Taxation · 2017

a. Damilola Adewunmi Computation of Income Tax Payable for 2015 Year of Assessment N N Basic Salary 3,144,000 Commission 525,000 Bonus 90,000 Benefits-in-kind 225,000 GROSS INCOME 3,984,000 Consolidated Relief Allowance(see working) (996,800) 2,987,200 Tax Exempt Items: Insurance 180,000 Mortgage Interest 90,000 (270,000) Chargeable Income 2,717,200 Income Tax Payable 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 N1,117,200 @21% 234,612 N2,717,200 ________ 458,612 48

b. Damilola Adewunmi Computation of Income Tax Payable for 2015 Year of Assessment N N Basic Salary 3,144,000 Commission 525,000 Bonus 90,000 Benefits-in-kind 225,000 GROSS INCOME 3,984,000 Consolidated Relief Allowance (See Working) (996,800) 2,987,200 Tax Exempt Items: Insurance Premium 180,000 National Housing Fund Contribution 78,600 National Health Insurance Scheme 210,000 Pension Contribution 235,800 Mortgage Interest 90,000 (794,400) Chargeable Income 2,192,800 Income Tax Payable 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 N592,800 @ 21% 124,488 N2,192,800 348,488 c.

i. Itinerant Worker An itinerant worker means an individual irrespective of his status, who works at any State during a year of assessment (other than a member of the armed forces) for wages, salaries or livelihood by working in more than one State, and work for a minimum of twenty (20) days in at least three (3) months of every assessment year.

ii. Non-resident Individual A non-resident individual is a person who is not domiciled in Nigeria or who stays in Nigeria for less than 183 days in a 12-month period but derives income or profit from Nigeria. 49

iii. Earned Income This refers to an income derived from a trade, business, profession, vocation or employment carried on or exercised by him and a pension derived by him in respect of a previous employment. It includes profits, salaries, wages, commissions, bonuses, etc.

iv. Resident Individual An individual is regarded as resident in Nigeria if he

• is domiciled in Nigeria;

• sojourns in Nigeria for a period or periods all amounting to 183 days or more in a 12-month period; and

• serves as a diplomat or diplomatic agent of Nigeria in a country other than Nigeria.

v. Unearned income This is income derived from a source other than trade, business, profession or employment e.g. dividend, rental income, royalty, interest, etc.

d. The following dividends are excluded from tax:

i. Dividend paid out of pioneer profit; ii. Dividend paid by issue of bonus shares; iii. Dividend from small companies (revenue less than N2,000,000); iv. Dividend paid by companies assessed under Petroleum Profits Tax; v. Dividend from companies in petrochemical and liquefied natural gas; vi. Dividend earned from abroad and brought into Nigeria by a Nigerian resident in convertible currency and paid into a domiciliary account in a bank approved by the government; and vii. Dividend distributed by a Unit Trust. Working: Consolidated Relief Allowance Higher of N200, 000 or 1% of Gross Income + 20% of Gross Income = N200,000 + N796,800 = N996,800 50

EXAMINER’S REPORT The question tests candidates’ understanding of the assessment of an individual. Candidates had a good understanding of the question and performance was above average. The commonest pitfall was the inability of the candidates to recognise the fact that investment incomes are taxed on preceding year basis. Candidates are advised to pay attention to incomes assessable on preceding year basis.

MARKING GUIDE MARKS MARKS a. Computation of Chargeable Income: 8 points raised @ 1 mark each 8 4 points in Computation of Tax liability @¼ mark each 1 Tax payable 1 10

b. Computation of Chargeable Income: The first 5 points @ ½ mark each 2½ The five Exempt Items @ 1 mark each 5 Chargeable Income @ ½ mark ½ 5 points in Computation of Tax liability @ ¼ mark each 1¼ Tax Payable ¾ 10

c. The 5 definitions @ 1 mark each 5

d. The first 5 dividends exempted from tax @ 1 mark each 5 30 51

a. TRANSACTIONS IN RESPECT OF WHICH A TAX CLEARANCE CERTIFICATE MAY BE DEMANDED BY GOVERNMENT AGENCY The requirement to obtain a Tax Clearance Certificate on an annual basis places the onus on the taxpayers to ensure full compliance with the requirements of the tax laws. The following are transactions in respect of which a Tax Clearance Certificate may be demanded by a government agency:

i. Application for Government loan for industry or business; ii. Registration of motor vehicles; iii. Application for firearms license; iv. Application for foreign exchange or exchange control permission to remit funds outside Nigeria; v. Application for Certificate of Occupancy; vi. Application for award of contracts by governments, their agencies and registered companies; vii. Application for approval of building plans; viii. Application for trade license;

ix. Application for transfer of real property; x. Application for import or export license; xi. Application for agent license; xii. Application for pools or gaming license; xiii. Application for registration as a contractor; xiv. Application for distributorship;

xv. Confirmation of appointment by government, as chairman or member of public board, institution, commission, company or to any other similar position made by the government; xvi. Stamping of guarantor’s form for Nigerian Passport; xvii. Application for registration of a limited liability company or of a business name; xviii. Application for allocation of market stalls; xix. Appointment or election into public office;

xx. Change of ownership of vehicle by vendor; and xxi. Application for a plot of land. 52

b. PROCEDURES FOR HEARING AN APPEAL BEFORE A TAX APPEAL TRIBUNAL Where an appeal is not discontinued, the procedures for hearing the appeal before the Tax Appeal Tribunal are as follows:

i. The Tax Appeal Tribunal gives seven (7) days notice to the appellant and Federal Inland Revenue Service (FIRS) of the date and place fixed for hearing of the appeal; ii. An appeal should be heard by not less than three members of the Tax Appeal Tribunal in attendance with the Chairman or any other member, (in the absence of the Chairman), presiding; iii. A member with vested interest in any matter before the Tax Appeal Tribunal must disclose such interest and abstain from attending any sitting at which the matter is to be heard; iv. All appeals before the Tax Appeal Tribunal are heard in public;

v. Appellant may be represented by a professional adviser or may give his evidence by written notice; vi. Appellant leads the case, by proving that the assessment is excessive, that is, onus of proof is put on the appellant; vii. If the representative of the FIRS can prove to the Tax Appeal Tribunal that: ▪ The appellant failed to file returns, audited accounts etc. as required by the provisions of Companies Income Tax (CITA) C21 LFN 2004 (as amended); or ▪ The appeal is frivolous, vexatious or an abuse of appeal process; or ▪ It is expedient to require the appellant to pay a security deposit:

• The Tax Appeal Tribunal may make an order that the appellant pay deposit to the tax authority on account of tax being disputed before the matter could be heard; and

• The deposit payable, is the lower of tax paid in the immediately preceding year and half of the tax charged (which is on an appeal), plus 10% of the deposit.

viii. The Tax Appeal Tribunal can confirm, reduce, increase, or annul the assessment, as deemed necessary; ix. The Tax Appeal Tribunal’s decisions are recorded in writing, by the Chairman, and a Certified True Copy is supplied to the appellant or the FIRS on request, within 3 months of the decision; x. Particulars of the extent to which the Tax Appeal Tribunal is dissatisfied with the appellant’s accounts, books, etc, non-compliance with precepts representative and refusal to answer questions put, should all be noted in the decision of the Tax Appeal Tribunal; and xi. Notice of the amount of tax chargeable, as determined by the Tax Appeal Tribunal, shall be served on the company by FIRS. 53 The tax payable as determined by the Tax Appeal Tribunal is payable within one month of the date of Notice of Assessment notwithstanding that an appeal may be pending on same before the Federal High Court.

EXAMINER’S REPORT The question tests candidates’ knowledge of issues relating to Tax Clearance Certificate and procedures for hearing an appeal before the Tax Appeal Tribunal. Candidates had a fair understanding of the question and performance was average. The commonest pitfall was the inability of the candidates to differentiate between Objection and Tax Appeal. Candidates are advised to read wider for future examinations by reading ICAN Study Text and other relevant study materials.

MARKING GUIDE MARKS a. 1 mark each subject to a maximum of any 10 transactions 10

b. 1 mark each subject to a maximum of any 10 procedures 10 20 54

(a) COMPUTATION OF ADJUSTED INCOME OF MUSEAK & CO (CHARTERED ACCOUNTANTS) FOR 2016 ASSESSMENT YEAR ₦ ₦ Net Profit for the year 43,350,000 Add: Disallowable expenses: Provision for bad debts 2,000,000 Depreciation 1,500,000 Repairs and Maintenance 550,000 Donations 400,000 Medical expenses 500,000 4,950,000 Adjusted Income 48,300,000 Agreed Capital allowances (4,000,000) Distributable Income 44,300,000

(b) Computation of Partners’ Chargeable Income Muyiwa Seyi Akpan Total ₦ ₦ ₦ N Interest on Capital 1,200,000 600,000 250,000 2,050,000 Share of Profit (6:4:2) 22,150,000 14,766,667 7,383,333 44,300,000 23,350,000 15,366,667 7,633,333 46,350,000 Interest on Loan 0 400,000 0 400,000 Partners’ Assessable Income 23,350,000 15,766,667 7,633,333 46,750,000 Consolidated Relief Allowance (4,903,500) (3,353,333) (1,726,667) (9,983,500) 18,446,500 12,413,334 5,906,666 36,766,500 Tax Exempt Items: Contribution to Pension Scheme ( 0) ( 0) (500,000) (500,000) Chargeable Income 18,446,500 12,413,334 5,406,666 36,266,500 55

(c) Computation of Tax Payable by Partners: Muyiwa Seyi Akpan ₦ ₦ ₦ Chargeable Income 18,446,500 12,413,334 5,406,666 First ₦300,000@7% 21,000 21,000 21,000 Next ₦300,000@11% 33,000 33,000 33,000 Next ₦500,000@ 15% 75,000 75,000 75,000 Next ₦500,000@19% 95,000 95,000 95,000 Next ₦1,600,000@21% 336,000 336,000 336,000 Above ₦3,200,000@24% Muyiwa:₦18,446,500 – ₦3,200,000@24% 3,659,160 Seyi: ₦12,413,334 – ₦3,200,000@24% 2,211,200 Akpan: ₦5,406,666 – ₦3,200,000@24% ___ _____ ___ 529,600 4,219,160 2,771,200 1,089,600

NOTES:

i. Consolidated Relief Allowance is the higher of N200,000 or 1% of Gross Income plus 20% of Gross Income.

ii. The deduction of Capital allowances from the Adjusted Income before arriving at the Distributable Income is preferable to sharing of Capital Allowances amongst the partners.

EXAMINER’S REPORT The question tests candidates’ knowledge of taxation of partners in partnership business. Many candidates attempted this question and performance was average. The commonest pitfall was the inability of the candidates to calculate Consolidated Relief Allowance and identify disallowable expenses. Candidates are advised to pay attention to computation of tax liabilities of partners. 56

MARKING GUIDE MARKS MARKS a. Heading ½ Net profit ½ 5 disallowable expenses @ ½ mark each 2½ Sub-total 1 Adjusted income ½ Agreed Capital allowances ½ Distributable Income ½ 6

b. Heading 1½ Interest on Capital ½ Share of Profit ½ Sub-total ½ Interest on loan ½ Partners’ Assessable Income ½ Consolidated Relief Allowance ½ Sub-total ½ Contribution to Pension Scheme ½ Chargeable Income ½ 6

c. Heading 1 First ₦300,000@7% ½ Next ₦300,000@11% ½ Next ₦500,000@ 15% ½ Next ₦500,000@19% ½ Next ₦1,600,000@21% ½ Above ₦3,200,000@24% 1½ Tax payable by the 3 partners @ 1 mark each 3 8 20 57

(a) Options Open to the Revenue Authority on Receipt of Letter of Objection On receipt of the Notice of Objection, the tax authority has the following options:

(i) Review and revise the assessment to an amount that is mutually- agreeable to the taxpayer and the Federal Inland Revenue Service. If this occurs, the tax authority will amend the assessment and serve on the company a notice of revised tax payable; or

(ii) Review and refuse to revise the assessment to the amount claimed by the taxpayer. In a situation where the taxpayer fails to agree with the tax authority on the amount of tax payable, and the Federal Inland Revenue Service does not see any reason to further revise the assessment, then it will issue a Notice of Refusal to Amend its assessment.

(b) Content of a Notice of Objection In line with the provision of Section 69 of Companies Income Tax Act Cap C21 LFN 2004 (as amended), for a Notice of Objection to be valid, it must:

i. be in writing and addressed to the Chairman, Federal Inland Revenue Service;

ii. state the grounds of objection, namely:

- Amount of Assessable and Total Profit of the company for the relevant assessment year; and

- Amount of tax which the taxpayer claims is payable for the year of assessment.

iii. be raised within thirty days of the date of service of the Notice of Assessment.

(c) Jurisdiction of the Tax Appeal Tribunal

i) The Tribunal shall have power to adjudicate on disputes, and controversies arising from the following tax laws (hereinafter referred to as “the tax laws”):

- Companies Income Tax Act CAP C21 LFN 2004 (as amended) - Personal Income Tax Act CAP P8 LFN 2004 (as amended) - Petroleum Profits Tax Act CAP P13 LFN 2004 (as amended) - Value Added Tax Act CAP V1 LFN 2004 (as amended) 58

- Capital Gains Tax Act CAP C1 LFN 2004 (as amended) - Any other law contained in or specified in the First Schedule to this Act or other laws made from time to time by the National Assembly.

ii) The Tribunal shall apply such provisions of the tax laws referred to in sub-paragraph (1) of the paragraph as may be applicable in the determination or resolution of any dispute or controversy before it.

(d) The conditions to be fulfilled for an Appeal to the Federal High Court to be valid For such appeals to be valid, the following conditions must be satisfied:

(i) Amount involved must not be less than N400;

(ii) The appeal must be on points of law;

(iii) Notice of appeal must be given to the Tax Appeal Tribunal within 30 days after the date of the judgement of the Tax Appeal Tribunal; and

(iv) The grounds of law on which the decision of the Tax Appeal Tribunal is being challenged should be stated.

(e) Option open to an aggrieved taxpayer who is not satisfied with the decision of the Federal High Court Further appeal against the decision of the Federal High Court shall lie with the Court of Appeal and from there to the Supreme Court.

EXAMINER’S REPORT The question tests candidates’ knowledge of Objections and Appeals before a Tax Appeal Tribunal. Many candidates attempted the question and performance was average. Candidates had a fair understanding of the question. The commonest pitfall was the inability of the candidates to state the Jurisdiction of the Tax Appeal Tribunal. Candidates are advised to pay attention to Objections and Appeals before a Tax Appeal Tribunal as contained in ICAN Study Text. 59

MARKING GUIDE MARKS MARKS (a) (i) Review and revise the assessment 1

(ii) Review and refuse to revise the assessment 1 2

(b) (i) Be in writing 1 (ii) State the grounds of objection 1 (iii) Be raised within 30 days 1 3

(c) (i)Companies Income Tax 1 (ii) Personal Income Tax 1 (iii) Petroleum Profits Tax 1 (iv) Value Added Tax 1 (v) Capital Gains Tax 1 (vi) Any other law 1 6

(d) Amount involved must not be less than N400 1 Must be on points of law 1 Notice within 30 days 1 Grounds of law stated 1 4

(e) Court of Appeal 2½ Supreme Court 2½ 5 20 60

a. CHIEF JONGBO SETTLEMENT ASSESSABLE INCOME IN THE HANDS OF BENEFICIARIES Banke Abidemi Sunkanmi Olajire Ojo Gbenga Total N N N N N N N Discretionary Income 262,500 350,000 437,500 315,000 - - 1,365,000 Annuity Received - - - - 87,500 52,500 140,000 Share of distributable Income 2,815,772 2,815,772 2,815,772 2,815,772 2,815,772 2,815,772 16,894,632 Assessable Income in the hands of the beneficiaries 3,078,272 3,165,772 3,253,272 3,130,772 2,903,272 2,868,272 18,399,632 See Workings i and ii

WORKINGS N N i. Interest received 3,500,000 Dividend (Gross) 15,555,556 Rental Income 10,500,000 29,555,556 Business Profit 31,500,000 Capital Allowance (7,350,000) 24,150,000 Miscellaneous income 5,600,000 Gross Income 59,305,556 Less: Allowable Expenses Trustee’s remuneration: Fixed 787,500 Variable: 3% of N59,305,556 1,779,167 Fixed Annuity for grandchildren: Ojo 87,500 Gbenga 52,500 Administrative expenses 4,550,000 (7,256,667) Computed Income 52,048,889 Discretionary Payments: Banke 262,500 Abidemi 350,000 Sunkanmi 437,500 Olajire 315,000 (1,365,000) Distributable Income 50,683,889 61 N N Less: Amount available for distribution 1/3 of N50,683,889 = N16,894,632 ii. Distribution as follows: Ojo (1/6 x N16,894,632) = 2,815,772 Gbenga (1/6 x N16,894,632) = 2,815,772 Banke (1/6 x N16,894,632) = 2,815,772 Abidemi (1/6 x N16,894,632) = 2,815,772 Sunkanmi (1/6 x N16,894,632) = 2,815,772 Olajire (1/6 x N16,894,632) = 2,815,772 (16,894,632)

b. COMPUTATION OF NET ASSESSABLE INCOME IN THE HANDS OF THE TRUSTEE N Distributable Income 50,683,889 Amount available for distribution 16,894,632 33,789,257 Dividend (Gross) (15,555,556) Net assessable income in the hands of the Trustee 18,233,701

EXAMINER’S REPORT The question tests candidates’ knowledge of the assessment of Trustees, Estates and Settlements. Most of the candidates that attempted the question did not understand its requirements. Consequently, performance was poor. The commonest pitfall was the non-grossing up of the dividend. Candidates should pay attention to computation of net assessable income in the hands of Trustees. 62

MARKING GUIDE MARKS MARKS a. Discretionary Income 11/3 Annuity received 2/3 Share of distributable income 2 Assessable income in the hands of the beneficiaries 2

Workings: Interest received 1/3 Dividend Gross 1/3 Rental Income 1/3 Sub-total 1/3 Business Profit 1/3 Capital Allowance 1/3 Sub-total 1/3 Miscellaneous Income 1/3 Gross Income 1/3 Trustee’s remuneration – Fixed 1/3 – Variable 1/3 Fixed Annuity – Ojo 1/3 – Gbenga 1/3 Admin expenses 1/3 Discretionary Payments – Banke 1/3 – Abidemi 1/3 – Olasunkanmi 1/3 – Olajire 1/3 Distribution to beneficiaries 2 14

b. 4 entries @ ¼ mark each 1 15 63

CAMPBELL COMPANY LIMITED (a) COMPUTATION OF CAPITAL ALLOWANCES FOR 2015 YEAR OF ASSESSMENT Accounting Date or Basis Period 1/1/2014 - 31/12/2014 Motor Vehicle Furniture & Fittings Plant Total Initial Allowance 50 25 50 Annual Allowance 25 20 25 N N N N TWDV b/f 40,000 60,000 70,000 Cost – Additions 840,000 160,000 300,000 Initial (420,000) (40,000) (150,000) 610,000 Annual – Old (20,000) (20,000) (35,000) 75,000 Annual – New (105,000) (24,000) (37,500) 166,500 851,500 Investment allowance 30,000 881,500

Workings Initial: MV F&F PLANT 50% x 840,000 = 420,000 25% x 160,000 50% x 300,000 =40,000 =150,000 Annual 1 TWDV nV- 2 000,40 years = 000,20 3 000,60 years = 000,20 2 000,70 years = 000,35 Annual 2 cost – TWDV 000,840 - 4 000,420 000,160 5

- 000,40 2 000,70 years = 000,35 =105,000 =24,000 = 37,500 64 CAMPBELL COMPANY LIMITED (b) COMPUTATION OF TOTAL PROFIT, COMPANIES INCOME TAX (CIT) AND TERTIARY EDUCATION TAX (TET) N N Net profit 1,145,650 Add: Stamp duty on increase in Share Capital 75,000 Depreciation 234,450 Tertiary Education Tax 37,325 346,775 Assessable Profit 1,492,425 Capital allowances: Brought forward 70,000 For the year 881,500 Relieved (951,500) TOTAL PROFIT 540,925 Companies Income Tax (30% of Total Profit) = N162,277.50 Tertiary Education Tax (2% of Assessable Profit) = N29,848.50

EXAMINER’S REPORT The question tests candidates’ knowledge of Capital Allowances and Companies Income Tax Computations Many candidates that attempted the question did not understand its requirements. Consequently, the performance was below average. The commonest pitfall was the poor presentation of the solution. It is recommended that attention should be paid to the presentation of solutions. 65

MARKING GUIDE MARKS MARKS a. 1/3 mark each for 21 entries 7

b. Heading ½ Net Profit ½ Stamp duty ½ Depreciation ½ Tertiary Education Tax ½ Total of disallowable expenses ½ Assessable Profit ½ Capital allowances 1½ Total Profit 1 Companies Income Tax 1 Tertiary Education Tax 1 8 15 66

(a) Withholding Tax is a tax deducted at source from payments made to a taxable person for the supply of goods and services. It is not another form of tax, but simply an advance payment of tax, as the withholding tax deducted at source is off-settable against any subsequent tax liability that may be due in respect of other income. In certain cases, the Withholding Tax deducted at source is the final tax in the hands of the recipients.

(b) (i) The Withholding Tax rate is reduced to 7.5% for dividend, interest, and royalty for recipients of a country which has double tax treaty with Nigeria at the rates contained in the double taxation treaty.

(ii) The types of income involved are royalty, interest and dividend.

(c) The currency in which tax is to be deducted and paid over to the relevant tax authorities is the currency of transaction. Where the transaction is in foreign currency, the tax is to be withheld in the foreign currency and paid to the relevant tax authority, through the Central Bank of Nigeria (CBN). The CBN would then effect the necessary conversion, using the ruling rate of exchange and then credit the appropriate government account with the sum.

(d) The payment schedule must contain the following particulars:

i. Name of the taxpayers who suffered the deductions; ii. Their addresses; iii. The nature of their activities/services and period covered; iv. Their tax file numbers [now Tax Identification Number (TIN)];

v. The total amount payable; vi. The rate of tax applied; vii. The amount of tax withheld; viii. The balance paid to the taxpayer;

ix. The tax contract for which returns were being made;

x. The date of payment; and xi. The cheque number and date. 67

EXAMINER’S REPORT The question tests candidates’ knowledge of the provisions of the law relating to Withholding Tax. Many candidates attempted the question and performance was above average. The commonest pitfall was the candidates’ inability to state the rate applicable to international transactions. Candidates are advised to study the law relating to Withholding Tax as contained in ICAN Study Text.

MARKING GUIDE MARKS MARKS (a) Deducted at source 1 Advance payment of tax 1 Final tax liability 1 3

(b) i. Rate 1 ii. Dividend 1 Interest 1 Royalty 1 4

(c) Currency of transaction 3

(d) Nature of the taxpayer Addresses Nature of activities Tax file number Total amount payable The rate of tax Amount of tax withheld The balance paid to the taxpayer The tax contract Date of payment Cheque number and date (1 mark each subject to a maximum of 5 points) 5 15 68 THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA

(a) MONSTAR & CO COMPUTATION OF ADJUSTED PROFIT FOR THE YEAR ENDED DECEMBER 31, 2016 N’000 N’000 Net Profit for the year 37,500 Add: Disallowable expenses: Depreciation 5,450 Loss on sale of property, plant and equipment 2,450 Donations 1,850 Interest on capital 1,985 Partners’ salaries 18,600 Repairs and maintenance (Moon’s brother car) 640 General provision for bad debts 1,800 32,775 Adjusted Profit 70,275 Deduct: Interest on capital 1,985 Partners’ salaries 18,600 (20,585) 49,690 Capital allowances (3,480) Computed Income 46,210

(b) COMPUTATION OF GROSS INCOME OF EACH OF THE PARTNERS Sun Moon Star Total N’000 N’000 N’000 N’000 79 Share of computed income 18,484 18,484 9.242 46,210 Interest on capital 650 785 550 1,985 Salaries 6,800 6,100 5,700 18,600 Interest on loan 1,250 850 0 2,100 Gross income 27,184 26,219 15,492 68,895

(c) COMPUTATION OF INCOME TAX LIABILITY OF EACH PARTNER Sun Moon Star Total N’000 N’000 N’000 N’000 Gross income 27,184 26,219 15,492 68,895 Consolidated Relief Allowance (Higher of N200,000 or 1% of Gross income + 20% of Gross income) (5,709) (5,506) (3,253) (14,468) 21,475 20,713 12,359 54,427 Tax exempt items: Life assurance premium (690) (720) (580) (1,990) Chargeable Income 20,785 19,993 11,659 52,437 TAX LIABILITIES Sun Moon Star N N N First N300,000 @ 7% 21,000 21,000 21,000 Next N300,000 @ 11% 33,000 33,000 33,000 Next N500,000 @ 15% 75,000 75,000 75,000 Next N500,000 @ 19% 95,000 95,000 95,000 Next N1,600,000 @ 21% 336,000 336,000 336,000 Next N17,279,060 @ 24% 4,220,400 Next N16,402,710 @ 24% 4,030,320 Next N8,316,480 @ 24% 2,030,160 Tax liability of each partner 4,780,400 4,590,320 2,590,160

EXAMINER’S REPORT The question tests candidates’ knowledge of the computation of partners’ tax liability. The candidates had a good understanding of the question and performance was good. The commonest pitfall was the failure of some candidates to identify expenses that are disallowable. 80 Candidates are advised to get familiar with disallowable expenditures in the ascertainment of taxable income.

MARKING GUIDE Marks Marks (a) Heading ½ Net profit ½ Disallowable expenses (1/2 mark each for seven expenses) 3½ Total of disallowable expenses ½ Adjusted profit ½ Interest on capital ½ Partners’ salaries ½ Subtotal 1 Capital allowances ½ Computed income 1 9

(b) Share of computed income ¾ Interest on capital ¾ Salaries ¾ Interest on loan ¾ 3

(c) Consolidated Relief allowance 1 Life assurance premium 1 Tax payable for each band based on the graduated tax table at 1/3 mark each subject to 18 points 6 8 20

(a) Types of Loss Reliefs The different types of loss relief are as follows:

i. Current Year Loss Relief This is one of the methods of relieving losses. It is applicable to only individuals. In this case, losses incurred from a particular source of income can be relieved against other sources. 81 In order to enjoy this relief, a written claim must be made within 12 months after the end of the year of assessment in which the loss arises. It is important to note that the Current Year Loss Relief is applicable to a loss incurred only in the first year. Any unrelieved loss can only be set off against profit from the source from which the loss was incurred.

ii. Carry Forward Loss Relief This relief is available only against profit from the same source of income where the loss originally occurred. It does not require approval before the relief can be granted. The relief also applies to both individuals and corporate bodies.

(b) OLOGBOJO NIGERIA PLC COMPUTATION OF INCOME TAX LIABILITIES FOR 2012 – 2015 ASSESSMENT YEARS N’000 A.Y. 2012 (1/1/2011 – 31/12/2011) Loss for the year (950,000) Capital allowances for the year (65) Unrelieved loss and capital allowances c/f (950,065) Companies Income Tax NIL Tertiary Education Tax NIL A.Y. 2013 (1/1/2011 – 31/12/2012) N’000 N’000 Loss for the year ( 650,000) Add: Unrelieved loss b/f ( 950,000) (1,600,000) Capital allowances for the year 103 Capital allowances b/f 65 ( 168) Unrelieved losses and capital allowances c/f (1,600,168) Companies Income Tax NIL Tertiary Education Tax NIL A.Y. 2014 (1/1/2013 – 31/12/2013) Loss for the year (1,260,000) Add: Unrelieved losses b/f (1,600,000) (2,860,000) 82 Capital allowances for the year 85 Capital allowances b/f 165 (253) Unrelieved losses and capital allowances c/f (2,860,253) Companies Income Tax NIL Tertiary Education Tax NIL A.Y. 2015 (1/1/2014 – 31/12/2014) Loss for the year (125,000) Add: Unrelieved losses b/f (2,860,000) (2,985,000) Add: Capital allowances for the year 120 Capital allowances b/f 253 (373) Unrelieved losses and capital allowances c/f (2,985,373) Companies Income Tax NIL Tertiary Education Tax NIL A.Y. 2016 (1/1/2015 – 31/12/2015) N’000 N’000 Profit for the year 136,000 Losses brought forward (2,985,000) Unrelieved losses c/f (2,849,000) (2,849,000) Add: Capital allowances: For the year 0 B/f from A.Y. 2015 373 (373) Losses and Capital allowances c/f for A.Y 2017 (2,849,373) Companies Income Tax liability NIL Tertiary Education Tax liability NIL A.Y 2017 (1/1/2016 – 31/12/2016) Profit for the year 1,240,000 Losses brought forward (2,849,000) Unrelieved losses c/f (1,609,000) (1,609,000) Capital allowances: Brought forward from A.Y 2016 373 83 For the year 0 (373) Losses and Capital allowances c/f to A.Y 2018 Companies Income Tax Tertiary Education Tax (1,609,373) NIL NIL

EXAMINER’S REPORT The question tests candidates’ knowledge of loss reliefs and how it affects the tax liabilities of businesses. Candidates had a good understanding of the question and performance was also good. The commonest pitfall was the poor presentation of the solution to the question by some candidates. Candidates are advised to pay attention to presentation in future examinations.

MARKING GUIDE Marks Marks (a) Current year loss relief 3 Carried forward loss Relief 3 6

(b) A.Y. 2012 Loss for the year ½ Capital allowances ½ Companies Income Tax (CIT) ¼ Tertiary Education Tax (TET) ¼ A.Y. 2013 Loss for the year ½ Unrelieved loss b/f ½ Capital allowances for the year ½ Capital allowances b/f ½ CIT ¼ TET ¼ A.Y. 2014 Loss for the year ½ Unrelieved loss b/f ½ Capital allowances for the year ½ Capital allowances b/f ½ CIT ¼ TET ¼ 84 A.Y. 2015 Loss for the year ½ Unrelieved loss b/f ½ Capital allowances for the year ½ Capital allowances b/f ½ CIT ¼ TET ¼ A.Y. 2016 Profit for the year ½ Losses brought forward ½ Capital allowances for the year ½ Capital allowances b/f ½ CIT ¼ TET ¼ 85 A.Y. 2017 Profit for the year ½ Losses brought forward ½ Capital allowances for the year ½ Capital allowances b/f ½ CIT ¼ TET ¼ 14 20

(a) The principles of a good tax system according to Adam Smith are:

(i) Equity This affirms that every taxable person should be taxed according to his ability, that is, the rich should pay more, while the poor pay less.

(ii) Certainty The time of payment, the manner of payment, the amount to be paid should be certain and clear to the taxpayer. The determination of tax liability should not be left to the whims and caprices of tax officials.

(iii) Convenience The social and economic standing of the taxpayer must be taken into consideration, that is, the time of payment should not be inconvenient to the taxpayer.

(iv) Administrative efficiency The process of levying and collection must be administratively efficient, transparent and must not cause economic distortion to the taxpayer.

(v) Simplicity The tax system should be simple to understand by the taxpayers.

(vi) Productivity The tax system should bring in sufficient revenue to the government. The cost of administering the tax should be less than the revenue such tax will generate. (vii) Flexibility and stability A good tax system should be flexible enough to accommodate changes to be effected by any government of the day. This 86 flexibility, however, must be balanced with the need to have a stable tax system.

(b) Categories of individuals exempted from the rules of residence include:

(i) Individuals in full-time employment with the armed forces;

(ii) Nigerian Diplomats;

(iii) Foreign Diplomats; and

(iv) An employee whose remuneration is subject to Nigerian tax, but who is not deemed to be resident in a territory for that year.

(c) i. A Tax Clearance Certificate is issued by the relevant tax authority, that is, the Federal Inland Revenue Service in respect of companies and the State Boards of Internal Revenue in respect of individuals. It shows the tax position of the individual to whom it is issued. The certificate is issued only upon application by the taxpayer. In issuing the certificate, the relevant tax authority would have satisfied itself that, the tax assessed on the income of the applicant for the 3 years immediately preceding the current year of assessment, has been fully paid, that no tax is due on such income or that the applicant is not liable to tax for any of the three years.

ii. Contents of a Tax Clearance Certificate are:

• Name, address and Taxpayer’s Identification Number (TIN) of the company;

• Chargeable income;

• Tax payable;

• Tax paid;

• Nature of business;

• Type of Assessment Best Of Judgment (BOJ), Self Assessment, etc); and

• Expiry date

iii. Transactions that require a Tax Clearance Certificate include:

• Application for Government loan for industry or business;

• Registration of motor vehicle;

• Application for firearms licence;

• Application for foreign exchange or exchange control permission to remit funds outside Nigeria;

• Application for Certificate of Occupancy; 87

• Application for award of contracts by government, its agencies and registered companies

• Application for approval of building plans;

• Application for trade licence;

• Application for transfer of real property;

• Application for import or export licence;

• Application for agent licence;

• Application for pools or gaming licence;

• Application for registration as a contractor;

• Application for distributorship;

• Confirmation of appointment by government, as Chairman or member of public board, institution, commission, company or to any other similar position made by the government;

• Stamping of guarantor’s form for Nigerian passport;

• Application for registration of a limited liability or of a business name;

• Application for allocation of market stalls;

• Appointment or election into public office;

• Change of ownership of vehicle by vendor; and

• Application for plot of land.

EXAMINER’S REPORT The question tests candidates’ knowledge of the use and content of Tax Clearance Certificate. The candidates demonstrated a good understanding of the question and performance was good. The commonest pitfall of some candidates was the inability to present their solutions clearly. Candidates are advised to pay attention to clear presentation. MARKING GUIDE Marks (a) Principles of a good tax system (2 marks each for any principle subject to a maximum of 3 points) 6 88

(b) 1 mark each for the people (4) exempted from the rules of residence 4

(c) i) Tax Clearance Certificate 2

ii) Contents of a Tax Clearance Certificate subject to (1 mark each subject to a maximum of 4 points) 4 iii)Transactions that require a Tax Clearance Certificate (1 mark each for any point subject to a maximum of 4 points) 4 20

(a) Nature of Withholding Tax Withholding tax is a tax deducted at source from payments made to a taxable person for the supply of goods and services. It is not another form of tax, but simply an advanced payment of tax, as the withholding tax deducted at source is off-settable against any subsequent tax liability that may be due in respect of other income. In certain cases, the withholding tax deducted at source is the final tax in the hands of the recipients. A taxpayer has no option as to whether to pay it or not as the person making the payment is statutorily required to deduct. Failure to deduct attracts sanctions. It is an advanced payment of income tax and can therefore be utilised as tax credit against income tax liability of the year to which the income relates. It represents the final tax in certain cases.

(b) Penalty for Non-deduction and Non-remittance of Withholding Tax Section 82 of CITA, CAP C21 LFN 2004 (as amended), specifies that where any person who being obliged to deduct tax under Sections 78 (deduction of tax from interest, etc). 79 (deduction of tax on rent), 80 (deduction of tax from dividend) or 81 (deduction of tax at source) of this Act fails to deduct or having deducted fails to pay to the Board within 21 days from the date the amount was deducted or the time the duty arose, shall be guilty of an offence and shall be liable to a penalty of 10% per annum of the tax withheld or not remitted, as the case may be. Similarly, failure to deduct or having deducted, fail to remit to the Revenue, Withholding tax withheld from payments due to individuals, is an offence punishable on conviction with a fine of N5,000, in addition to the tax deductible or deducted, but not remitted, plus interest at the prevailing commercial rate. 89

(c) Principle Behind Double Taxation Relief and Withhold Tax(WHT) Rate The principle behind Double Taxation Relief is to avoid being taxed more than once. Where there is a double taxation treaty between Nigeria and any other country, the resident of such a country, in receipt of income in Nigeria, will be entitled to double taxation relief at the rates contained in the double taxation treaty. The withholding tax rate is reduced to 7.5% for dividend, interest and royalty for recipients of a country which had double tax treaty with Nigeria.

(d) Five Differences Between Value Added Tax (VAT) and Withholding Tax (WHT) The major differences between VAT and WHT are as shown in the table below: Value Added Tax Withholding Tax (i) An indirect tax (i) A direct tax (ii) Imposed on goods and services (ii) Imposed on incomes at source (iii) Imposed at 5% (iii) Rate applicable is dependent on type of transaction (iv) Backed by VAT Act 2004 (as amended) (iv) Backed by certain Sections of CITA 2004 and PIT (Amendment) Act 2011

(v) Is governed only by Federal Inland Revenue Service

(v) Is governed by State Internal Revenue Service and Federal Inland Revenue Service (vi) VAT is shared by the 3 tiers of government

(vi) Withholding tax is not shared by the 3 tiers of government

EXAMINER’S REPORT The question tests candidates understanding of transaction taxes and double taxation reliefs. Candidates displayed a good understanding of the question and performance was good. The commonest pitfall by some candidates was their lack of adequate knowledge of double taxation relief. Candidates are advised to pay attention to the provisions relating to double taxation relief.

MARKING GUIDE Marks Marks

(a) Nature of Withholding Tax 4

(b) Penalties for non-deduction and non- 90 remittance of withholding tax 4

(c) Principles behind double taxation relief 2

(d) Difference between VAT and WHT (1/2 mark each subject a maximum of 10 points) 5 15

(a) Reasons for the imposition of tax in Nigeria include: Revenue generation The primary objective of taxation is to raise money to meet government expenditures. Thus, taxation has also been employed to raise sufficient revenue to satisfy the needs of government, such as provision of services like defence, health services education and ensuring law and order. Revenue from taxation can also be spent on capital projects, otherwise called capital expenditure, creating a social and economic infrastructure, which will improve the social life of the people and also enable the economy of the country to grow. Redistribution of income and wealth This can be looked at from two angles. The first is the doctrine that taxation should be based on the ability to pay, so that the burden of taxation ought to be heavier for rich than for the poor, with the taxes collected being used to pay the social services for the less fortunate. This is achieved by the graduation or “progressiveness” of the rates at which the taxes are levied.

i) This objective sees the present distribution of wealth as being unjust and so attempts to reverse the situation by fixing taxes at concessionary rates in favour of the poor.

ii) High taxes on the income and wealth of the rich can produce either incentive or disincentive effects. Sometimes, a tax payer’s spendable income is reduced through taxation, so he is compelled to work harder in order to maximize this income. Taxes that produce incentive effects therefore increase productivity. On the other hand, a high marginal tax rate can produce a disincentive effect which makes the worker take to leisure rather than to extra work. This disincentive effect is an indication of economic inefficiency and waste Management of the economy Taxation is important in the planning of savings and investments and by harmonizing it with development strategy and changing economic structure. The government can use taxation as a powerful fiscal weapon to plan and develop a country. 91 Harmonisation of economic objectives Harmonisation of diverse trade or economic objectives of different countries can be achieved through a good tax system. For example, tax system can be employed by member states of Economic Committee of West African States (ECOWAS) so as to achieve the philosophy of the single market (free movement of people and goods) within the region. Taxation is a device to improve gross national income, induce economic development and influence favourable balance of payments with other countries.

(b) Tax authorities in charge of administration of Personal Income Tax in Nigeria are: (i) State Board of Internal Revenue (SBIR) Section 87 of PITA, 2004 and PIT (Amendment) Act, 2011 established the State Board of Internal Revenue whose operational arm is known as the State Internal Revenue Service (SIRS).

(ii) Federal Inland Revenue Service (FIRS) For other categories of individuals such as:

• Members of the Armed Forces; and

• Individuals resident in Abuja

(c) 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. Functions of the State Board of Internal Revenue The State Board 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; 92

(ii) Doing all such things 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 (JTB) on tax policies, tax reform, tax legislations, 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, 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.

EXAMINER’S REPORT The question tests candidates’ knowledge of general principles of taxation. Candidates displayed a fair understanding of the question and performance was average. The commonest pitfall was the inability of some candidates to list the composition of the State Board of Internal Revenue (SBIR). Candidates are advised to cover areas relating to general principles of taxation in future.

MARKING GUIDE Marks Marks

(a) Reasons for the imposition tax in Nigeria (1 mark each for each of the 5 points) 5

(b) Tax authority in charge of administration of personnel income tax

- State Board of Internal Revenue - Federal Inland Revenue Service 1 1 2

(c) Members of the tax authority (State Board of Internal Revenue) 1 mark each for each point subject to a maximum of 4 points) 4 Functions of the Board 1 mark each for each point subject to a maximum of 4 points 4 8 15

(i) Members of Joint State Revenue Committee (JSRC) JSRC comprises: (a) The Chairman of the State Internal Revenue Service as the Chairman; (b) The Chairman of each of the Local Government Revenue Committees; (c) A representative of the Bureau on Local Government Affairs not below the rank of a Director; (d) A representative of Revenue Mobilisation Allocation and Fiscal Commission, as an observer; (e) The State Sector Commander of the Federal Road Safety Commission, as an observer; (f) The Legal Adviser of the State Internal Revenue Service; and (g) The Secretary of the Committee who shall be a staff of the State Internal Revenue Service.

(ii) The functions of the Joint State Revenue Committee shall be to:

(a) Implement the decisions of the Joint Tax Board; (b) Advise the Joint Tax Board and the State and Local Governments on revenue matters; (c) Harmomise tax administration in the State; (d) Enlighten members of the public generally on State and Local Government revenue matters; and (e) Carry out such other functions as may be assigned to it by the Joint Tax Board. (b) Mr. Salami’s Trust Computation of Amounts Due to the Beneficiaries for 2016 Year of Assessment Shola Bimbo Tiwa Motherless Total N N N N N Ratio 3 2 1 6 Share of distributable income 2,741,625 1,827,750 913,875 0 5,483,250 Fixed Annuity 178,000 178,000 Discretionary Payment 60,000 72,000 80,000 0 212,000 Amounts due for the beneficiaries 2,801,625 1,899,750 993,875 178,000 5,873,250

Workings Mr. Salami’s Trust Computation of Distributable Income for 2016 Year of Assessment N N Profit for the year ended 14,000,000 Capital Allowances (3,000,000) 11,000,000 Rent 8,000,000 19,000,000 Allowable expenses: Remuneration of Trustees (N18,000 by 12) 216,000 Trustee’s administrative expenses 116,500 Annuity 178,000 (510,500) Computed Income 18,489,500 Discretionary payments (212,000) Distributable Income 18,277,500 30% of distributable income amongst the beneficiaries (5,483,250) Net distributable income in the hand of the Trustee 12,794,250

EXAMINER’S REPORT The question tests candidates’ knowledge of the membership of the Joint State Revenue Committee and computation of incomes in the hands of beneficiaries for taxation of the income of a trustee. Some candidates displayed poor knowledge of the question and performance was poor. The commonest pitfall was the inability of some candidates to correctly compute what is due for a beneficiary in the taxation of trust incomes. Candidates are advised to pay attention to the rules governing the taxation of trust incomes.

MARKING GUIDE (a)i Members of the Joint State Revenue Committee (¾ mark each for any point subject to a maximum of 4 points) Marks 3 Marks Ii Functions of the Committee (2/3 mark each for any point subject to a maximum of 3 points) 2 5

(b) Share of distributable income (1/2 mark x 3) 1½ Fixed Annuity ½ Discretionary payments (1/2 mark x 4) 2 Marks Amounts due to the beneficiaries (1/2 mark x 4) Marks 2 Workings: Profit for the year ½ Capital allowance ½ Rent ½ Remuneration of Trustees ½ Trustee’s administrative expenses ½ Annuity ½ Discretionary payments ½ 30% of distributable income amongst the beneficiaries ½ 10 15 THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA