Advanced Taxation · November 2025

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