Advanced Taxation · 2025

JASCOBAN & Co (TAX CONSULTANTS) Mowe, Ogun State Date: The Managing Director Nancy Nigeria Limited Enugu Dear Sir, RE: Computation of Adjusted Profit and Tax Liabilities for the Relevant Assessment Years We refer to your request on computation of adjusted profit for the year ended December 31, 2024 and tax liabilities for 2021, 2022, 2023, 2024 and 2025 assessment years. Our comments are as follows:

a. Adjusted profit for the year ended December 31, 2024 As shown in the attached appendix 1, the adjusted profit of the company for the year ended December 31, 2024 is N43,300,000.

b. Tax liabilities for 2021- 2025 assessment years Appendix 2 presents the report of the companies income tax and tertiary education tax payable for 2021 through 2025 assessment years, while that of capital gains tax is in appendix 3.

c. Provisions of the CITA 2004 (as amended) on back duty audit

i. The CITA 2004 (as amended) provides for the conduct of back duty audit to be conducted on a taxpayer if for instance the tax returns earlier submitted is suspected to contain errors or omissions, with deliberate intention of the taxpayer; or failure to disclose in full any income or earnings in the returns submitted. ii. The principal Act allows the tax authority to go back as far as 6 years before the year of examination. iii. During the course of the audit, the records of the taxpayer are audited to examine the truth in the information that were earlier produced in the annual returns. iv. The tax computation is reviewed based on the findings from the audit exercise. This is compared with the results in the tax computations earlier submitted. v. The taxpayer is mandated to pay if there is shortfall in the amount of tax liabilities earlier made in form of additional assessment. vi. However, this additional assessment arising from this audit is subject to the objection and appeal procedures. 56 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, Dean Jayeola Appendix 1: Adjusted profit for the year ended December 31, 2024 N’000 N’000 Net profit as per accounts 24,950 Add back: Depreciation 5,500 Improvement to industrial warehouse 1,000 General allowance for doubtful debts 4,350 Legal- acquisition of long lease 1,500 Legal- issue of shares 1,400 Loss on disposal of motor vehicle 1,800 Provision of unbranded xmas hampers 1,100 Income tax provisions 1,500 Preliminary expenses written off 1,200 Transfer to general reserve 2,000 21,350 46,300 Deduct: Non-taxable items Excess on revaluation of industrial building 1,300 Dividend received (net) 1,700 3,000 Adjusted profit 43,300 Appendix 2: Computation of tax liabilities for 2021-2025 assessment years N’000 N’000 2021 assessment year Basis period: 1/7/20 - 31/12/20 Adjusted loss 27,950 Capital allowance for the year 17,376.25 Capital allowance utilised Nil Nil Unutilised capital allowance c/f 17,376.25 _____ Total loss c/f 27,950 Companies income tax @ 20% Nil Tertiary education tax @ 2% of adjusted profit Nil 57 2022 assessment year Basis period: 1/1/21 - 31/12/21 Adjusted profit 2,600 Unrelieved loss b/f 27,950 Loss relieved (2,600) (2,600) Unrelieved loss c/f 25,350 Capital allowance for the year 4,752.5 Capital allowance b/f 17,376.25 Capital allowance available 22,128.75 Capital allowance utilised Nil Nil Unutilised capital allowance c/f 22,128.75 Total profit Nil Companies income tax @ 20% Nil Tertiary education tax @ 2.5% of N2,600,000 65 2023 assessment year Basis period: 1/1/22 - 31/12/22 Adjusted profit 6,200 Unrelieved loss b/f 25,350 Loss relieved (6,200) (6,200) Unrelieved loss c/f 19,150 Capital allowance for the year 8,742.5 Capital allowance b/f 22,128.75 Capital allowance available 30,871.25 Capital allowance utilised Nil Nil Unutilised capital allowance c/f 30,871.2 Total profit Nil Companies income tax @ 30% Nil Tertiary education tax @ 2.5% of N6,200,000 155 2024 assessment year Basis period: 1/1/23 - 31/12/23 Adjusted profit 12,870 Unrelieved loss b/f 19,150 Loss relieved (12,870) (12,870) Unrelieved loss c/f 6,280 58 Capital allowance for the year 5,592.5 Capital allowance b/f 30,871.25 Capital allowance available 36,463.75 Capital allowance utilised Nil Nil Unutilised capital allowance c/f 36,463.75 Total profit Nil Companies income tax @ 30% Nil Tertiary education tax @ 3% of N12,870,000 386.1 2025 assessment year Basis period: 1/1/24 - 31/12/24 Adjusted profit 43,300 Balancing charge on disposal of vehicle (W3) 825 44,125 Unrelieved loss b/f 6,280 Loss relieved (6,280) (6,280) Unrelieved loss c/f Nil 37,845 Capital allowance for the year 15,482.75 Capital allowance b/f 36,463.75 Capital allowance available 51,946.5 Capital allowance utilised (37,845) (37,845) Unutilised capital allowance c/f 14,101.5 Total profit Nil Companies income tax @ 30% Nil Tertiary education tax @ 3% of N44,125,000 1,323.75 Appendix 3: computation of capital gains tax on disposal of the motor vehicle N’000 Sales proceeds 1,200 Less: Cost of acquisition 3,000 Capital gains Nil Capital gains tax@10% Nil 59 Appendix 4: Capital allowances schedule Industrial building Cap. Allow IA 15% AA 10% Non-ind building Furniture & fittings IA 15% IA 25% IA 50% IA 50% AA 10% AA 20% AA 25% AA 25% N’000 N’000 N’000 N’000 N’000 N’000 2021 A/Y Cost 15,000 8,000 2,400 12,000 7,500 IA (2,250) (1,200) (600) (6,000) (3,750) 13,800 AA (637.5) W1 (340) (180) (750) (468.75) 2,376.25 Inv. Allowance ________ _______ ________ (1,200) ________ 1,200 17,376.25 2022 A/Y TWDV 12,112.5 6,460 1,620 5,250 3,281.25 AA (1,275) W2 (680) (360) (1,500) (937.5) 4,752.5 2023 A/Y TWDV 10,837.5 5,780 1,260 3,750 2,343.75 Addition 600 6,000 IA (150) (3,000) 3,150 AA (1,275) (680) (450) (1,500) (1,687.5) 5,592.5 8,742.5 2024 A/Y TWDV 9,562.5 5,100 1,260 2,250 3,656.25 AA (1,275) (680) (450) (1,500) (1,687.5) 5,592.5 2025 A/Y TWDV 8,287.5 4,420 810 750 1,968.75 Disposal (375) W3 1,593.75 Addition 1,000 18,000 IA (150) (9,000) 9,150 AA (1,360) (680) (450) (2,999) (843.75) 6332.75 15,482.75 c/f 7,777.5 3,740 360 6,751 750 60 Indust plant Motor Vehicle

Workings (1) 2021 Y/A (AA) Industrial building This is a case of 6 months in the basis period, hence annual AA = Cost-IA x 1/2 n = (15,000 - 2250) x 1/2 10 = N637.5 (2) 2022 Y/A (AA) Industrial building This is a case of 12 months in the basis period, hence annual AA = Cost-IA n = 15,000 - 2250 10 = N1,275 (3) 2025 Y/A (Disposal of motor vehicle) Motor vehicle IA 50% AA 25% N’000 Cost 3,000 IA 1,500 AA (for 3 years)= 375 x 3 1,125 Total capital allowance claimed up to date of disposal 2,625 TWDV at disposal (cost - total capital allow) 375 Sales proceeds 1,200 Balancing charge (sales proceeds - TWDV) 825 61

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 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 back duty audit. This being a compulsory question, all the candidates attempted the question. Candidates demonstrated a fair understanding of the question and performance was average. The commonest pitfall was the inability of some candidates to identify correctly the allowable and disallowable expenses in 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 when preparing for future examination.

Marking guide Marks Marks a. Computation of adjusted profit Heading ½ Depreciation ½ Improvement to industrial warehouse ½ General allowance for doubtful debts ½ Legal- acquisition of long lease ½ Legal- issue of shares ½ Loss on disposal of motor vehicle ½ Provision of unbranded xmas hampers ½ Income tax provisions ½ Preliminary expenses written off ½ Transfer to general reserve ½ Excess on revaluation of industrial building ½ Dividend received (net) ½ Adjusted profit ½ 7

b. Computation of tax liabilities 2021 assessment year Adjusted loss ¼ Capital allowance for the year ¼ Companies income tax ¼ Tertiary education tax ¼ 2022 assessment year 62 Adjusted profit ¼ Loss relieved ¼ Capital allowance for the year ¼ Total profit ¼ Companies income tax ¼ Tertiary education tax ¼ 2023 assessment year Adjusted profit ¼ Loss relieved ¼ Capital allowance for the year ¼ Capital allowance b/f ¼ Total profit ¼ Companies income tax ¼ Tertiary education tax ¼ 2024 assessment year Adjusted profit ¼ Loss relieved ¼ Capital allowance for the year ¼ Capital allowance b/f ¼ Total profit ¼ Companies income tax ¼ Tertiary education tax ¼ 2025 assessment year Adjusted profit ¼ Balancing charge ¼ Loss relieved ¼ Capital allowance for the year ¼ Capital allowance b/f ¼ Total profit ¼ Companies income tax ¼ Tertiary education tax ¼ Computation of capital gains tax Sales proceeds ¼ Cost of acquisition ¼ Capital gains ¼ Capital gains tax ¼ Appendix 4: Capital allowances schedule 2021 assessment year IA Industrial building ¼ IA Non-industrial building ¼ IA Furniture and fittings ¼ IA Industrial plants ¼ IA Motor vehicles ¼ AA Industrial building ¼ 63 AA Non-industrial building ¼ AA Furniture and fittings ¼ AA Industrial plants ¼ AA Motor vehicles ¼ Inv. allowance Industrial plant ¼ Total of capital allowance ¼ 2022 assessment year AA Industrial building ¼ AA Non-industrial building ¼ AA Furniture and fittings ¼ AA Industrial plants ¼ AA Motor vehicles ¼ Total of capital allowance ¼ 2023 assessment year IA Furniture and fittings ¼ IA Motor vehicles ¼ AA Industrial building ¼ AA Non-industrial building ¼ AA Furniture and fittings ¼ AA Industrial plants ¼ AA Motor vehicles ¼ Total of capital allowance ¼ 2024 assessment year AA Industrial building ¼ AA Non-industrial building ¼ AA Furniture and fittings ¼ AA Industrial plants ¼ AA Motor vehicles ¼ Total of capital allowance ¼ 2025 assessment year Disposal Motor vehicle ¼ IA Industrial building ¼ IA Industrial plant ¼ AA Industrial building ¼ AA Non-industrial building ¼ AA Furniture and fittings ¼ AA Industrial plants ¼ AA Motor vehicles ¼ Total of capital allowance ¼

Workings- 2025 assessment year Disposal Total capital allowance claimed ¼ TWDV at disposal ¼ Balancing charge ¼ 20 64

c. Provisions of CITA on back duty audit (1 mark for correct discussion of the provision, subject to a maximum of 3 points ) 3 Total 30

Dandy Producing Company Limited Computation of hydrocarbon tax For 2023 assessment year N’million N’million Revenue Value of crude oil sold 486,000 Value of condensate from associated gas sold 128,000 Value of natural gas liquid from associated gas 112,500 Gross revenue 726,500 Balancing charge Nil Total income 726,500 Allowed deductions (Section 263) Production cost 330,400 Cost of gas reinjection wells 1,600 Drilling cost 6,650 Decommissioning and abandonment 2.500 Repairs and maintenance 4,200 Royalties cost incurred and paid 171,500 NDDC charge 340 Terminaling cost 2,345 Concession rentals 74,110 Host community fund 23,200 Local government municipal levy 250 Environmental remediation fund 2,800 Total allowable deductions (S.263) 619,895 (619,895) Total costs subject to CPR limit (W1) 623,995 Excess allowable cost carried forward NIL Adjusted profit 106,605 Less: Loss relief (380) Assessable profit 106,225 Less: Section 266 and 6th schedule deductions Capital allowance for the year 2,750 Unrecouped b/f 1,350 (4,100) 65 102,125 Less: production allowance (6,401) chargeable profit 95,724 Hydrocarbon tax@15% od N95,724 14,358.6

Workings

1. Cost –price –ratio (CPR) limit N’ million N’million a. Gross revenue 726,500 I Maximun allowable @65% on gross revenue of N726,500 472,225 Total operating cost 619,895 Capital allowances 4,100 b. Total eligible costs 623,995 Less: Exempted cost incurred [(section 263 (1)] Royalties paid 171,500 NDDC Charge 340 Concession rentals 74,110 Host community fund 23,200 Environmental remediation fund 2,800

ci. Total exempted cost (271,950) ii =B-C1=Net total costs to be subject to CPR 352,045 C2 Maximum allowable cost is the lower of (i) and (ii) Which is N352,045 million D. Total allowable cost ( in line with the Practice of FIRS) =C1+C2 ( that is , Exempted cost +CPR restricted cost) =N271,950 million + N352, 045 million =N623,995 million

Note: We sincerely believe that capital allowances should not have been added to total operating cost in determining the total eligible costs in the computation of CPR limit. But in this situation, we adhered strictly to the format of FIRS, being the Federal tax administration. Henceforth, candidates are advised to adhered to this format (FIRS circular), pending any subsequent review of the same. 66

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 80% of the candidates attempted the question, and majority of them showed a good understanding of its requirements, hence their performance was above average. The commonest 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 Circular issued by the Federal Inland Revenue Service (FIRS) on hydrocarbon tax computations and relevant sections of the Petroleum Industry Act, 2021 when preparing for future examination.

Marking guide Marks (a) Computation of hydrocarbon tax Heading ½ Value of crude oil sold ½ Value of condensate from associated gas sold ½ Value of gas liquid from associated gas ½ Gross revenue ½ Production cost ½ Cost of gas reinjection wells ½ Drilling cost ½ Decommissioning and abandonment cost ½ Repairs and maintenance ½ Royalties paid ½ NDDC charge ½ Terminaling cost ½ Concession rentals ½ Host community fund ½ Local government levy ½ Environmental remediation fund ½ Total allowable deductions (S.263) ½ Total costs subject to CPR limit ½ Excess allowable costs c/f ½ Adjusted profit ½ Loss relief ½ Assessable profit ½ Capital allowance for the year ½ Unrecouped capital allowance ½ Production allowance ½ 67 Chargeable profit ½ Hydrocarbon tax 1½

Workings 1 (CPR limit): Gross revenue ½ Maximum allowable @ 65% of gross revenue ½ Capital allowances ½ Total eligible costs ½ Total exempted cost ½ Net total costs to be subject to CPR ½ Maximum allowable costs 1½ Total allowable cost ½ Total 20

Bam Abbey & Co. (Chartered Accountants) Ceremonial Building Road, Abeokuta November 25, 2024 The Chairman Tax Reform Committee Abuja, FCT Dear Sir, Memorandum on Digital Economy in Nigeria I refer to your Committee’s request for memoranda in respect of digital economy in Nigeria. My comments are as follows:

a. Challenges of taxing digital economy in Nigeria The rapid growth in information and communication technology (ICT) in Nigeria has brought with it boundless opportunities and changes in the way we do business. Today, a significant number of transactions in Nigeria (sale and purchase of goods and services) are transacted using mobile devices and online payment platforms. This is broadly referred to as electronic commerce (e- commerce). Whilst there are numerous benefits of e-commerce, the paradigm shift from a physical to an ’invisible’ business framework comes with its challenges. Some of these challenges include: i tracking transactions especially for the purposes of taxation. The drive towards growing non-oil tax revenue (through fiscal optimisation) and eliminating leakages are not mutually exclusive objectives. Thus, the process of diversifying the revenue base of the economy can only be further 68 complemented by the choices the Federation makes to arrest revenue leakages from the digital economy;

ii. the inability to adequately capture the quantum of attendant direct and indirect taxes payable on e-commerce transaction has left leakages in the tax system (that is, loss of tax revenue to the government);

iii. the applicable rules for corporate taxation have failed to effectively capture the realities of a modern economy in our world of fast-paced digital transactions. There are also various profitable business models in digital services that derive income from countries without creating palpable physical presence;

iv. given that non-resident companies are taxed in Nigeria based on profits derived from Nigeria, the question as to whether a foreign company is liable to pay income tax in Nigeria is usually controversial. Section 13 of the Companies Income Tax Act (CITA) implies that a non-resident company must have physically performed activities in Nigeria before it can be concluded that such a company has income tax liability in Nigeria; and

v. the Federal Inland Revenue Service (FIRS) is, however, making efforts to ensure that income arising from e-commerce is subjected to Nigerian tax. These efforts seem to have yielded some results in the aspect of indirect taxes as opposed to direct tax. In recent times, the FIRS has made attempts to assess some foreign mobile application transport operators to income tax in Nigeria on the basis that the income for services they provide is derived from Nigeria. However, the absence of the required fixed base or physical operations in Nigeria under Section 13 of CITA has made it difficult for the FIRS to establish liability of such foreign companies to Nigerian tax.

b. Ways of tackling the challenges associated with taxing digital economy in Nigeria Digital economy is growing rapidly in Nigeria just as it is happening all over the world, therefore, there is need for urgent actions in Nigeria to block tax revenue leakages associated with existing gaps in taxing digital economy. Such actions include

i. review of the scope of “fixed base” under section 13 of CITA: Although Nigeria, not a member of the OECD or the EU, it is important that the scope of “fixed base” under Section 13 of the CITA be expanded to ensure that the Nigerian digital economy is effectively captured for tax purposes. The introduction of a digital fixed base in Nigeria will certainly increase the tax base, thereby sharing the collective tax burden of taxpayers while ensuring an increase in government revenue; 69

ii. adoption of creative approach through innovative tax legislation: It has become expedient for the Nigerian tax authorities to explore a more creative approach to ensure taxation of the digital economy. Nigeria will need to borrow a leaf from other nations who have taken bold steps to tackle the non-taxation of the digital economy to plug revenue leakages through innovative tax legislation rather than seeking to extend the interpretation of obsolete legislations that are not sufficient to bring cross border digital transactions into the tax net. Given the peculiarities and innovations of the digital economy, it will be most appropriate for the Nigerian Government to enact a legislation to adequately cater for the taxation of the digital economy rather than trying to make it fit into existing tax laws;

iii. automated tax administration: The implication of this for the digital economy is two-fold. On one hand, full (or substantial automation) of the tax processes or system increases the degree of exposure of tax officers, administrators, taxpayers and other stakeholders in the use and mastery of those processes. On the other hand, it enhances the prospects of positioning the tax system and its electronic platforms for a robust and seamless interface with diverse payment platforms which can facilitate tracking of electronic transactions liable to tax in Nigeria;

iv. data handling: Another critical success factor in a digital economy is data handling. Elsewhere, data is treated with something akin to reverence but Nigeria’s data gathering and storage processes are still not fully integrated. This will require huge investments, including for data protection as the recent ransomware “WannaCry” threat showed;

v. strategic partnership with digital economy service providers: The FIRS should form “a strategic partnership with institutions which provide platforms to carry out digital transactions in Nigeria. This would ensure that the objective of minimising and reducing tax leakages especially from the digital economy is achieved at a faster pace;

vi. ratification of multilateral conventions: Ratification of multilateral conventions on tax related treaties to end profit shifting and tax evasion by multinational companies. The benefits are that the convention will swiftly modify existing bilateral tax treaties to implement tax treaty related matters in a cost efficient manner, instead of individual negotiations and amendment of the treaty. The treaty will address abuse of tax laws, raise government tax revenue, promote transparency and check illicit financial flows; and

vii. capacity development: There is need for capacity development for tax administrators so they can implement a seamless interface with the different payment systems available in Nigeria. 70

c. The provisions of the Finance Act, 2019 on digital and other services in relation to significant economic presence (SEP) of a foreign entity The Finance Act. 2019 introduced the concept of significant economic presence (SEP) to expand the scope of Nigerian tax on foreign companies deriving income from their activities in Nigeria which were hitherto not captured in the tax net. Consequently, the Companies Income Tax (Significant Economic Presence) Order, 2020 (“the Order”) was issued by the Federal Government of Nigeria. The Order provides clarification on what constitute a SEP for foreign companies doing business, or providing services to customers, in Nigeria, in line with Section 13(2)(c) and (e) of CITA. The Order provides that a foreign company shall have a SEP in Nigeria in any accounting year, where it:

i. derives N25 million annual gross turnover or its equivalent in other currencies from any or combination of the following digital activities:

• streaming or downloading services of digital contents, including but not limited to movies, videos, music, applications, games and e-books to any person in Nigeria; or

• transmission of data collected about Nigerian users which has been generated from such users activities on a digital interface, including website or mobile applications; or

• provision of goods or services other than those under sub-paragraph 5 of the Order, directly or indirectly through a digital platform to Nigeria; or

• provision of intermediation services through a digital platform, website or other online applications that link suppliers and customers in Nigeria;

ii. uses a Nigerian domain name (i.e., .ng) or registers a website address in Nigeria: or

iii. has a purposeful and sustained interaction with persons in Nigeria by customising its digital page or platform to target persons in Nigeria, including reflecting the prices of its products or services in Nigerian currency or providing options for billing or payment in Nigerian currency. Please do not hesitate to contact me if your Committee needs any further clarification on the above subject. Yours faithfully, Bolaji Abbey Principal Partner BAM Abbey & Co (Chartered Accountants) 71

Examiner’s report The question tests candidates’ understanding of challenges of taxing digital goods and services; ways of tackling the identified challenges; and the provisions of the Finance Act, 2019 in respect of foreign entity with significant economic presence in Nigeria offering digital and other services. About 70% of the candidates attempted the question, and majority of them showed a good understanding of its requirements, hence their performance was above average. The commonest pitfall of the candidates was their inability to state correctly the provisions of the Finance Act, 2019 in respect of foreign entity with significant economic presence in Nigeria offering digital and other services. Candidates are advised to study extensively the Institute’s Study Text, other relevant textbooks, the Companies Income Tax Act, 2004 (as amended), and relevant Finance Acts when preparing for future examination.

Marking guide Marks Marks a. Challenges of tax digital economy in Nigeria Heading 1 1½ marks for each challenge of taxing digital economy, subject to maximum of 4 points 6 7

b. Ways of tackling the challenge associated with taxing digital economy in Nigeria 1½ marks for each way of tackling the challenges associated with digital economy, subject to maximum of 6 points 9

c. The provisions of the finance Act, 2019 on digital and other services in relation to significant economic presence (SEP) of a foreign country 2 marks for each discussion of the provisions of the Finance Act, 2019 on digital and other services in relation to SEP of a foreign entity, subject to a maximum of 2 points 4 Total 20 72

Obiageli & Co (Tax Consultants) Asaba Road, Umunede, Delta State INTERNAL MEMO Date: ……. From: Assistant Manager To: Principal Partner SUBJECT: RE: Mergers and Acquisitions and other Related Matters I refer to our client’s request on tax considerations for mergers and acquisitions when a new company takes over an existing company; tax concessions and conditions to be met by a company seeking for reorganisation and restructuring; and powers of the Federal Inland Revenue Service (FIRS) in respect of mergers and acquisition. I hereby present a report for your review before same is presented to the client.

a. Tax considerations for mergers and acquisitions when a new company takes over an existing company

i. Where a new company takes over an existing or old company, the old company is deemed to have ceased business while the new company is deemed to have commenced a new business. The cessation rules will apply to the old company, while the commencement rules will apply to the new company.

ii. Filing of annual returns: The new company that emerges from a merger process is expected to file audited accounts and returns with the FIRS within eighteen months from the date of its incorporation or not later than six months after the end of its first accounting period, whichever is earlier. Meanwhile, it should be noted that a mere change of name of an existing business entity does not constitute a new company. Such companies will continue to be treated as old businesses on ongoing concern basis.

iii. Basis of assessment: The commencement rules will apply to the new company.

iv. Claim of capital allowances: No initial allowance will be claimed on the transferred assets. The annual allowance claimable will be based on the tax written down value of the transferred assets.

v. Unabsorbed losses and capital allowances brought forward: The unrelieved losses and unabsorbed capital allowances of the individual merging companies will not be allowed to be carried forward and set off against the assessable profits of the new company after the merger. However, the utilised capital allowances may be added to the tax written down value of the assets taking over for annual allowance purposes in the enlarged entity. 73

vi. Stamp duties: Stamp duty payment will arise on the share capital of the new company. If a merger also results in increase in share capital, stamp duty will be paid on the increase in share capital. Besides, merger of companies will also involve the sale/transfer of assets of the merging companies to the new company, necessary transfer or sale documents must be prepared to reflect the change of title. Stamp duties will be paid on documents perfecting these titles in accordance with the Stamp Duties Act.

vii. Merger cost: There are some costs which are incurred in the merger process due to the involvement of professionals and regulatory agencies, for example, financial advisers, solicitors, stockbrokers, estate valuers, issuing houses, corporate affairs commission, Nigerian Exchange, Securities and Exchange Commission. The FIRS may seek to disallow these expenses on the basis that they are capital in nature and as such not tax deductible.

viii. Value added tax and withholding tax: The fees paid to the professionals for services rendered in connection with the merger will attract value added tax and withholding tax at the appropriate rates.

ix. Guarantee or security for payment of tax: The FIRS may require the new company to guarantee or give security to the satisfaction of the FIRS, for the payment in full of all tax due or to become due by any of the ceased companies.

x. End of service award: When companies merge, the services of some employees may no longer be needed. The new company may have to pay benefits, such as gratuity, compensation for loss of employment and other retirement benefits. These expenses will be treated as allowable for the new company.

b. Tax concessions and conditions to be met before qualifying for same in respect of entities that engaged in business re-organisation and restructuring Applicable tax concessions include:

i. the commencement and cessation provisions are not applied;

ii. for capital allowances purposes, the assets sold or transferred shall be deemed to have been sold for an amount equal to the residue of qualifying expenditure thereon on the day following such sale or transfer;

iii. the company acquiring the assets shall not be entitled to any initial allowance thereon and shall be deemed to have received all allowance already granted to the vendor company up to the date of the sale or transfer; and

iv. there is no reference to unutilised losses incurred in the old trade. Such losses cannot be transferred to the new business and may not be relieved in any other way. 74 Conditions to be met before qualifying for such tax concessions The Finance Act, 2019 introduced amendment to Section 29(9) of CITA to the effect that:

i. qualification for exemption from commencement and cessation rules in a business restructuring amongst related parties to now include requirements to be related for a period of at least one year (365 days) prior to the restructuring;

ii. no disposal of assets post restructuring until after one year; and

iii. flouting of this provision will lead to a revocation of the exemption.

c. The powers of Federal Inland Revenue Service in respect of mergers and acquisitions

i. The consent of the Federal Inland Revenue Service, including clearance with respect to any capital gains tax that may be due and payable, must be obtained before any merger, take-over, transfer or restructuring of a trade or business carried on by a company can take place.

ii. The Companies Income Tax Act (CITA) gave the FIRS powers to the extent that no merger can be concluded without obtaining the consent or direction of the FIRS. Under CITA, no merger, take-over, transfer or restructuring of the trade or business carried on by a company can take place without having obtained the FIRS’s direction and clearance with respect to any tax that may be due and payable. Thank you, Obi Akande

Examiner’s report The question tests the candidates’ knowledge of the tax implications arising from merger and acquisition when a new company takes over an existing company; the tax concessions and conditions in respect of entities that engaged in business re- organisation and restructuring; and the powers of FIRS in merger and acquisition activities. About 70% 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 tax concessions available to entities that engaged in business re-organisation and restructuring. Candidates are advised to read widely the Institute’s Study Text, the Companies Income Tax Act, 2004 (as amended), and other relevant textbooks, when preparing for future examination. 75

Marking guide Marks Marks a. Tax considerations for mergers and acquisition when a new company takes over an existing company Heading 1 1½ marks for each discussion of tax consideration for mergers and acquisition when a new company takes over an existing company, subject to a maximum of 6 points 9 10

b. Tax concessions and conditions to be met before qualifying for same in respect of entities that engaged in business re-organisation and restructuring 2 marks for each applicable tax concessions, subject to a maximum of 3 points 6 1 mark for each condition to be met before qualifying tax concessions, subject to a maximum of 2 points 2 8

c. The powers of FIRS in respect of mergers and acquisitions 1 mark for each discussion of power of FIRS in respect of mergers and acquisitions, subject to a maximum of 2 points 2 Total 20 76

ai LIS Limited Computation of capital gains For 2023 assessment year N’000 N’000 Sales proceeds 16,500 Less: Cost of acquisition 11,000 Capital gains 5,500 Determination of rolled-over relief Lower of: Amount re-invested in Ibadan factory 22,000 Sales proceeds on disposal of warehouse 16,500 Less: Cost of acquisition of ware house 11,000 Amount rolled-over (5,500) Net capital gains Nil Computation of capital gains for 2024 assessment year N’000 N’000 Sales proceeds 60,000 Less: Cost of acquisition 35,000 Capital gains 25,000 Determination of roll-over relief Lower of: Amount re-invested in Ibadan factory 50,000 Sales proceeds on disposal of bauchi factory 60,000 Less: Cost of acquisition of ware house 35,000 Amount roll-over (15,000) Net capital gains 10,000 aii Computation of capital gains tax for the relevant assessment year 2023 assessment year Capital gains NIL Capital gains tax @ 10% of capital gains Nil 77 2024 assessment year Capital gains N10,000,000 Capital gains tax@10% of capital gains N1,000,000

b. The provisions of the Finance Act, 2023 in respect of application of roll- over relief on shares disposed Section 31(6) of Companies Income Tax Act, 2004 is amended by Section 4 of the Finance Act, 2023. It provides for the inclusion of stocks and shares as assets that qualify for roll-over relief on disposal and re-investment on similar assets. The provisions of the Finance Act state that, for the application of roll-over relief for shares pursuant to Sections 30 and 31 of CITA 2004, the proceeds from qualifying disposals must be reinvested within the same year of assessment in the acquisition of eligible shares in the same or other Nigerian companies.

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, 2023 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 commonest pitfall was the inability of some candidates to explain correctly the provisions of the Finance Act 2023 in respect of application of roll-over relief on shares disposed. Candidates are advised to read the Institute’s Study Text, the Finance Act, 2023 and other relevant textbooks, as this would go a long way in assisting them to pass future examination. 78

Marking guide Marks Marks a. (i) Computation of capital gains for 2023 assessment year Sales proceeds ½ Less: cost of acquisition ½ Capital gains ½ Amount re-invested in Ibadan factory ½ Sales proceeds on disposal of warehouse ½ Less: cost of acquisition of warehouse ½ Amount roll-over ½ Net capital gains 1 Computation of capital gains for 2024 assessment year Sales proceeds ½ Less: cost of acquisition ½ Capital gains ½ Amount re-invested in Ibadan factory ½ Sales proceeds on disposal of Bauchi factory ½ Less: cost of acquisition of Bauchi factory ½ Amount roll-over ½ Net capital gains 1 9 a(ii) Computation of capital gains tax for the relevant assessment year 2023 assessment year (Nil) 2 2024 assessment year (N1,000,000) 2 4

b. The provisions of the Finance Act, 2023 In respect of application of roll-over relief on shares disposed 2 marks for correct rendition of the Provisions of the Finance Act, 2023 in respect of application of roll-over relief on shares disposed 2 Total 15 79

a. Concept of connected taxable persons and category of persons regarded as connected persons Connected taxable persons include persons, individual, entities, companies, partnerships, joint ventures, trust or associations (collectively referred to as "connected taxable persons”). Also includes the persons referred to in section 13, section 22 of CITA, section 15 of PPTA, section 10 of PITA, article 9 of OECD Model Tax Convention and "associated enterprise" in OECD guidelines. The following persons will be regarded as connected taxable persons (that is, related parties) within the context of the Transfer Pricing Regulation, 2018:

i. any entity dealing with a related party (associate subsidiary, joint venture); ii. members of a local group of companies; iii. members of a conglomerate; iv. multinationals; v. an entity in a group located in a free trade zone; vi. a group entity that has a pioneer status; vii. intra company profits which is taxable under different regimes for example, tax exempt export profits; viii. loss making entity within a profitable group; ix. related parties subject to tax at different rates; and x. permanent establishment. Under the 2018 Regulations, the definition of connected persons have been widened to accommodate where one person has the ability to control or influence the other person in making financial, commercial or operational decisions, or there is a third person who has the ability to control or influence both persons in making financial, commercial, or operational decisions.

b. Dispute resolution under Income Tax (Transfer Pricing) Regulations, 2018

i. Based on the 2018 guidelines, a taxpayer who has any objection on assessment cannot approach the Decision Review Panel for a review of the assessment received from FIRS. ii. Taxpayers are now expected to lodge their complaints with the Head, FIRS Transfer Pricing Unit (TPU) within 30 days of the date of receipt of the assessment notice. iii. Effective March 12, 2018, the Head of TPU has the prerogative to decide whether or not to refer the taxpayer’s objection to the Decision Review Panel. 80

c. Regulation measures used in mitigating against potential activities in tax havens To avoid tax competition, many high tax jurisdictions have enacted legislations to counter the tax sheltering potential of tax havens. Generally, such legislations tend to operate in one of the following seven ways:

i. attributing the income and gains of the company or trust in the tax haven to a taxpayer in the high-tax jurisdiction on an arising basis. Controlled foreign corporation legislation is an example of this; ii. transfer pricing rules, standardisation of which has been greatly helped by the promulgation of OECD guidelines; iii. restrictions on deductibility, or imposition of a withholding tax when payments are made to off shore recipients; iv. taxation of receipts from the entity in the tax haven, sometimes enhanced by notional interest to reflect the element of deferred payment. The EU withholding tax is probably the best example of this; v. exit charges, or taxing of unrealised capital gains when an individual, trust or company emigrates; vi. many jurisdictions employ blunter rules, for example, in France, securities regulations are such that it is not possible to have a public bond issue through a company incorporated in a tax haven; and vii. also becoming increasingly popular is "forced disclosure" of tax mitigation schemes. Broadly, these involve the revenue authorities compelling tax advisers to reveal details of the scheme, so that the loopholes can be closed during the following tax year, usually by one of the five methods indicated above. Although not specifically aimed at tax havens, given that so many tax mitigation schemes involve the use of offshore structures, the effect is much the same.

Examiner’s report The question tests candidates’ understanding of the concept and category of persons regarded as connected taxable persons; dispute resolution available to an aggrieved taxpayer under the Transfer Pricing Regulations, 2018; and the regulatory measures being used by some developed countries in mitigating potential tax havens. About 60% of the candidates attempted the question. Candidates showed a fair understanding of the requirements of the question and their performance was average. The commonest pitfall was the inability of some candidates to explain correctly the regulatory measures being used by some developed countries in mitigating potential tax havens. Candidates are advised to read the Institute’s Study Text, the Transfer Pricing Regulations, 2018, and other relevant textbooks, as this would go a long way in assisting them to pass future examination. 81

Marking guide Marks Marks a. Concept of connected taxable persons and the category of persons regarded as connected persons 1 mark for correct description of the concepts of connected taxable persons in line with the provisions of the law 1 1 mark for each category of persons regarded as connected person, subject to a maximum of 5 points 5 6

b. Dispute resolution under Transfer Pricing Regulations 2018 1½ marks for each correct discussion of dispute resolution under Transfer Pricing Regulation 2018, subject to a maximum of 2 points 3

c. Regulatory measures used in mitigating potential tax havens 1 mark for each correct discussion of regulatory measures used in mitigating against potential activities in tax havens, subject to a maximum of 6 points 6 Total 15 82

Ayorinde & Co (Chartered Accountants) Kabba Road, Lokoja INTERNAL MEMO Date: ……. From: Manager (Corporate Tax Matters) To: Principal Partner Subject: RE: Possession and Purchase of Minerals and Tax Incentives available to Pioneer Industries and Related Matters I refer to our client’s request on procedures for possession and purchase of minerals; incentives available to pioneer industries; treatment of losses and capital allowances of pioneer period; and restriction applicable to pioneer industries. I hereby present a report for your review before the same is presented to the client.

a. Possession and purchase of minerals in accordance with the provisions of the Principal Act Section 93 of the Nigerian Minerals and Mining Act 2007 provides that no person, other than an officer of the Ministry authorised in that behalf by the Minister and acting in the execution of his duty, shall possess any mineral unless:

i. the mineral is won from a mineral title area of which the person is the holder and which entitles him to explore and exploit the minerals; or

ii. the person holds a permit to possess or purchase that mineral issued under the provisions of the Act; or

iii. the person is in respect of that mineral within the meaning of regulations made under the Act, a duly authorised agent or employee of any person permitted by paragraphs (i) and (ii) above to possess the mineral. Purchase of minerals; Section 94 provides that no person shall purchase any mineral unless he holds a licence to purchase minerals issued under this Act.

b. Tax incentives available to pioneer industries

i. The profit of a pioneer company during the pioneer period is exempted from tax; ii. Any amount of loss or net loss incurred by the pioneer company during pioneer period shall be available for relief against other periods. Net loss is the aggregate of losses of the pioneer period; iii. The qualifying capital expenditure incurred during the pioneer period is not subject to capital allowance computation during the pioneer period. They are deemed to be incurred on the first day of the post-pioneer period; iv. The provision for the commencement of a new business is applied on the profit of the post- pioneer period in arriving at the assessable profit; and 83

v. Dividend paid out of pioneer profit shall not be chargeable to tax in the hands of the recipient.

c. Treatment of losses and capital allowances of pioneer period Losses (i) Where the Revenue Service is satisfied that a pioneer company has incurred a loss in any accounting period within the tax relief period, it shall issue a certificate to the company accordingly (IDA Section 10 (6)).

(ii) In determining whether such a loss has been made, the Revenue Service may in its absolute discretion exclude such sum as may be in excess of an amount appearing to the Revenue Service to be just and reasonable in respect of:

• remuneration to directors of the company; and

• interest, service, agency or other similar charges made by a person who is a shareholder of the company or by a person controlled by such shareholder (IDA Section 13(3)).

(iii) A net loss incurred by a pioneer company shall be deemed to have been incurred by the company on the day on which its new trade or business commences, that is, on the day following the expiry of the tax relief period (IDA Section 14(3)).

(iv) For each accounting period, the Revenue Service shall issue to the pioneer company a statement showing the amount of the income or loss for that period.

(v) Any dispute between the Revenue Service and the company with regards to the statement of income or loss issued by the Revenue Service shall be subject to objection and appeal in like manner as if such statement were in assessment under CITA. Capital allowances (i) No capital allowance shall be claimed during the pioneer period. (ii) Qualifying capital expenditure incurred prior to or during the pioneer period shall be brought forward to the new trade or business and shall be deemed to have been acquired on the first day of the new trade or business.

d. Restrictions applicable to pioneer industries

i. Non-pioneer product during pioneer period: If during the pioneer period, a pioneer company deals in products other than the pioneer product, any profit derived from such a transaction cannot be exempted from taxation despite the fact that the transaction is taking place during the pioneer period. In essence, the tax exemption period is applicable only to pioneer products for which the pioneer certificate was originally granted; and

ii. Restrictions on dividends distribution and on the granting of loans (Section 18): During its tax relief period, a pioneer company shall not: 84

• make any distribution to its shareholders, by way of dividend or bonus, in excess of the amount by which the account maintained for the exempt profits is in credit at the date of such distribution; and

• grant any loan without first obtaining the consent of the Minister. The consent of the Minister shall only be given if he is satisfied that the pioneer company is obtaining adequate security and a reasonable interest for any such loan. Thank you. Tobi Babatolu

Examiner’s report The question tests the candidates’ understanding of the provisions of the Nigerian Minerals and Mining Act, 2007 (as amended) in respect of possession and purchase of minerals; tax incentives available to pioneer industries; and the treatment of losses, capital allowances and restrictions applicable to pioneer industries. About 80% of the candidates attempted the question and they showed a good understanding of it, resulting in an above average performance. The commonest pitfall was some candidates’ inability to explain correctly the provisions of the principal Act in respect of possession and purchase of minerals. Candidates are advised to read the Institute’s Study Text, Nigerian Minerals and Mining Act, 2007 (as amended), and other relevant textbooks when preparing for future examination.

Marking guide Marks Marks

a. Possession and purchase of minerals in accordance with the provisions of the principal Act Heading ½ 1½ marks for each discussion of possession of minerals in accordance with the provisions of the principal Act, subject to a maximum of 2 points 3 1½ marks for discussion of purchase of minerals in accordance with the provisions of the principal Act 1½ 5 85

b. Tax incentives available to pioneer industries 1 mark for each discussion of tax incentives available to pioneer industries, subject to a maximum of 3 points 3

c. Treatment of losses and capital allowances of pioneer period 1 mark for each discussion of treatment of losses of pioneer period, subject to a maximum of 3 points 3 1 mark for each discussion of treatment of capital allowances of pioneer period, subject to a maximum of 2 points 2 5

d. Restrictions applicable to pioneer industries 1 mark for each discussion of restriction applicable to pioneer industries, subject to a maximum of 2 points 2 Total 15 86 INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA

BABS & Co. (Chartered Accountants) Date: …. The Chief Executive Officer Relazer Company Limited Dear Sir, RE: Tax Investigation by the Federal Inland Revenue Service (FIRS) We refer to our appointment as tax consultants to Relazer Company Limited for the purpose of providing professional advice in respect of the tax investigation on your company by FIRS. Our comments are as follows:

(a) The revised computations of total profit and income tax payable for 2023 to 2025 years of assessment YOA 2023 2024 2025 N N N Total profit 213,660 268,735 359,894 Companies income tax 64,098.00 80,620.50 107,968.20 Tertiary education tax 6,642.00 8,247.00 11,113.80 Total tax 70,740.00 88,867.50 119,082.00 Minimum tax 2,300 2,600 3,220 The companies income tax for the relevant years of assessment are based on normal profits since the minimum tax computed above are lower. Please see appendix 1 for details.

(b) i. The objectives of tax audit The primary objectives of tax audit are to enable the tax auditors determine whether or not:

• adequate accounting books and records exist for the purpose of determining the total profit or loss of the taxpayer and the related tax payable;

• the tax computations submitted to the tax authority by the taxpayer agree with the underlying records; and

• all applicable tax legislations have been complied with. 131 The secondary objectives are to:

• provide for an avenue to educate taxpayers on various provisions of the tax laws;

• discourage tax evasion;

• detect and correct accounting and / or arithmetic errors in tax returns;

• provide feedback to the management on various provisions of the law and recommend possible changes;

• identify cases involving tax fraud and recommend them for investigation;

• forestall taxable persons’ failure to render tax returns;

• forestall taxable person’s rendering incomplete or inaccurate returns; and

• encourage voluntary compliance by taxpayers.

ii. Distinction between tax investigation and tax audit

• Tax investigation is called for when there are problems in, for example, an organisation, either affecting the whole or segment of the organisation. Such could be required when a large fraud is suspected.

• In an investigation, the scope of work is wider than that of a tax audit. The details of checking and depth of the work will also likely be more than what is required for an audit exercise.

• Tax investigation is like any other form of investigation. It is not carried out on routine basis as that of an audit.

• Tax investigation would be carried out when a taxpayer is suspected to have committed fraud. Suspected cases of tax evasion could lead to investigation.

• Tax investigation is conducted by tax inspectors who have special training and competence in investigation techniques. They can request for assistance of police investigators and enforces, if necessary. These are not required for tax audit.

• The principal aim of investigation is to expose all the circumstances of fraud or tax evasion and to obtain evidence for possible prosecution. Tax investigators have been given greater power than tax auditors. They can seal up a business premises to facilitate their work and obtain all the documents needed to substantiate the evidence of tax evasion and fraud.

• Tax audit is legally required periodically, to confirm the accuracy of the self-assessment of a taxpayer. Tax investigation may not be required for same taxpayer for several years. 132 Please feel free to contact us if you need further clarification on any of the above. Yours sincerely, For: Babs & Co. (Chartered Accountants) Romoke Atanda Audit Partner Appendix 1: Revised total profit and companies income tax payable for the relevant years of assessment YOA 2023 2024 2025 N’000 N’000 N’000 Gross turnover 460,000 520,000 644,000 Operating profit before tax 160,600 195,800 260,400 Add: Depreciation and amortisation 42,000 62,000 63,000 Donations to social clubs 2,600 1,900 4,800 Stamp duties on increase in share capital - - 3,600 Rent - long term lease - - 16,800 Private travelling expenses 9,800 12,000 12,500 Provision for assets impairment 4,200 3,200 1,900 Investment allowance on motor vehicle - - 5,960 Unrealised loss on exchange transactions 2,200 - 1,500 Adjusted profit/ assessable profit 221,400 274,900 370,460 Deduct: Capital allowance (w1) (7,740) (6,165) (10,566) Total profit 213,660 268,735 359,894 Companies income tax @ 30% 64,098.00 80,620.50 107,968.20 Tertiary education tax @ 3% of assessable profit 6,642.00 8,247.00 11,113.80 Total tax 70,740.00 88,867.50 119,082.00 Minimum tax @ 0.5% of turnover less franked investment income 2,300 2,600 3,220 133 (W1) Computation of capital allowances Plant and machinery Motor Furniture vehicles and fittings Total I. A. 50 50 50 25 A.A. 25 25 25 20 N’000 N’000 N’000 N’000 N’000 2023 YOA TWDV b/fwd 10 1,640 525 480 Additions - 10,600 - - 10 12,240 525 480 I. A. - (5,300) - - 5,300 A.A. - W2(2,145) W2(175) W2(120) 2,440 7,740 2024 YOA TWDV b/fwd 10 4,795 350 360 Additions - - 5,960 - 10 4,795 6,310 360 I. A. - - (2,980) - 2,980 A.A. - W2(2,145) W2(920) W2(120) 3,185 6,165 2025 YOA TWDV b/fwd 10 2,650 2,410 240 Additions - 9,500 3,160 720 10 12,150 5,570 960 I. A. - (4,750) (1,580) (180) 6,510 A.A. - W2 (2,513) W2(1,315) W2(228) 4,056 10,566 TWDV c/fwd 10 4,887 2,675 552 (W2) Annual allowances (A.A) on old and new assets

(i) Motor vehicle 2023 YOA N Old motor vehicle: N1,640,000 2 = 820,000 New motor vehicle: I.A. = N10,600,000 x 50% = N5,300,000 A.A. = N10,600,000 – 5,300,000 4 = N5,300,000 1,325,000 4 Total 2,145,000 134 Office / solar equipment 2024 YOA A.A. on old assets 2,145,000 2025 YOA N A.A. on old assets 1,325,000 New assets: additions = N9,500,000 x 50% I.A. = N4,750,000 = N9,500,000 – 4,750,000 4 N4,750,000 = 1,187,500 Total 2,512,500

(ii) Office equipment 2023 YOA N I.A. = N525,000 3 = 175,000 2024 YOA Old assets N525,000 3 = 175,000 New assets: additions I.A. = N5,960,000 x 50% N2,980,000 A.A. = N5,960,000 – 2,980,000 4 = N2,980,000 = 745,000 Total 4 920,000 2025 YOA N Old assets A.A. 920,000 New assets: additions I.A. = N3,160,000 x 50% = N1,580,000 A.A. = N3,160,000 – 1,580,000 4 = N1,580,000 4 = 395,000 Total 1,315,000 135

(iii) Furniture and fittings 2023 YOA N A.A. old assets = N480,000 4 = 120,000 2024 YOA A.A. on old assets N360,000 3 = 120,000 2025 YOA N A.A. on old assets N240,000 2 = 120,000 New assets: additions I.A. = N720,000 x 25% N180,000 A.A. = N720,000 – 180,000 5 = N540,000 5 = 108,000 Total 228,000

Examiner’s Report The question is divided into two parts. The first part tests the candidates’ understanding of the provisions of Companies Income Tax Act Cap C21 LFN (CITA) 2004 (as amended) in respect of computations of total profit and tax liabilities. The second part tests the candidates’ knowledge of audit and investigation. This being a compulsory question, all the candidates attempted the question. Candidates demonstrated a fair understanding of the question and performance was average. The commonest pitfall was the inability of some candidates to identify correctly the allowable and disallowable expenses in the computations of total 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 when preparing for future examination. 136

Marking Guide Marks Marks a. Computations of revised total profit and taxes payable for the relevant assessment years Body of the letter: Addressee and heading 1/2 Opening paragraph 1/2 Identification of 2023 – 2025 YOA 1/2 Total profit (1/2 x 3) 11/2 Total tax (1/2 x 3) 11/2 Minimum tax (1/2 x 3) 11/2 Appendix 1: Depreciation and amortisation (1/4 x 3) 3/4 Donation to social clubs (1/4 x 3) 3/4 Stamp Duties 1/4 Rent – long term lease 1/4 Private traveling expenses (1/4 x 3) 3/4 Provision for impairment (1/4 x 3) 3/4 Investment allowance 1/4 Unrealised loss on Exchange (1/4 x 2) 1/2 Adjusted profit (1/2 x 3) 11/2 Capital allowance (1/4 x 3) 3/4 Total profit (1/4 x 3) 3/4 Income tax (1/4 x 3) 3/4 Tertiary education tax (1/4 x 3) 3/4 W1 computation of capital allowances: 2023 YOA TWDV B/fwd (1/4 x 4) 1 Additions to motor vehicle ¼ I.A. (motor vehicle) ¼ A.A. (1/4 x 3) ¾ Total of capital allowances ¼ 2024 YOA TWDV B/fwd (1/4 x 4) 1 Additions to office solar ¼ I.A. of office solar ¼ A.A. (1/4 x 3) ¾ Total of capital allowances ¼ 2025 YOA TWDV B/fwd (1/4 x 3) ¾ Additions (1/4 x 3) 3/4 I.A. (1/4 x 3) 3/4 A.A. (1/4 x 3) 3/4 Total of capital allowances ¼ TWDV (1/4 x 4) 1 24 137

bi. Objectives of tax audit 1/2 mark for each objective of tax audit, subject to a maximum of 6 points 3 bii. Distinction between tax investigation and tax audit 1/2 mark for each distinction, subject to a maximum of 6 points 3 Total 30

Date: .......... From: Tax Manager To: Managing Partner, Sanya Consult Re: Highlights of Workshop on Transfer Pricing Organised by the Federal Inland Revenue Service

(a) Purpose, objectives, and scope of transfer pricing regulations Purpose The purpose of the Transfer Pricing Regulations, 2018 is to give effect to the provisions of certain or specific tax legislations, such as the Personal Income Tax Act, Companies Income Tax Act, Value Added Tax Act, Petroleum Industries Act, and Capital Gains Tax Act. Objectives The objectives of the regulations are to:

i. ensure that Nigeria is able to tax on an appropriate taxable basis corresponding to the economic activities deployed by taxable persons in Nigeria, including their transactions and dealings with associated enterprises;

ii. provide the Nigerian authorities with the tools to fight tax evasion through over or under-pricing of controlled transactions amongst associated enterprises;

iii. enforce compliance with arm’s length principles;

iv. provide a level playing field amongst multinational enterprises and independent enterprises doing business in Nigeria; and

v. provide taxable persons with certainty of transfer pricing treatment in Nigeria. 138 Scope The regulations shall apply to transactions amongst connected taxable persons carried on in a manner not consistent with the arm’s length principle and include: i. sale and purchase of goods and services; ii. sales, purchase or lease of tangible assets; iii. transfer, purchase, licence or use of intangible assets; iv. provision of services; v. lending or borrowing of money; vi. manufacturing arrangement; and vii. any transaction which may affect profit and loss or any other matter incidental to, connected with, or pertaining to the transactions referred to in the regulations.

b. The expectations of FIRS on taxpayers compliance with arm’s length principle Every taxpayer is expected to comply with arm’s length principle in dealing with transactions between their related entities. The regulation provides that:

i. where a connected taxable person has entered into a transaction or a series of transactions to which these Regulations apply, the person shall ensure that the taxable profits resulting from the transactions is in a manner that is consistent with the arm’s length principle; and

ii. where a connected taxable person fails to comply with the provisions of this regulation, the FIRS shall make adjustments where necessary if it considers that the conditions imposed by connected taxable persons in controlled transactions are not in accordance or consistent with the ’’arm’s length principle’’.

c. Transfer pricing methods as recommended by OECD The following transfer pricing methods shall be applied as recommended in the guidelines issued by Organisation for Economic Co-operation and Development (OECD):

i. Comparable uncontrolled price method (CUPM) The comparable uncontrolled price method compares the price charged for transactions between associated enterprises (related parties) with prices charged for similar transactions between independent enterprises (unrelated parties) in comparable circumstances. If there is any difference between the two prices, this might be an indication that the transactions amongst the associated enterprises are not made at arm’s length. However, in applying the CUPM, it should be noted that prices for the same product may differ not necessarily because of being sold to associated or independent enterprises, but because the product is not 139 sold under similar terms and circumstances in comparable quantities and markets. Therefore, it may be necessary to make a reasonable comparability adjustment for such differences.

ii. Resale price method (RPM) The resale price method begins with the resale price to an independent enterprise of a product purchased from an associated enterprise and a gross margin is then deducted from this resale price.

iii. Cost-plus method (CPM) Under this approach, the costs incurred by the supplier in making the product transferred or services provided to an associated enterprise are ascertained and marked-up. An appropriate mark-up may be determined by reference to other enterprise in similar independent supplier earns in comparable transactions (internal comparable), or by reference to the mark-up earned in comparable transactions by entirely independent enterprises (external comparable).

iv. Profit split method (PSM) The first step is to determine the combined profit that arises from a business transaction in which the associated enterprises are engaged. This profit is then split between the associated enterprises in a manner that reflects the division of profit that would have been expected between independent enterprises. The combined profit or loss attributed to the transactions in which the associated enterprises participated is allocated to the associated enterprises in proportion to their respective contributions to that combined operating profit or loss.

v. Transactional net margin method (TNMM) Under this method, the net profit margin that an enterprise earns from transactions with an associated enterprise is compared with the net profit margin earned in comparable transactions with an independent enterprise. An appropriate net margin may be determined by reference to the net margin that the enterprise earns in comparable transactions with independent enterprises (internal comparable), or by reference to the net margin earned in comparable transactions by independent enterprises (external comparable). The transactional net margin method operates in a manner similar to the cost plus and resale price methods. However, the transactional net margin examines the net profits in relation to an appropriate base (e.g. costs, sales, assets) and not gross margin on resale or mark-up on costs. 140

(d) Contents and mandatory transfer pricing documents and relevant information to be submitted to the Service by taxpayers Transfer pricing declaration form (contents of transfer pricing declaration form) contains the following:

i. particulars of reporting company or entity; ii. particulars of immediate parent companies; iii. particulars of directors of reporting companies; iv. particulars of major shareholders of reporting companies and related parties; v. ownership, structure of reporting entity and related parties; vi. particulars of subsidiary and other connected persons; vii. particulars of external auditors of reporting entity; viii. particulars of tax consultant of the reporting entity; ix. particulars of company secretary of the reporting entity; and x. particulars of the person making the declaration. Contents of transfer pricing disclosure form include: i. particulars of the reporting company or entity; ii. income from controlled transaction; iii. costs of controlled transactions; iv. summary of controlled transactions with connected persons; v. transfer pricing methods and documentation; vi. basic financial information for reporting entity and the group; vii. particulars of the person making the disclosure; and viii. declaration.

(e) Transfer pricing offences and penalties S/N Offences Penalties i. Failure to file TP declaration form N10million for the first month of default, and N10,000 for every day the failure continues ii. Failure to file TP disclosure form and TP documentation The higher of: N10million or 1% of the value of uncontrolled transaction(s) not disclosed, and N10,000 for every day the failure continues iii. Making an incorrect disclosure in the TP disclosure form The higher of N10million or 1% of the value of controlled transactions incorrectly disclosed

iv. Failure to provide the FIRS with information or document required within the time specified in a notice issued to the taxpayer 1% of the value of each controlled transaction for which the information or document was required, plus N10,000 for each day such failure continues v. Failure to submit updated TP declaration form N25,000 for every day the failure continues 141

Examiner’s Report The question tests candidates’ understanding of the relevant provisions of the Income Tax (Transfer Pricing) Regulations, 2018, in respect of the purpose, objectives, and scope of the regulations; expectations of the FIRS on taxpayers’ compliance with “arm’s length principle; transfer pricing methods; contents and mandatory transfer pricing documents; and various offences and penalties on non- compliance with transfer pricing. About 30% of the candidates attempted the question, and majority of them showed a good understanding of its requirements, hence their performance was above average. The commonest pitfall of the candidates was their inability to state correctly the various penalties introduced by the regulations for offences or acts on non- compliance with transfer pricing. Candidates are advised to study extensively the Institute’s Study Text, other relevant textbooks, and relevant sections of the Income Tax (Transfer Pricing) Regulations, 2018 for future examination.

Marking Guide Marks Marks a Purpose, objectives, and scope of transfer pricing regulations 1 mark for correct discussion of the purpose of transfer pricing 1 1 mark each for discussion of objectives of TP, subject to a maximum of 3 points 3 1 mark each for discussion of scope of TP, subject to a maximum of 2 points 2 6

b. Expectations of FIRS on taxpayers’ compliance with arm’s length principle 11/2 marks each for discussion of the expectation of FIRS on taxpayers compliance with arm’s length principle, subject to a maximum of 2 points 3

c. Transfer pricing methods 1/2 mark for identification of the method and 1/2 mark for discussion of each method, subject to a maximum of 5 methods 5

d. Contents of TP documentation and relevant information to be submitted to FIRS 1/2mark for each content of transfer pricing declaration form, subject to a maximum of 4 points 2 142 1/2mark for each content of transfer pricing disclosure form, subject to a maximum of 4 points 2 4

e. Offences and penalties I mark each for stating both the offence and corresponding penalty, subject to a maximum of 2 points 2 Total 20

WESTPOINT FOODS LIMITED The Managing Director Westpoint Foods Limited Lagos. Dear Sir, Re: Adjusted Profit, Total Profit, and Income Tax Payable for the Relevant Assessment Years and Other Related Matters We write to accept your offer to prepare adjusted profit, total profit, and income tax payable for the relevant assessment years, as well as other tax related matters. Our comments are as follows:

a. Computation of adjusted profit, total profit and income tax payable for the relevant assessment years As shown in Appendix 1, the adjusted profit of the company for the year ended December 31, 2023 (2024 assessment year) was N11,100,000. The total profit was N6,930,700. Since the annual gross turnover of the company, for the period under review, was N18,500,000, which is within the threshold of N25 million and below, the company, in line with the provisions of Finance Act, 2019, is deemed to be a small company. It, therefore, implies that for the 2024 assessment year, the companies income tax rate of 0% shall apply. The company will also not be liable to pay tertiary education tax, and exempted from minimum tax provisions.

b. Dividend basis (Section 19 of CITA 2004 (amended by Section 7 of Finance Act, 2019 Section 19 (1) CITA Cap C21 LFN 2004, provides that total dividends (proposed or paid) distributed out of profits of any year of assessment on which no income tax has been computed and paid shall replace total or taxable profit and be taxed at the appropriate rate in that tax year if the 143 dividend deduction resulted to any of the following situations in the same year of assessment under consideration: ▪ Where there is no total or assessable profits, or ▪ Where the total or assessable profit is less than the total dividend The effect of this provision is that where a company pays dividend from its accounting profits while declaring that it had no total profit or total profit is less than the dividend paid out, the tax authority will treat the dividend paid out as the profit of the company and subject it to the appropriate companies income tax (in line with the Finance Act, 2019). In the case of Westpoint Foods Limited, total profit computed in (a) above for 2024 assessment year was N,6,930,700 as against the dividend of N5,000,000 paid out. The dividend of N5,000,000, therefore, will not be subjected to tax.

c. Capital gains tax for 2024 assessment year As shown in appendix 2, the capital gains tax payable by the company for 2024 assessment year was N38,393,950. Thank you. Yours faithfully, For: XYZ & Co. Bamiji Abiloro Audit Partner Appendix 1: Computation of adjusted profit, total profit and income tax payable for the 2024 assessment year N N Operating profit 8,584,800 Add back: Long lease renewal 1,500,000 Depreciation 635,200 Income tax – Directors 325,000 Repairs and maintenance 55,000 2,515,200 Adjusted profit 11,100,000 Deduct capital allowances (4,169,300) Assessable profit/ total profit 6,930,700 Companies income tax thereon @ 0% Nil Tertiary education tax (exempted) Nil Total tax payable Nil 144 Appendix 2: Computation of capital gains tax for 2024 assessment year N N Sales proceeds 650,000,000 Less: Initial cost of factory building in 1973 1,800,500 Renewal of long lease in 2023 181,500,000 Refurbishment cost 24,260,000 Agency fees (3% of N650m) 19,500,000 Solicitors fees (5%of N650m) 32,500,000 Adverts 6,500,000 266,060,500 Capital gains 383,939,500 Capital gains tax @ 10% of N383,939,500 38,393,950

Examiner’s Report The question is divided into three parts. The first part tests candidates’ knowledge of computations of adjusted profit, total profit, and income tax liabilities in line with the provisions of CITA 2004 (as amended). The second part tests candidates’ understanding of the provisions of the Finance Act, 2019 when dividend payable by a company exceeds profit or there is no total profit. The third part tests candidates’ knowledge of computations of capital gains tax of a company in line with the provisions of Capital Gains Tax Act Cap C1 LFN 2004 (as amended). About 80% of the candidates attempted the question. Candidates showed a good understanding of the requirements of the question and their performance was above average. The commonest pitfall was the inability of some candidates to explain correctly the provisions of the Finance Act 2019 in respect of assessment of companies income tax liability when dividend payable exceeds profit or there is no total profit. Candidates are advised to read the Institute’s Study Text, the Finance Act, 2019, and other relevant textbooks, as this would go a long way in assisting them to pass future examination.

Marking Guide Marks Marks

a. Computations of adjusted profit, total profit, and income tax payable Addressee 1/2 Opening paragraph 1/2 Body of the letter (stating that the company is exempted from paying income tax and tertiary education tax 1 Appendix 1 Heading (2024 assessment year) 1/2 Opening profit 1/2 145 Long lease renewal 1/2 Depreciation 1/2 Income tax for directors 1/2 Repairs and maintenance 1/2 Adjusted profit 1 Capital allowances 1/2 Assessable / total profit 1 Income tax @ 0% 1/2 Tertiary education tax 1/2 Total tax payable 1/2 9

b. Relevant provisions of the Finance Act, 2019 in respect of dividend paid exceeding profit or when there is no profit 1 mark for each provision of the Finance Act, subject to a maximum of 3 points 3

c. Capital gains tax computation Heading (2024 assessment year) 1/2 Sales proceeds 1 Initial cost in 1973 1 Renewal of lease in 2023 1 Refurbished cost 1 Agency fees 1/2 Solicitors’ fees 1/2 Adverts 1/2 Capital gains 1 Capital gains tax 1 8 20 146

(a) PSOK Peroleum Company Limited Computation of hydrocarbon tax For 2024 year of assessment N’million N’million Revenue Value of crude oil sold ($75 x 4 million barrels xN1,150) 345,000 Value of condensates from associated gas sold ($56 x 1.5 million MMBtu x N1,150) 96,600 Value of gas liquid from associated gas ($52 x 1.2 million MMBtu x N1,150) 71,760 Gross revenue 513,360 Allowable deductions (Section 263): Production cost 205,344 Drilling cost 51,000 Royalties paid 102,671 Repairs and maintenance 2,200 Terminating cost 180 Concesssion rentals 25,660 First two appraisal wells cost 4,800 Cost of gas reinjection wells 1,300 Host community fund 1,900 Environmental remediation fund 30 NDDC charge 350 Administrative expenses: - Salaries and other personnel costs 950 - Power costs 254 - Transport and traveling 122 General expenses- Stamp duties 33 General expenses- State government land use charges 150 Total allowable cost 396,944 Total costs subject to CPR limit (W1) (396,944) (396,944) Excess allowable cost carried forward Nil Adjusted profit 116,416 Less: Loss relief Nil Assessable profit 116,416 Less: Section 266 and 6th schedule deductions: Capital allowance 2,750 113,666 Production allowance: Onshore operations 1,850 Shallow water operations 2,100 3,950 Chargeable profit 109,716 /Hydrocarbon tax @ 30% of N109,716 million 32,914.8 147 (1) Cost-price-ratio (CPR) limit N’million N’million Gross revenue 513,360

i. Maximum allowable @ 65% of Gross revenue of N513,360 333,684 Total operating cost 396,944 Capital allowances 2,750 Total eligible costs 399,694 Less: Exempted cost incurred (Section 263): Royalties paid 102,671 Concession rentals 25,660 Host community fund 1,900 Environmental remediation fund 30 NDDC charge 350 130,611

ii. Net total costs to be subject to CPR 269,083 Maximum allowable cost is the lower of (i) and (ii), which is N269,083 million. Total allowable cost (in line with the practice of FIRS) = Total exempted cost + CPR restricted cost = N130,611 million + N269,083 million = N399,694 million. Allowable expenses is however restricted to actual amount incurred of N396,944 million.

b. Conditions that must be met before a gas utilisation company can enjoy the GUIA on qualifying plant and equipment expenditure are:

i. the cost of the qualifying plant and equipment must have been incurred by the company;

ii. the cost must have been incurred fro the commencement date of this incentive Order;

iii. proof of ownership of qualifying plant and equipment; and iv. evidence of direct use of plant and equipment for gas processing and transportation in midstream gas operations.

Examiner’s Report The question is divided into two parts. The first part 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. The second part tests candidates’ knowledge of the conditions that must be met before a gas utilisation company can enjoy the gas utilisation investment allowance applicable to qualifying expenditure on plant and equipment. 148 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 commonest pitfall of the candidates was their inability to identify correctly the conditions that must be met before a gas utilisation company can enjoy the gas utilisation investment allowance applicable to qualifying expenditure on plant and equipment. Candidates are advised to study extensively the relevant sections of the Petroleum Industry Act, 2021 and the Oil and Gas Companies (Tax Incentives, Exemptions, Remission, etc) Order 2024, when preparing for 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 gas liquid from associated gas ½ Gross revenue ½ Production cost ½ Drilling cost ½ Royalties paid ½ Repairs and maintenance ½ Terminaling cost ½ Concession rentals ½ First two appraisal wells cost ½ Cost of gas reinjection wells ½ Host community fund ½ Environmental remediation fund ½ NDDC charge ½ Administrative expenses- Salaries ½ Administrative expenses- power costs ½ Administrative expenses- transport and traveling ½ Stamp duties ½ State government land use charges ½ Total allowable costs ½ Total costs subject to CPR limit (W1) ½ Adjusted profit ½ Assessable profit ½ Capital allowance ½ Production allowance ½ Chargeable profit ½ Hydrocarbon tax ½ 149

Workings (CPR limit) Maximum allowable @ 65% of gross revenue 1/4 Total operating cost 1/4 Capital allowances 1/4 Royalties paid 1/4 Concession rentals 1/4 Host community fund 1/4 Environmental remediation fund 1/4 NDDC charge 1/4 Net total costs to be subject to CPR 1/4 Maximum allowable cost (lower of i and ii) 1/4 Total allowable cost in line with FIRS 1/4 Restriction of allowable cost to actual amount 1/4 17 b. Conditions that must be met before a gas utilisation company can enjoy the GUIA on qualifying plant and equipment expenditure 1 mark for each condition, subject to a maximum of 3 points 3 Total 20

a. Tax inspectors without borders (TIWB)

i. This is a joint new initiative of the Organisation for Economic Cooperation and Development (OECD) and the United Nations Development Programme (UNDP) for delivering assistance needed to build tax audit capacity in developing countries, bridging the gap between theory and practice.

ii. It also complements efforts from the international development community to help with a range of broader domestic resource mobilisation (DRM) issues. As such, TIWB can make a significant contribution to DRM efforts by developing countries.

iii. TIWB facilitates targeted tax audit assistance programmes in developing countries across the globe. Under TIWB, tax audit experts work alongside local officials of developing country tax administrations on current direct and indirect tax audits and related issues concerning international tax matters and sharing general audit practices for specific cases.

iv. TIWB programmes can include pre-audit risk assessment and case selection, invenstigatory techniques, audit cases involving transfer pricing issues, anti-avoidance rules, or sector-specific issues, relating for example to natural resources, e-commerce, financial services or telecommunications. 150

v. The host administrations of developing countries are the lead partners in TIWB programmes, clearly specifying their needs and scope of work. TIWB assistance is delivered by current or recently retired tax audit experts. Audit experts work with the host administration under a programme agreement which covers all the legal and practical safeguards and provisions. The experts are not intended to act as a substitution of local audit staff or to carry out audit work where no local audit personnel would otherwise exist.

b. Cooperative compliance

i. Cooperative compliance is a tax planning strategy that is in a form of relationship between the revenue authority and a taxpayer with the objective of agreeing actions that ensure that taxpayers is tax compliant in an uncertain and controversial tax situation.

ii. The aim of cooperative compliance is to ensure that a business is fully tax compliant through a preventive dialogue with tax authorities.

iii. In recent years, a growing number of tax authorities have shifted their strategies towards large organisations to include forms of so-called cooperative compliance programmes.

iv. Cooperative compliance programmes require large organisations to have internal (or tax) control frameworks in place that assure that they can comply with their tax obligations and can also detect uncertain tax positions and disclose these to the tax authority. In exchange, the tax authority sees to it that tax matters are resolved quickly, quietly, fairly, and with finality.

v. Cooperative compliance programmes have, therefore, been characterised as “transparency in exchange for certainty”.

c. Simultaneous tax examination A simultaneous tax examination is an arrangement amongst two or more countries to examine the tax affairs of a person or entity simultaneously, but independently, in each country. This approach allows tax authorities to:

i. exchange information and coordinate efforts to ensure accurate taxation; ii. minimise the risk of double taxation and tax disputes; and iii. streamline tax audits and examinations. Simultaneous tax examination has the following benefits as it: i. encourages taxpayers to comply with tax laws and regulations; ii. helps detect and prevent tax evasion and avoidance schemes; and iii. fosters cooperation and collaboration between tax authorities. 151

Examiner’s Report The question tests the candidates’ knowledge of selected initiatives in international taxation, specifically, tax inspectors without borders, cooperative compliance, and simultaneous tax examination. About 60% of the candidates attempted the question and they exhibited a lack of understanding of its requirements. The performance was below average. The commonest pitfall was the inability of some candidates to explain correctly the cooperative compliance. Candidates are advised to read widely the Institute’s Study Text and other relevant textbooks, when preparing for future examination.

Marking Guide Marks Marks

a. Tax inspectors without borders (TIWB 1½ marks for each correct discussion of TIWB subject to a maximum of 4 points 6

b. Cooperative compliance 1 mark for each correct discussion of cooperative compliance, subject to a maximum of 4 points 4

c. Simultaneous tax examination 1 mark for description of simultaneous tax examination 1 1 mark for each approach that simultaneous tax examination allows tax authorities to do, subject to a maximum of 2 points 2 1 mark for each benefit of simultaneous tax examination, subject to a maximum of 2 points 2 5 Total 15

(a) i. Concept and tax implications of thin capitalisation Concept of thin capitalisation A company is said to be thinly capitalised when its capital is made up of a much greater proportion of debt than equity, that is, its gearing, or leverage, is too high. This is perceived to create problems for two classes of people- creditors and tax authorities. 152 Tax issues on thin capitalisation Even where countries’ corporate laws permit companies to be thinly capitalised, tax authorities in those countries will often limit the amount that a company can claim as a tax deduction on interest, particularly when it receives loans at non-commercial rates (for example, from connected parties). However, some countries simply disallow interest deductions above a certain level from all sources when the company is considered to be too highly geared under applicable tax regulations. Some tax authorities limit the applicability of thin capitalisation rules to corporate groups with foreign entities to avoid “tax leakage” to other jurisdictions. The United States “earnings stripping” rules are examples. Hong Kong protects tax revenue by prohibiting taxpayers from claiming tax deductions for interest paid to foreign entities, thus eliminating the possibility of using thin capitalistion to shift income to a lower-tax jurisdiction. Prior to the commencement of Finance Act, 2019, there were no thin capitalisation rules in Nigeria. However, in practice, FIRS sometimes seeks to disallow interest deductions considered excessive, which in most cases are usually done arbitrarily. The Finance Act, 2019, now introduces a specific benchmark of thirty percent (30%) of earnings before interest, taxes, depreciation and amortisation (EBITDA) in a year as the limit for interest deduction on loans by a foreign ’connected person’. Where there is excess interest, such is considered as a disallowable deduction in that year.

ii. Concept and tax implications on treaty shopping Concept of treaty shopping Treaty shopping is a situation where a person, who is resident in one country (say the “home” country) and who 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). This 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. Tax implication on treaty shopping 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. This practice consists in a resident of a state that is not a party to the double taxation treaty establishing an entity within a state that is party to the treaty in order to take advantage of its provision. 153 154 The problem of treaty shopping could be tackled through anti-treaty shopping provisions despite the fact that it is one of t | | | :-: | | [**Page 1**]() | 154 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. Some countries have also tackled the problem of treaty shopping by including in their tax treaties specific provision referred to as “limitation on benefit” or “LOB”. These provisions limit the benefit under the treaties in certain circumstances. Therefore, companies which are not bonafide residents of the treaty countries or which are set up for treaty shopping purpose may be denied the treaty benefits. b. The OECD has issued 15 action items to address the main areas where they feel companies have been most aggressively accomplishing this shifting of profit. The action items are as follows: i. Address the tax challenges of the digital economy: Identify the main difficulties that the digital economy poses for the application of existing international tax rules and develop detailed options to address these difficulties, taking a holistic approach and considering both direct and indirect taxation. Issues to be examined include, but are not limited to, the ability of a company to have a significant digital presence in the economy of another country without being liable to taxation due to the lack of nexus under current international rules, the attribution of value created from the generation of marketable location-relevant data through the use of digital products and services, the characterisation income derived from new business models, the application of related source rules, and how to ensure the effective collection of value a tax or goods and services tax with respect to the cross-border supply of digital goods and services. ii. Neutralise the effects of hybrid mismatch arrangements: Develop model treaty provisions and recommendations regarding the design of domestic rules to neutralise the effect (for example, double non- taxation, double deduction, long-term deferral) of hybrid instruments and entities. This may include: • changes to the OECD Model Tax Convention to ensure that hybrid instruments and entities (as well as dual resident entities) are not used to obtain the benefits of treaties unduly; • domestic law provisions that prevent exemption or non- recognition for payments that are deductible by the payer; • domestic law provisions that deny a deduction for a payment that is not includible in income by the recipient (and is not subject to taxation under controlled foreign company (CFC) or similar rules); • domestic law provisions that deny a deduction for a payment that is also deductible in another jurisdiction; and ----- | | | :-: | | [**Page 2**]() | 155 • where necessary, guidance on co-ordination or tie-breaker rules if more than one country seeks to apply such rules to a transaction or structure. Special attention should be given to the interaction between possible changes to domestic law and the provisions of the OECD Model Tax Convention. This work will be coordinated with the work on interest expense deduction limitations, the work on CFC rules, and the work on treaty shopping. iii. Strengthen controlled foreign company (CFC) rules: Develop recommendations regarding the design of controlled foreign company rules. This work will be coordinated with other work as necessary. iv. Limit base erosion via interest deductions and other financial payments: Develop recommendations regarding best practices in the design of rules to prevent base erosion through the use of interest expense, for example through the use of related-party and third-party debt to achieve excessive interest deductions or to finance the production of exempt or deferred income, and other financial payments that are economically equivalent to interest payments. The work will evaluate the effectiveness of different types of limitations. In connection with and in support of the foregoing work, transfer pricing guidance will also be developed regarding the pricing of related party financial transactions, including financial and performance guarantees, derivatives (including internal derivatives used in intra- bank dealings), and captive and other insurance arrangements. The work will be coordinated with the work on hybrids and CFC rules. v. Counter harmful tax practices more effectively, taking into account transparency and substance: Revamp the work on harmful tax practices with a priority on improving transparency, including compulsory spontaneous exchange on rulings related to preferential regimes, and on requiring substantial activity for any preferential regime. It will take a holistic approach to evaluate preferential tax regimes in the BEPS context. It will engage with non-OECD members on the basis of the existing framework and consider revisions or additions to the existing framework. vi. Prevent treaty abuse: Develop model treaty provisions and recommendations regarding the design of domestic rules to prevent the granting of treaty benefits in inappropriate circumstances. Work will also be done to clarify that tax treaties are not intended to be used to generate double non-taxation and to identify the tax policy considerations that, in general, countries should consider before deciding to enter into a tax treaty with another country. The work will be coordinated with the work on hybrids. vii. Prevent the artificial avoidance of PE status: Develop changes to the definition of PE to prevent the artificial avoidance of PE status in relation to BEPS, including through the use of commissionaire ----- | | | :-: | | [**Page 3**]() | 156 arrangements and the specific activity exemptions. Work on these issues will also address related profit attribution issues.

viii. Assure that transfer pricing outcomes are in line with value creation – intangibles: Develop rules to prevent BEPS by moving intangibles among group members. This will involve: • adopting a broad and clearly delineated definition of intangibles; • ensuring that profits associated with the transfer and use of intangibles are appropriately allocated in accordance with (rather than divorced from) value creation; and • developing transfer pricing rules or special measures for transfers of hard-to-value intangibles; and updating the guidance on cost contribution arrangements. ix. Assure that transfer pricing outcomes are in line with value creation - risk and capital: Develop rules to prevent BEPS by transferring risks among, or allocating excessive capital to, group members. This will involve adopting transfer pricing rules or special measures to ensure that inappropriate returns will not accrue to an entity solely because it has contractually assumed risks or has provided capital. The rules to be developed will also require alignment of returns with value creation. This work will be coordinated with the work on interest expense deductions and other financial payments. x. Assure that transfer pricing outcomes are in line with value creation – other high risk transactions: Develop rules to prevent BEPS by engaging in transactions which would not, or would only very rarely, occur between third parties. This will involve adopting transfer pricing rules or special measures to: • clarify the circumstances in which transactions can be recharacterised; • clarify the application of transfer pricing methods, in particular profit splits, in the context of global value chains; and • provide protection against common types of base eroding payments, such as management fees and head office expenses. xi. Establish methodologies to collect and analyse data on BEPS and the actions to address it: Develop recommendations regarding indicators of the scale and economic impact of BEPS and ensure that tools are available to monitor and evaluate the effectiveness and economic impact of the actions taken to address BEPS on an ongoing basis. This will involve developing an economic analysis of the scale and impact of BEPS (including spillover effects across countries) and actions to address it. The work will also involve assessing a range of existing data sources, identifying new types of data that should be collected, and developing methodologies based on both aggregate (for example, FDI and balance of payments data) and micro-level data (for example, ----- | | | :-: | | [**Page 4**]() | 157 from financial statements and tax returns), taking into consideration the need to respect taxpayer confidentiality and the administrative costs for tax administrations and businesses. xii. Require taxpayers to disclose their aggressive tax planning arrangements: Develop recommendations regarding the design of mandatory disclosure rules for aggressive or abusive transactions, arrangements, or structures, taking into consideration the administrative costs for tax administrations and businesses and drawing on experiences of the increasing number of countries that have such rules. The work will use a modular design allowing for maximum consistency but allowing for country specific needs and risks. One focus will be international tax schemes, where the work will explore using a wide definition of “tax benefit” in order to capture such transactions. The work will be coordinated with the work on co- operative compliance. It will also involve designing and putting in place enhanced models of information sharing for international tax schemes between tax administrations.

xiii. Re-examine transfer pricing documentation: Develop rules regarding transfer pricing documentation to enhance transparency for tax administration, taking into consideration the compliance costs for business. The rules to be developed will include a requirement that multinational enterprises (MNE’s) provide all relevant governments with needed information on their global allocation of the income, economic activity and taxes paid among countries according to a common template.

xiv. Make dispute resolution mechanisms more effective: Develop solutions to address obstacles that prevent countries from solving treaty-related disputes under Mutual Agreement Procedure (MAP), including the absence of arbitration provisions in most treaties and the fact that access to MAP and arbitration may be denied in certain cases. xv. Develop a multilateral instrument: Analyse the tax and public international law issues related to the development of a multilateral instrument to enable jurisdictions that wish to do so to implement measures developed in the course of the work on BEPS and amend bilateral tax treaties. On the basis of this analysis, interested parties will develop a multilateral instrument designed to provide an innovative approach to international tax matters, reflecting the rapidly evolving nature of the global economy and the need to adapt quickly to this evolution. ----- | | | :-: | | [**Page 5**]() | 158

Examiner’s Report The question is divided into two parts. The first part tests candidates’ understanding of the concepts and tax implications of thin capitalisation and treaty shopping. The second part tests candidates’ knowledge of strategies used by the organisation for Economic Cooperation and Development (OECD) in mitigating the use of aggressive base erosion and profit shifting by taxpayers. About 60% of the candidates attempted the question. Candidates showed a fair understanding of the requirements of the question and their performance was average. The commonest pitfall was the inability of some candidates to explain correctly the strategies used by the OECD in mitigating the use of aggressive base erosion and profit shifting by taxpayers. 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 pass future examination.

Marking Guide Marks Marks ai. Concept of, and tax implications on thin capitalisation 1 mark for each correct discussion of the concept of thin capitalisation, subject to a maximum of 2 points 2 1 mark for each correct discussion of the tax implications on thin capitalisation, subject to a maximum of 2 points 2 4 aii. Concept of, and tax implications on treaty shopping 1 mark for each correct discussion of the concept of treaty shopping, subject to a maximum of 2 points 2 1 mark for each correct discussion of the tax implications on treaty shopping, subject to a maximum of 2 points 2 4 b. Strategies being used by OECD in mitigating the the use of aggressive base erosion and profit shifting by taxpayers 1 mark for each correct discussion of the mitigating strategy being used by OECD, subject to a maximum of 7 points 7 Total 15 ----- | | | :-: | | [**Page 6**]() | 159

MEMORANDUM Date: ….. To: Jefferson From: The Tax Consultant Subject: Re: Mining Revenue, Incentives, and Digital Economy Please find below for your perusal, my response on the above subject matter. a. Fees payable to the Mining Cadastre Office and consequence of failure to pay fees The Mining Cadastre Office shall collect: i. a fee for processing of applications for mineral titles; ii. an annual service fee established at a fixed rate per square cadastral unit for administrative and management services rendered by the Cadastre Office; and iii. a mineral title shall become liable to revocation where the holder thereof has failed to pay the prescribed fees. b. Priority for use of land for mining i. The use of land for mining operations shall have a priority over other uses of land and be considered for the purposes of access, use and occupation of land for mining operations as constituting an overriding public interest within the meaning of the Land Use Act. ii. In the event that a mining lease, a small-scale mining lease or a quarry lease is granted over land subject to an existing and valid statutory or customary right of occupancy, the Governor of the state within which such rights are granted shall within sixty days of such grant or declaration revoke such right of occupancy in accordance with the provisions of section 28 of the Land Use Act. c. The key incentives available to companies engaged in mining operation in Nigeria in line with Companies Income Tax Act, 2004 (as amended) i. Tax holiday for an initial period of 3 years from commencement of operations renewable for additional 2 years. Any dividend recorded during the tax holiday periods will not be subject to withholding tax upon distribution to shareholders. ii. Exporters of mineral products may be permitted to retain part of their foreign exchange earning in a domiciliary account for the purpose of acquiring spare parts and other mining inputs. iii. Exemption from customs and import duties in respect of plant, machinery equipment and accessories imported exclusively for mining ----- | | | :-: | | [**Page 7**]() | 160 operations. However, the plant and equipment can only be disposed of locally upon payment of the applicable customs and import duties. iv. Free transferability of foreign currency through the Central Bank of Nigeria (CBN) for the following:

- payment for servicing of certified foreign loan; and

- remittance of foreign capital in event of sale or liquidation of the business. v. Grant of personal remittance quota for expatriate personnel free from any tax imposed by any enactment for the transfer of external currency out of Nigeria; vi. Accelerated capital allowance on mining expenditure (95% initial allowance and retention of 5% until asset is disposed of;

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

viii. All infrastructure cost provided by the mining company and approved by the MCO to be capitalised and capital allowance claimed at 95% in the first year of operation; ix. A company may also be entitled to claim an additional rural investment allowance on its infrastructure cost, depending on the location of the company and the type of infrastructure provided; x. Annual indexation of unutilised capital allowance carried forward by 5% for mines that commenced production within five (5) years from the date of enactment of the Act. Whilst the period for new companies to enjoy this incentive lapsed in 2012, new producers may apply to the Minister of Finance, through the Minister of Mines and Steel Development, to enjoy this incentive. Such application may be considered on a case-by-case basis; xi. The Minister may grant a concession for the royalty payable on any mineral to be deferred for a number of years, subject to the approval of the Federal Executive Council; and xii. Actual amount incurred out of reserves made for environmental protection, mine rehabilitation, reclamation and mine closure cost shall be tax deductible, subject to certification by an independent. d. The objections and appeal procedures relating to dispute with a relevant tax authority (i) Notice of objection If any taxpayer disputes a tax assessment raised by the tax authority, it may give a notice of objection to the tax authority seeking a review of assessment, the objection must be valid. For a notice of objection to be valid, the following are applicable: • The objection must be in writing; • Timely submission: The objection must be submitted within the stipulated time frame (30 days) to be considered valid; ----- | | | :-: | | [**Page 8**]() | 161 • It must contain clear grounds for objection: The objection must specify in detail the grounds upon which it is made, including facts and reasons for objecting to each issue; • Supporting documents: The taxpayer must provide evidence and supporting documents to substantiate their objection;- and • Payment of non-disputed tax: The taxpayer must pay all tax not in dispute as well as 50% of the amount of tax in dispute (for Value Added Tax objections). (ii) Amendment of assessment and refusal to amend • Upon the receipt of the valid notice of objection, the relevant tax authority will examine the grounds of objection to determine its validity. Where the grounds are found to be valid, the tax computation would be reviewed and a revised or amended assessment raised. Payment would be based on the revised amendment within the statutory time limit of sixty days from the date of receipt of the revised assessment by the taxpayer. • Where the relevant tax authority believes that there is no merit in the notice of objection, then a notice of refusal to amend (NORA) would be sent to the taxpayer. • The taxpayer, if aggrieved by the notice of refusal to amend, may file a notice of appeal to the Tax Appeal Tribunal within 30 days of the receipt of the notice of refusal to amend.

(iii) Appeal to the Tax Appeal Tribunal (TAT) If the taxpayer is dissatisfied with the response to his objection, he can appeal to the TAT within 30 days of receiving the notice of refusal to amend (NORA).

(iv) Appeal to Federal High Court • If a party is aggrieved by the final decision of the TAT, it can appeal to the Federal High Court within 30 days of receiving the TAT’s decision. • It is essential to note that these limits are crucial and failure to adhere to them result in the assessment becoming final and conclusive.

Examiner’s Report The question tests the candidates’ understanding of the provisions of the Nigerian Minerals and Mining Act, 2007 (as amended) in respect of fees payable and failure to pay to mining cadastre office; priority of using land for mining; key incentives available to mining companies in line with the provisions of CITA 2004 (as amended); and the objections and appeal procedures relating to dispute between a taxpayer and a relevant tax authority. About 30% of the candidates attempted the question and they showed a fair understanding of it, resulting in an average performance. ----- | | | :-: | | [**Page 9**]() | 162 The commonest pitfall was some candidates’ inability to explain correctly the provisions of the Nigerian Minerals and Mining Act, 2007 (as amended) in respect of using land for mining. Candidates are advised to read the Institute’s Study Text, Nigerian Minerals and Mining Act, 2007 (as amended), and other relevant textbooks when preparing for future examination.

Marking Guide Marks Marks a. Fees payable and failure to pay to mining cadastre office 1 mark for each discussion of fees payable and failure to pay to mining cadastre office, subject to a maximum of 2 points 2 a. Priority of using land for mining 1 mark for each discussion of priority of using, land for mining, subject to a maximum of 2 points 2 b. Mining incentives in line with CITA 2004 (as amended) ½ mark each for discussion of mining incentives, subject to a maximum of 8 points 4 c. Objections and appeal procedures 1 mark for each discussion of notice of objection, subject to a maximum of 3 points 3 1 mark for each discussion of amendment of assessment or refusal to amend, subject to a maximum of 2 points 2 1 mark for discussion of appeal to Tax Appeal Tribunal, subject to a maximum of 1 point 1 1 mark for discussion of appeal to Federal High Court, subject to a maximum of 1 point 1 7 Total 15 ----- | | | :-: | | [**Page 10**]() | 41 INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA