Advanced Taxation · May 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

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