tax (covering both individuals and corporate entities) and expenditure tax (covering all expenditures); and

(iii) Adequate funding of the departments and agencies by the State and Local governments.

c. Roles being performed by international organisations in global cooperation and assistance on tax matters The United Nations (UN) and the Organisation for Economic Cooperation and Development (OECD) are the two principal venues for the development of international tax norms. Their means include:

(i) The maintenance of model conventions and commentaries; (ii) Codes of conduct and guidance to countries; (iii) Organisation of various platforms where tax related matters are discussed. For example, the global forum on transparency and exchange of information for tax purposes was organised by the OECD in conjunction with the G-20 group of countries; 84

(iv) The OECD also serves as a coordinator and overseer of implementation of its agreements and has designed a number of multilateral conventions and instruments; (v) The UN and its agencies conduct international policy analysis, just like the OECD, World Bank and the International Monetary Fund (IMF); (vi) The IMF and the World Bank also work at the national level on policy analysis and recommendations; (vii) Norm setting include model conventions and multilateral treaties, international policy analysis (such as, research papers, handbooks) and oversight of implementation (such as, peer reviews and the assessment of compliance with international standards); (viii) National policy analysis and advice such as, surveillance, assessment of tax administrations and policy proposals; and (ix) Capacity building work such as, the OECD/UNDP tax inspectors without borders initiative, the global tax programme of the World Bank, the OECD global relations programme. Thank you. Baba Tolu Manager (Tax Compliance)

Examiner’s report The question tests candidates’ understanding of the causes of multiplicity of taxes in Nigeria; the impact of multiplicity of taxes on tax compliance and revenue yield; and the roles of international organisations in global cooperation and assistance on tax matters. About 40% of the candidates attempted the question and they showed a poor understanding of the requirements of the question. Therefore, their performance was below average. The common pitfall was the inability of the candidates to explain the roles of international organisations in global cooperation and assistance on tax matters. Candidates are advised to read the Institute’s Study Text and other relevant textbooks when preparing for future examination.

Marking guide Marks Marks a) Memo (address) ½ Memo (introduction) ½ Causes of multiplicity of taxes in Nigeria 1 mark for discussion of causes of multiplicity of taxes in Nigeria, subject to a maximum of 4 points 4 5 85

b) Impact of multiplicity of taxes on tax compliance and revenue yield 1 mark for discussion of problems of multiplicity of taxes, subject to a maximum of 2 points 2 1 mark for discussion of solutions to multiplicity of taxes, subject to a maximum of 2 points 2 4

c) I½ marks for discussion of roles being performed by international organisations in global cooperation and assistance on tax matters, subject to a maximum of 4 points 6 Total 15

Blaqqy Tax Consultants Plot 5, Lagos Road, Kano Date: The Managing Director Suruz Limited 19 Sokoto Way Kano Dear Sir, Re: Computation of Capital Gains Tax on Assets Disposed and Other Related Tax Matters We refer to your request on determination of relief; capital gains tax payable on assets disposed; and professional advice on the provisions of the Finance Act 2021 in respect of disposal/acquisition of government securities and shares in Nigerian listed companies. Our comments are as follows:

a. Relief (if available) on the disposal and re-acquisition of plant, property and equipment and motor vehicle The results as presented in Appendix I reveal that the roll-over relief on land and building is N7,550,000 and on machinery is N800,000. Although, there was an acquisition of a new motor vehicle when the old one was disposed, there is no roll-over relief to be claimed as motor vehicle is not among the classes of assets that are stated in the Capital Gains Tax Act 2004 (as amended). 86

b. Determination of capital gains tax liabilities on asset and investment disposed Results in appendix 2a suggest that no capital gains tax liability is due on land and building. This is because of the full roll-over relief enjoyed by the company for re- investment of N42.7 million on new asset, when N33 million was received from the disposal of the old asset. Capital gains tax payable on machinery is N68,600 as the company is entitled to a partial roll-over relief. As no roll-over is claimed on motor vehicle, the company is liable to pay a capital gains tax of N28,000. As for disposal of premium bonds and savings certificate at a gain (see Appendix 2b), no capital gains tax is payable on them. This is as a result of the fact that these investments are variants of Federal Government securities.

c. The provisions of section 2 of Finance Act 2021, in respect of disposal/re acquisition of ordinary shares in Nigerian listed companies The gains accruing to a person on disposal of its shares in any Nigerian company registered under the Companies and Allied Matters Act shall be chargeable gains under the Act, except where:

(i) The proceeds from such disposal are reinvested within the same year of assessment in the acquisition of shares in the same or other Nigerian companies, provided that tax shall accrue proportionate on the portion of the proceeds which are not reinvested in the manner stipulated above; or

(ii) The disposal proceeds, in aggregate, is less than N100 million in any 12 consecutive months, provided that the person making the disposals shall render appropriate returns to the Revenue Service on an annual basis; or

(iii) The shares are transferred between an approved borrower and lender in a regulated securities lending transaction as defined under CITA 2004 (as amended). We hope that this report adequately represents the mandate given to us. Should you need any further clarification on this, we will be glad to address it. Yours faithfully, For: Blaqqy Tax Consultants Ola Niyi Senior Partner 87 Appendix I: Roll-over relief Land and building Machinery N’000 N’000 Lower of: Sales proceeds on disposal of old asset 33,000 10,230 and Amount re-invested in new asset 42,700 9,500 Less: Cost of old asset 25,450 8,700 Roll-over relief 7,550 800 Working note on motor vehicle: In line with the provisions of Capital Gains Tax Act 2004 (as amended), motor vehicle is not one of the classes of assets that qualify for a roll-over relief. Appendix 2a: Capital gains tax computation on property, plant and equipment and motor vehicle Land and building Machinery Motor Vehicle N’000 N’000 N’000 N’000 N’000 N’000 Sales proceeds 33,000 10,230 3,500 Less: Cost of acquisition 25,450 8,700 3,210 Incidental cost of disposal 360 25,810 44 8,744 10 3,220 7,190 1,486 280 Less: Roll-over relief 7,550 800 Nil Chargeable gains Nil 686 280 Capital gains tax @ 10% of chargeable gains Nil 68.6 28 Appendix 2b: Capital gains tax computation on investment Savings certificate N’000 N’000 Sales proceeds 1,315 Less: Cost of acquisition 1,300 Incidental cost of disposal 10 1,310 Chargeable gains _5_ Capital gains tax @ 10% of chargeable gains Nil 88

Examiner’s report The question tests candidates’ understanding of the provisions of Capital Gains Tax Act Cap C1 LFN 2004 (as amended) and the Finance Act, 2021 in respect of roll-over relief and 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 above average. The common pitfall was the inability of some candidates to explain the provisions of the Finance Act 2021 in respect of disposal and re-acquisition of ordinary shares in listed Nigerian companies. Candidates are advised to read the Institute’s Study Text, Finance Act, 2021 and other relevant textbooks, as this would go a long way in assisting them to pass future examinations.

Marking guide Marks Marks a) Memo (address) ½ Computation of roll-over relief Land and building: Sales proceeds ¼ Amount re-invested ¼ Cost of old asset ¼ Machinery: ¼ Sales proceeds ¼ Amount reinvested ¼ Cost of old asset ¼ Roll-over relief ¼ Motor vehicle (working note) ½ 3 _______

b) Computation of capital gains tax Land and building: Sales proceeds ½ Cost of acquisition ½ Incidental cost of disposal ½ Chargeable gains ½ Capital gains tax ½ Machinery: Sales proceeds ½ Cost of acquisition ½ Incidental cost of disposal ½ Chargeable gains ½ Capital gains tax ½ 89 Motor vehicle: Sales proceeds ½ Cost of acquisition ½ Incidental cost of disposal ½ Chargeable gains ½ Capital gains tax ½ Savings certificate: Sales proceeds ½ Cost of acquisition ½ Incidental cost of disposal ½ Chargeable gains ½ Capital gains tax ½ 10

c) The provisions of the Finance Act 2021 in respect of disposal and re-acquisition of ordinary shares in listed Nigerian companies 1 mark for each discussion of the provisions of the Finance Act 2021 in respect of disposal and Re-acquisition of ordinary shares in listed Nigerian Companies, subject to a maximum of 2 points 2 Total 15

Chukwu & Co. (Tax Consultants) 20, Nature Road, Igbogbo, Lagos State INTERNAL MEMO Date: …. From: Senior Tax Consultant To: Principal Partner Re: EPS Mining Limited I refer to your directive on the above-named client’s request on the objectives of pre- investigation meeting; tax implications of lateness in filing VAT returns and remittance of money collected; and computation of tax liabilities for 2023 assessment year. My comments on each of the thematic areas are as follows:

a. Objectives of a pre-investigation meeting

(i) Informing the taxpayer of the purpose of the investigation. (ii) Confirming background information of the taxpayer earlier obtained in the surveillance or pre-investigation activities assessment file. (iii) Familiarisation with the company’s accounting and operational systems. (iv) Giving the taxpayer opportunity to express their views on the investigation. 90

(v) Seeking the cooperation of the taxpayer in terms of providing books and records and explanation where necessary.

b. Tax implications of lateness in filing returns and remittance of value added tax collected Sections 15 and 16 of Value Added Tax Act 2004 (as amended) specify the need for a taxable person to render returns and remission of tax collected. The effect of failure to render returns and non-remittance of tax collected are captured in the same Act in Sections 18 and 19. Where a taxable person fails to render returns or renders an incomplete or inaccurate returns, the Revenue Service shall assess, to the best of its judgment, the amount of tax due on the taxable goods and services purchased or supplied by the taxable person (Section 18). If a taxable person does not remit the tax within the time specified in the Act (section 15), a sum equal to 10% of the tax not remitted and interest at the prevailing CBN minimum re-discount rate, shall be added to the tax not remitted. The provisions of the CITA relating to collection and recovery of unremitted tax, penalty and interest shall apply (Section 40, Finance Act 2019).

c. Tax payable As shown in the attached appendix 1, the company is liable to pay companies income tax of N31,896,000 and tertiary education tax of N2,815,250. This gives a total tax payable of N34,711,250. These tax liabilities are derived from the company’s adjusted profit of N112,610,000 and total profit of N106,320,000. Should you need further clarifications, please feel free to contact me. Ola Bisi Senior Tax Consultant Appendix 1: Tax payable EPS Mining Limited Computation of adjusted profit For the year ended December 31, 2022 N’000 N’000 Net profit as per accounts 96,710 Add back: Depreciation 10,750 Donation- Cultural group 350 Improvement to office building 1,200 Transfer to revenue reserve 3,600 Formation expenses written off 2,400 91 Fines and penalty paid 3,000 21,300 118,010 Less: Non- taxable income Dividends received (net) 5,400 Adjusted profit 112,610 EPS Mining Limited Computation of tax liabilities For the 2023 assessment year N’000 Adjusted profit 112,610 Less: Capital allowances 6,290 Total profit 106,320 Companies income tax @ 30% of N106,320 31,896.00 Tertiary education tax @ 2.5% of N112,610 2,815.25 Total tax payable 34,711.25 Computation of minimum tax N’000 Gross turnover 355,400 Dividend received (gross) N5,400/0.9 6,000 361,400 Less: Franked investment income (Dividend) 6,000 Net turnover for minimum tax computation 355,400 Minimum tax @ 0.5% of N355,400 1,777

Examiner’s report The question is divided into three parts. The first part tests the candidates’ understanding of the objectives of pre-investigation meeting. The second part tests the candidates’ knowledge of tax implications of lateness in filing returns and remittance of value added tax collected to the relevant tax authorities. The third part tests the candidates’ knowledge 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, resulting in an average performance. The common pitfalls were the candidates’ inability to identify correctly the disallowable expenses in the computations of adjusted profit and tax liabilities of a company. Candidates are advised to read the Institute’s Study Text, Pathfinders, and other relevant textbooks when preparing for future examination.

Marking guide Marks Marks a. Memo (address) ½ Memo (heading) ½ Objectives of a pre-investigation meeting 1 mark for each discussion of the objectives of a pre-investigation meeting, subject to a maximum of 3 points 3 4

b. Tax implications of lateness in filing returns and remittance of value added tax collected 1½ mark for discussion of tax implication of lateness in filing returns 1½ mark for discussion of tax implication of lateness in remitting value added tax collected 3

c. Computation of tax liabilities Adjusted profit computation: Net profit as per account ½ Depreciation ½ Donation- Cultural group ½ Improvement to office building ½ Transfer to revenue reserve ½ Formation expenses written off ½ Fines and penalty paid ½ Dividends received (net) ½ Adjusted profit ½ Total tax computation: Capital allowances ½ Total profit ½ Companies income tax ½ Tertiary education tax ½ Minimum tax computation: Gross turnover ½ Dividends ½ Minimum tax ½ 8 Total 15 THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA