Advanced Taxation · May 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