Taxation · November 2016

MR. ADEOLA a) COMPUTATION OF TAX PAYABLE FOR 2014 YEAR OF ASSESESSMENT N N Trading Profit 2,350,000 Employment Income 4,320,000 Rental Income 1,200,000 Interest on Fixed Deposit (N80,000 ÷ 0.9) 88,889 Gross Income 7,958,889 Consolidated Relief Allowance 1,791,778 (N200,000 + 20% of N7,958,889) Tax Exempt Items:

i) Pension Fund Contribution 596,250 ii) Insurance Premium 240,000

iii) National Housing Fund Contribution 180,000

iv) National Health Insurance Contribution 150,000 (2,958,028) Chargeable Income 5,000,861 Tax Computation N 1st N300,000 @ 7% 21,000 Next N300,000 @ 11% 33,000 Next N500,000 @ 15% 75,000 Next N500,000 @ 19% 95,000 Next N1,600,000 @ 21% 336,000 Balance N1,800,861 @ 24% 432,207 N5,000,861 Tax Liability 992,207 Withholding Tax on: Interest on Fixed Deposit Rent-(10% of N1,200,000) 8,889 120,000 128,889) Final Tax Liability 863,318 SKILLS LEVEL EXAMINATIONS – NOVEMBER 2016 DIET 45

Workings Working 1 Trading Profits: N Profit (i) 8/12 x N2,625,000 1,750,000 (ii) 1/9/14 – 31/12/14 360,000 2,110,000 Add: Bad debts recovered 360,000 2,470,000 Capital allowances (120,000) 2,350,000 Working 2 Employment Income: N Salary 3,600,000 Benefits- in- kind: (i) Provision of car (5% of N7,200,000) 360,000 (ii) Luncheon Voucher 360,000 4,320,000

(b) Where a company permanently ceases to carry on a trade or business (or in the case of a company other than a Nigerian company, permanently ceases to carry on a trade or business in Nigeria) its Assessable Profits therefrom shall be:-

i. As regards the Year of Assessment in which the cessation occurs, the amount of the profits of that year.

ii. As regards the Year of Assessment preceding that in which the cessation occurs, the amount of the profits on preceding year basis or the amount of the profits of the Year of Assessment, whichever is higher. SKILLS LEVEL EXAMINATIONS – NOVEMBER 2016 DIET 46

Marking Guide Marks Marks (a) Incomes Trading Profit 2 Employment Income 2 Rental Income 1 Interest on fixed deposit 1 8 Gross Income 1 7 Reliefs Consolidated Relief Allowance 1 a. Pension Fund Contribution(71/2% of N7,950,000) 1 b. Insurance Premium 1 c. National Housing Fund Contribution 1 d. National Health Insurance Contribution 1 Total Reliefs 1 Chargeable Income 1 7 Tax Computation 7% 1 11% 1 15% 1 19% 1 21% 1 24% 1 Tax liability 1 7 Withholding Tax on: Interest on Fixed Deposit 1 Rent 1 Total Withholding Tax 1 Final tax liability 1 11 25 Year of cessation 21/2 Penultimate Year 21/2 5 30

EXAMINER’S REPORT The question tests candidates’ knowledge of the taxation of individuals in the areas of trading, employment and investments. Most of the candidates attempted the question and performance was above average. The commonest pitfall was the inability of candidates to arrive at the trading profit in the year of cessation. Candidates are advised to read the Study Texts and Pathfinders of the Institute to ensure a good performance in future. SKILLS LEVEL EXAMINATIONS – NOVEMBER 2016 DIET 47

a) State Board of Internal Revenue Section 87 of PITA 2004 (as amended), established the State Board of Internal Revenue whose operational arm is known as the State Internal Revenue Service (SIRS). Composition The State Board of Internal Revenue for each State of the Federation comprises:

i. The Executive Head of the State Internal Revenue Service as Chairman; ii. The Directors and Heads of Departments within the State Internal Revenue Service; iii. A Director from the State Ministry of Finance; iv. The Legal Adviser to the State Internal Revenue Service;

v. Three other persons nominated by the Commissioner for Finance, on their personal merit; and vi. The Secretary of the State Internal Revenue Service, who shall be an ex- officio member. QUORUM Any five members of the State Board of Internal Revenue of whom one shall be the Chairman or a Director, shall constitute a quorum [Section 87(3)].

b) Functions of the State Board of Internal Revenue The State Board of Internal Revenue shall be responsible for:

i. Ensuring the effectiveness and optimum collection of all taxes and penalties due to the Government under the relevant laws;

ii. Doing all such things as may be deemed necessary and expedient for the assessment and collection of the tax and shall account for all sums so collected, in a manner to be prescribed by the Commissioner;

iii. Making recommendations, where appropriate, to the Joint Tax Board on tax policies, tax reforms, tax legislation, tax treaties and exemptions as may be required from time to time;

iv. Generally controlling, the management of the State Service on matters of policy matters, subject to the provisions of the law setting up the State Internal Revenue Service; and

v. Appointing, promoting, transferring and imposing discipline on employees of the State Internal Revenue Service. SKILLS LEVEL EXAMINATIONS – NOVEMBER 2016 DIET 48

c) Taxes and Levies Collectible by State Governments are:

i. Pay–As-You-Earn of individuals within the State; ii. Withholding Tax on individuals; iii. Capital Gains Tax on individuals; iv. Stamp Duties on Investments executed by individuals, pool betting, lotteries, gaming and Casino taxes; v. Road Taxes; vi. Business Premises registration fees, for:

- Urban areas (as defined by each State) N10,000 (maximum) for registration N5,000 for annual renewal of registration - Rural areas (as defined by each State) N2,000 for registration N1,000 for annual renewal of registration

vii. Development levy (individuals only),not more than N100 per annum on all taxable individuals; viii. Naming of street registration fees in a State capital;

ix. Right of occupancy fees on lands owned by the State in urban cities; and

x. Market taxes and levies where State finance is invested.

MARKING GUIDE Marks Marks (a) Composition 6 Quorum 1 7 (b) Functions of SBIR(2 marks for each for any 3 points) 6 (c) Taxes and Levies (1 mark for each point raised subject to a maximum of 7 points) 7 20

EXAMINER’S REPORT The question tests candidates’ understanding of the provisions of tax administration in Nigeria. Almost all the candidates attempted the question and performance was above average. The commonest pitfall was the inability of the candidates to list correctly taxes that are collectible by the State Governments. Candidates are advised to cover adequately the Institute’s syllabus before sitting for any examination. SKILLS LEVEL EXAMINATIONS – NOVEMBER 2016 DIET 49

The Managing Partner Johnson, Seyi and Bernard (Estate Managers) 3, Ahmed Street Lagos Dear Sir, RE: CONVERSION OF JOHNSON, SEYI AND BERNARD (ESTATE MANAGERS) TO JSB CONSULTANTS LIMITED We write in response to your recent decision to convert your partnership business into a limited liability company. We wish to comment as follows:-

(a) TAX IMPLICATIONS OF CONVERSION

(i) The partnership ceased business on August 31, 2015, therefore, the income of the new company will not be subject to Personal Income Tax. (ii) Commencement rules will apply from September 1, 2015, when JSB Consultants Limited commenced business. (iii) The incorporation expenses shall be applicable only to JSB Consultants Limited though not an allowable expense for tax purposes. (iv) JSB Consultants Limited will be required to register with the Federal Inland Revenue Service for VAT, EDT, CIT, etc.

(v) The promoters of JSB Consultants Limited shall deduct or (remit Witholding Tax on professional fees paid during incorporation at the rate of 10% if the beneficiary is a limited liability company and 5% if the recipient is an individual or partnership.

(b) TAX IMPLICATIONS OF COST OF INCORPORATION

(i) The total cost of N1,350,000 though paid during the partnership period, shall be considered as pre-operational expenses of JSB Consultants Limited.

(ii) The pre-operational expenses when added back to the Net Profit will increase taxable income, thereby increasing tax payable by JSB Consultants Limited.

(iii) N1,350,000 charged against revenue of JSB Consultants Limited is not an allowable expense for tax purposes even if spread over a number of years. SKILLS LEVEL EXAMINATIONS – NOVEMBER 2016 DIET 50 We have commented on areas deemed necessary, nevertheless, we are willing to supply additional information if you require any further clarification. Yours faithfully, For: Femi Jacobs & Co O.B. Okpobo For: Managing Partner

Marking Guide Marks Marks

(a) Address 1 Heading 1 Introduction 1 Tax implications of conversion(2 marks for each of any 4 points) 8 11 (b) Tax implications of cost of incorporation: Three (3) marks each for 3 points correctly stated(3 x 3) 9 Total Marks 20

EXAMINER’S REPORT The question tests candidates’ knowledge of the tax implications of converting a partnership to a limited liability company. Few Candidates attempted the question and performance was very poor. The commonest pitfall was the complete misunderstanding of the question by the candidates. Candidates are advised to read ICAN Study Texts and Pathfinders to broaden their knowledge on the conversion of partnerships to limited liability companies. SKILLS LEVEL EXAMINATIONS – NOVEMBER 2016 DIET 51

(a) Grounds for a valid objection to a tax assessment These include:

i. State the precise grounds of objection; ii. The objection must be submitted within 30 days of receiving the Notice of Assessment; and iii. The Notice of objection must be in writing and addressed to the Chairman, Federal Inland Revenue Service or the State Internal Revenue Service.

(b) The Composition of Joint Tax Board (JTB) The JTB comprises: i. The Chairman of the Federal Inland Revenue Service Board, who doubles as the Chairman of the Joint Tax Board;

ii. One member from each State, being a person experienced in income tax matters, nominated either by name or office, from time to time, by the Commissioner charged with responsibility for matters relating to income tax of the State in question;

iii. The Secretary, who is not a member of the Board, and is appointed by the Federal Civil Service Commission; and

iv. The Legal Adviser of the FIRS acts as the Legal Adviser to the JTB.

(c) Functions of The Joint Tax Board The Board shall: i. Exercise the powers or duties conferred on it by the PITA and other Acts;

ii. Advise the Federal Government on request, in respect of double taxation agreement with any other Country;

iii. Advise the Federal Government, on request, in respect of rates of capital allowances and other taxation matters, having effect throughout Nigeria in respect of any proposed amendment to PITA; SKILLS LEVEL EXAMINATIONS – NOVEMBER 2016 DIET 52

iv. Promote uniformity, both in the application of PITA and in the incidence of tax on individuals throughout Nigeria; and

v. Impose its decisions, on matters of procedure and interpretation of PITA, on any State, for purposes of conforming to agreed procedures of interpretations.

(d) Types of taxes that are exclusively collectible by the Federal Inland Revenue Service. These are:

(i) Value Added Tax; (ii) Petroleum Profits Tax; (iii) Tertiary Education Tax; (iv) Companies Income Tax; (v) Withholding Tax from companies; (vi) Information Technology Tax; and (vii) Personal Income Tax of members of armed forces, Nigeria Police Force, residents of FCT, staff of the Ministry of External affairs and Non-resident individuals.

(e) Taxes collectible by both FIRS and SBIR These include: (i) Capital Gains Tax of Corporate bodies are collectible by the FIRS while that of the individuals resident in States are collectible by the SIRS;

(ii) Stamp Duties on the instruments executed by corporate bodies are collectible by Federal Government while those of individuals are collectible by State Board of Internal Revenue;

(iii) Personal Income Tax of members of the armed forces, Nigeria Police Force, residents of the FCT and staff of the Ministry of External Affairs and Non-resident individuals are to be collected by the Federal Government while others are collectible by States; and

(iv) Withholding Tax. SKILLS LEVEL EXAMINATIONS – NOVEMBER 2016 DIET 53

MARKING GUIDE MARKS a) Grounds for a valid objection (1 mark each subject to 3 points) 3 b) Composition of Joint Tax Board (1/2 mark each subject to 4 points) 2 c) Functions of the Joint Tax Board (1 mark each subject to 5 points) 5 d) Taxes collectible by FIRS (1 mark each subject to 5 points) 5 e) Taxes collectible by FIRS and SBIR(11/4 mark each subject to 4 points) 5 20

EXAMINER’S REPORT This question tests candidates’ knowledge of objection to a tax assessment and tax administration. Most candidates attempted the question but performance was average. The commonest pitfall was the inability of the candidates to identify the list of taxes collectible by the State Boards of Internal Revenue and the composition of the Joint Tax Board. Candidates are advised to pay necessary attention to the ’objections and appeals’ and tax administration in Nigeria as clearly covered in the syllabus and Study Texts. SKILLS LEVEL EXAMINATIONS – NOVEMBER 2016 DIET 54

a (i) Stamp Duties are managed by the Commissioner of Stamp Duties who may be appointed from within the Service. The duty of a Commissioner may be performed by any one of the Commissioners where there are more than one. An instrument must be sent to the Commissioner of Stamp Duties for adjudication. The Federal Government is the only competent authority to impose, charge and collect duties on instruments specified in the schedule to the Act, if such instruments relate to the matters executed between a company and an individual group or body of individuals. State Governments impose, charge, collect Stamp Duties on instruments executed by individuals.

(ii) Instruments subject to Stamp Duties are:

- Lease; - Contract notes; - Bills of lading; - Agreements; - Duplicate and counterparts; - Marketable securities; - Mortgages; - Notarial Acts; - Insurance policies; - Receipts; - Settlements; - Share warrants; - Warrants of goods; - Appraisement; - Instrument of apprenticeship; - Capital of companies; - Other conveyances; - Letter of powers of attorney and voting papers; - Bank notes, bills of exchange and promissory notes; and - Exchange partition or division ; SKILLS LEVEL EXAMINATIONS – NOVEMBER 2016 DIET 55 b. OLAMIDE LIMITED COMPUTATION OF VAT PAYABLE TO FEDERAL INLAND REVENUE SERVICE Description Sales Value Input VAT Output VAT VAT payable N N N N Olamide Limited 1,800,000 - 90,000 90,000 Qudus Enterprises 2,500,000 90,000 125,000 35,000 Mr Lekan 5,000,000 125,000 250,000 125,000 Total VAT payable 250,000

Marking Guide Marks Marks (a) i. Stamp Duties – Explanation 2 Competent authority 2 Imposition of Stamp Duties 1 5 ii. 1 mark for each instrument subject to a maximum of 5 points 5

(b) ½ mark for each correct entry 5 15

EXAMINER’S REPORT The question tests candidates’ knowledge of the law on Stamp Duties and the calculation of Value Added Tax (VAT) remittable to Federal Inland Revenue Service. Many candidates did not understand the question and performance was just average. The commonest pitfall was the poor knowledge of the provisions of the Stamp Duties Act. Candidates are advised to pay attention to the content of ICAN Study Text and the Institute’s Pathfinder. SKILLS LEVEL EXAMINATIONS – NOVEMBER 2016 DIET 56

a. JOHN BULL NIGERIA LIMITED COMPUTATION OF CAPITAL ALLOWANCES FOR 2011 TO 2015 YEARS OF ASSESSMENT Plant & Machinery Total Capital Allowance % % % Initial Allowance 50 50 15 Annual Allowance 25 25 10 Investment Allowance 10 - - A.Y. 2011 N N N N Cost 500,000 300,000 400,000 Initial Allowance (250,000) (150,000) (60,000) 460,000 Annual Allowance (26,042) (15,625) (14,167) 55,834 Investment Allowance (50,000) 0 0 50,000 W.D.V. c/f to A.Y. 2012 223,958 134,375 325,833 565,834 A.Y. 2012 Cost - Additions 200,000 1,000,000 ( 0) Investment Allowance (20,000) (0) (0) 20,000 Initial allowance (100,000) (500,000) (0) 600,000 Annual allowance. Old (62,500) (37,500) (34,000) 134,000 Annual allowance. New (25,000) (125,000) (0) 150,000 W.D.V. c/f to A.Y. 2013 236,458 471,875 291,833 904,000 A.Y 2013 Annual allowance (87,500) (162,500) (34,000) 284,000 W.D.V. c/f to A.Y. 2014 148,958 309,375 257,833 A.Y 2014 Annual Allowance (87,500) (125,000) (34,000) 246,500 Disposals (0) (59,375) (0) W.D.V. c/f to A.Y. 2015 61,458 125,000 223,833 A.Y 2015 Disposals (14,583) 0 0 Annual allowance - Old

- New Motor Vehicle (21,865) (0) (0) 21,865 (25,000) (124,990) (34,000) 183,990 W.D.V. c/f to A.Y. 2016 10 10 189,833 205,855 SKILLS LEVEL EXAMINATIONS – NOVEMBER 2016 DIET 57 Factory Building

b. PLACEMENT OF ASSETS IN RELEVANT YEARS OF ASSESSMENT Year of Assessment Basis Periods Capital Allowances 2011 1/8/11 – 31/12/11 1/8/11 – 31/12/11 2012 1/8/11 – 31/7/12 1/1/12 – 31/7/12 2013 1/8/11 – 31/7/12 - 2014 1/8/12 – 31/7/13 1/8/12 – 31/7/13 2015 1/8/13 – 31/7/14 1/7/13 – 31/7/14 ALLOCATION OF QUALIFYING EXPENDITURE Date of Purchase Qualifying Expenditure Amount N Year of Assessment 1/ 07/2011 Plant and Equip 500,000 2011 31/10/11 Motor Vehicle 300,000 2011 15/12/11 Factory Building 400,000 2011 15/01/12 Motor Vehicle 1,000,000 2012 01/06/12 Plant and Equip 200,000 2012

c. COMPUTATION OF BALANCING CHARGE/ALLOWANCE Date Of Disposal Qualifying Capital Expenditure Year of Assessment Cost N 31/12/13 Equipment 2015 31/12/12 Motor Vehicle 2014 Capital allowances claimed on equipment disposed of: I.A/A.A. 50/25 A.Y 2011 N Cost 200,000 I.A (100,000) A.A (5 Months) (10,417) W.D.V. c/f to A.Y. 2012 89,583 A.Y 2012 A.A (25,000) W.D.V. c/f to A.Y. 2013 64,583 A.Y 2013 A.A (25,000) W.D.V. c/f to A.Y. 2014 39,583 SKILLS LEVEL EXAMINATIONS – NOVEMBER 2016 DIET 58 A.Y 2014 A.A (25,000) W.D.V. c/f to A.Y. 2015 14,583 A.Y 2015 S.P (50,000) Balancing Charge 35,417 There is no restriction on the balancing charge of N35,417 as this amount is not up to the total allowances of N185,417 already claimed. Capital allowances claimed on Motor Vehicle disposed of I.A./A.A. 50/25 A.Y. 2011 N Cost 300,000 I.A 50% (150,000) A.A (5 Months) (15,625) W.D.V. c/f to A.Y. 2012 134,375 A.Y. 2012 A.A (37,500) W.D.V. c/f to A.Y. 2013 96,875 A.Y. 2013 A.A (37,500) W.D.V. c/f to A.Y. 2014 (59,375) A.Y. 2014 S.P (400,000) Balancing Charge 340,625 Balancing charge is restricted to the total Capital allowances claimed of N240,625. SKILLS LEVEL EXAMINATIONS – NOVEMBER 2016 DIET 59

Marking Guide Marks (a) Computation of Capital allowances (44 ticks at ¼ per tick) 11 (b) Placement of assets in relevant Year of Assessment (10 ticks @ ¼ mark per tick subject to a maximum of 8 ticks) 2

(c) Computation of Balancing Charge/Allowance (22 ticks @ 1/8 per tick subject to a maximum of 16 ticks) 2 15

EXAMINER’S REPORT The question tests candidates’ knowledge of the computation of capital allowances. Candidates showed poor understanding of the calculation and presentation of capital allowances. The commonest pitfall was the area of placing chargeable assets in the relevant years of assessment. Candidates are advised to be conversant with the computation of capital allowances as it is a frequent examination area. SKILLS LEVEL EXAMINATIONS – NOVEMBER 2016 DIET 60

November 27, 2016 The Chief Executive Officer Trevor Optimal Nigeria Limited 27, Ajeromi Street Lagos State Dear Sir, RE: EXCESS INPUT VAT We refer to our meeting and your subsequent request for our advice on the above subject. We wish to comment as follows:

a. REASON FOR THE CURRENT SITUATION The reason why the company is in the current situation is due to the deduction of Output VAT at source by the company’s customers. This practice is otherwise known as “Reverse Charge”. Reverse Charge is a provision under section 10 (2) of the VAT Act 2004 as amended (also see FIRS Information Circular number 02/2007) which obliges all companies operating in the Oil and Gas (O&G) sector in Nigeria to deduct VAT at source from payments due to vendors and remit same to the FIRS. The practice, however, inhibits the ability of companies that rendered service or supplied goods to an O&G company to offset Input VAT arising from their direct costs of operations as is the case with your organization.

b. BEST ACTION TO FOLLOW The best action to follow whenever a company has an overpaid tax or excess Input VAT is to apply in writing to the FIRS for a refund of the excess Input VAT. According to section 16 (1)(b), if the input tax exceeds the output tax, a taxpayer shall be entitled to a refund of the excess tax from the FIRS on production of such documents as the Service may, from time to time, require. Also, section 23 of the FIRS (Establishment) Act 2007 provides for a refund of excess tax to a taxpayer within 90 days after proper tax audit by the FIRS. SKILLS LEVEL EXAMINATIONS – NOVEMBER 2016 DIET 61

c. STEPS REQUIRED BY THE FIRS TO GRANT TAX REFUND

(i) Taxpayer reviews its books to determine the amount of claim and applies for refund. (ii) FIRS reviews the application and propose a date for a special audit (iii) FIRS carries out field audit and report accordingly. (iv) Reconciliation meetings are held between the taxpayer and FIRS to close out all issues raised. (v) IRS confirms the Input VAT refundable after all adjustments for any incorrect returns in the past. (vi) The company applies for the refund of the adjusted and verified amount. (vii) According to the FIRS, the refund shall be made within 90 days. We have commented on areas deemed necessary, nevertheless, we shall be willing to supply additional information if required. Yours faithfully For: XYZ & Co A. D. James For: Managing Partner SKILLS LEVEL EXAMINATIONS – NOVEMBER 2016 DIET 62

Marking Guide Marks Marks (a) Reasons for current situation 11/2 Provision of the law 2 Practice 11/2 5 (b) Application in writing 1 Provision of the law 2 Refund of excess tax 2 5

(c) Steps required to grant tax refund (1 mark for each point subject to a maximum of 5 points) 5 15

EXAMINER’S REPORT The question tests the candidates’ knowledge of Value Added Tax where there is Reverse Charge Mechanism. Most of the candidates who attempted the question did not show a good understanding of its requirements and performance was poor. The commonest pitfall was the inability of the candidates to distinguish between the Input and Output VAT. Candidates are advised to have a good understanding of situations where there is a Reverse Charge Mechanism. SKILLS LEVEL EXAMINATIONS – NOVEMBER 2016 DIET 63 NIGERIAN TAX RATES

1. CAPITAL ALLOWANCES Initial % Annual % Office Equipment 50 25 Motor Vehicles 50 25 Office Buildings 15 10 Furniture and Fittings 25 20 Industrial Buildings 15 10 Non-Industrial Buildings 15 10 - Agricultural Production 95 Nil Plant and Machinery – Others 50 25

2. INVESTMENT ALLOWANCE 10%

3. RATES OF PERSONAL INCOME TAX Graduated tax rates with consolidated relief allowance of N200,000 or 1% of Gross Income whichever is higher + 20% of Gross Income. Taxable Income (N) Rate of Tax (%) First 300,000 7 Next 300,000 11 Next 500,000 15 Next 500,000 19 Next 1,600,000 21 Over 3,200,000 24 After the relief allowance and exemption had been granted, the balance of income shall be taxed as specified in the tax table above.

4. COMPANIES INCOME TAX RATE 30%

5. TERTIARY EDUCATION TAX 2% of Assessable Profit

6. CAPITAL GAINS TAX 10%

7. VALUE ADDED TAX 5% SKILLS LEVEL EXAMINATIONS – NOVEMBER 2016 DIET 64 THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA