Taxation · November 2018

1(a) Dr. Alade Ogungbemi Computation of personal income tax payable for 2017 tax year N N Earned income: Income from public service (Oyo State Government) 1/1/2017-31/7/2017 (N420,000x7) 2,940,000 Income from TUC Foods Limited 1/8/2017-31/12/2017 (N4,800,000x5/12) 2,000,000 Transport allowance (N120,000x5/12) 50,000 Rent allowance (N720,000x5/12) 300,000 Gross emoluments 5,290,000 Unearned income: Rental income: July 4, 2016 360,000 December 4, 2016 420,000 780,000 Gross income 6,070,000 Consolidated relief allowance: (Higher of 1% x N6,070,000 or (N200,000+20% x N6,070,000) N200,000 +N1,214,000 (1,414,000) 4,656,000 Tax exempt items: Contribution to pension fund scheme (71/2% x N6,070,000) 455,250 Contribution to national housing fund (21/2% x N6,070,000 ) 151,750 Life assurance premium 460,000 (1,067,000) Chargeable income 3,589,000 Computation of personal income tax N Applying tax table rate 21,000 First N300,000 @ 7% 33,000 Next N300,000 @ 11% 75,000 Next N500,000 @ 15% 95,000 Next N500,000 @ 19% 336,000 Next N1,600,000 @ 21% 93,360 Next N389,000 @ 24% 653,360 N3,589,000 44 1(b)

(i) National housing fund contribution The National Housing Fund Act Cap LFN 2004, provides that a Nigerian worker earning an income of N3,000 and above per annum in both public and the private sectors of the economy shall contribute 2.5% of his basic monthly salary to the fund. Employers who fail to deduct or remit are liable to pay a penalty of N50,000 whilst self- employed persons are to pay N5,000 or one year imprisonment on conviction or both. The employer is to deduct the contribution from the employee’s monthly salary and remit to the Federal Mortgage Bank of Nigeria within one month of the deduction. The Act mandates the Federal Mortgage Bank to collect, manage and administer the fund. Contributions made to the fund are tax deductible.

(ii) National pension scheme The Pension Reform Act 2014 (PRA), established a uniform contributory pension scheme for payment of retirement benefit of employees. The scheme applies to all employees in both the public and private sectors who are in employment in an organisation which has at least 15 employees. The rate of contribution to the scheme shall be a minimum of 8% of employee’s basic emoluments (i.e basic salary, housing allowance and transport allowance) as contribution for employees in the private and public sectors and 10% of the monthly emoluments as employers’ contribution. However, contributions made by an employee to the scheme shall be tax deductible. Notwithstanding the foregoing mode of contribution to the scheme, an employer may agree or elect to bear the full burden of the scheme, provided that in such case, the employer’s contribution shall not be less than 20% of the monthly emolument of the employee.

(iii) National health insurance scheme The national health insurance scheme was set up by the National Health Insurance Act Cap N42 LFN 2004, for the purpose of providing health insurance which shall entitle persons under the scheme and their dependants to have the benefits of prescribed good quality and cost effective health services as set out in the Act. The Act provides that an employer who has a minimum of ten employees may, together with every person in his employment, pay contribution under the scheme. 45 Contributions are earnings related for the public (federal) sector programme, the employer pays 3.25%, while the employee pays 1.75% representing 5% of the employee’s consolidated salary. For the private sector programme and other tiers of government, the employer pays 10% while the employee pays 5%, representing 15% of the employee’s basic salary. However, the employer may decide to pay the entire contribution. The employer may also undertake extra contributions for additional cover to the benefit package. An employer under the scheme shall cause to be deducted from an employee’s wages, any contribution which is payable by the employee. The employer’s contribution and the contributions in respect of its employees are to be paid into the account of a designated health maintenance organisation. Contributions to the scheme are tax deductible.

EXAMINER’S REPORT The question tests candidates’ knowledge of the computation of personal income tax liability and tax exempt items. Candidates had a fair understanding of the question. The commonest pitfall was the inability of the candidates to understand applicable rates for the deduction of tax exempt items. Candidates are advised to study the relevant laws and rules relating to tax exempt items as well as the Institute’s Study Texts.

Marking Guide Marks Marks (a) Heading 1 Earned income: Income from public service 1 Income from TUC Foods Limited 1 Transport allowance 1 Rent allowance 1 Gross emoluments 1 Rental income: July 4, 2016 1 December 4, 2016 1 Sub-total 1 Gross income 1 Consolidated Relief Allowance (CRA) 1 Sub-total after CRA 1 Contribution to national housing fund 1 Contribution to pension fund scheme 1 46 Life assurance premium 1 Sub-total of tax exempt items 1 Chargeable income 1 Computation of personal income tax payable (1/2 mark for each of the amounts) 3 20 (b)i Explanation of national housing fund contribution 3 ii Explanation of pension scheme 4 iii Explanation of national health insurance scheme Contribution 3 10 30

(a) Adamu Musa Co. Ltd Computation of total profit and companies income tax liability N N Net profit as per accounts 1,000,000 Add: Depreciation 125,000 Bad debts: general provision 22,500 Income tax provision 175,000 Business sign post 10,000 Legal expenses disallowed 25,000 Chief Taragi’s private use of official vehicle 25,000 Fine on Chief Taragi for traffic offence 12,500 Fine on employee for traffic offence (private journey) 7,500 Other magazines (for private use) 3,750 Travelling expenses - Chief Taragi’s private hotel bill 11,250 Expansion of cold room 500,000 917,500 1,917,500 Profit on sale of property, plant and equipment 160,000 Dividend received 175,000 (335,000) Adjusted or assessable profit 1,582,500 Capital allowances (125,000) Total profit 1,457,500 47 Companies income tax (30% of total profit) 437,250 WHT on rent (10% of N140,000) (14,000) Net companies income tax payable 423,250

(b) Tertiary Education Tax (TET) TET @ 2% of assessable profit (2/100 x N1,582,500) N31,650

(c) Companies liable to information technology tax The specified companies include: (i) GSM service providers and all telecommunication companies; (ii) Cyber companies and internet providers; (iii) Pension managers and pension related companies; (iv) Insurance companies; and (v) Banks and other financial institutions.

EXAMINER’S REPORT The question tests candidates’ knowledge of the computation of companies income tax liability and the identification of companies liable to information technology tax. Candidates displayed a fair understanding of the question but some were unable to identify the disallowable expenses and non-taxable incomes. Candidates are advised to read widely to facilitate the identification of disallowable items and non-taxable incomes.

Marking Guide Marks Marks (a) Heading ½ Net profit per accounts ½ Expenses disallowed: ½ mark for each of the eleven points 5½ Subtotal of expenses disallowed ½ Subtotal before adjusting for incomes deducted from net profit ½ Profit on sale of property, plant and equipment ½ Dividend received ½ Subtotal of profit on sale of property, plant and equipment and dividend received ½ Adjusted profit 1 Capital allowances ½ Total profit ½ Companies income tax ½ Withholding tax on rent 1 Net companies income tax payable ½ 13 48

(b) Basis of computing tertiary education tax 1 Tertiary education tax payable 1 2

c) 1 mark for each of the five specified companies liable to pay information technology tax 5 5 20

J & P Nigeria Limited Computation of assessable profits Assuming business ceases on December 31, 2017 Assessment Basis Assessable year period profits N 2017 1/1/2017- = (N1,875,000x7/12)+(5/8 x N750,000) 31/12/2017 = N1,093,750 + N468,750 1,562,500 2016 (Higher of) 1/1/2016 – (7/12 x N3,450,000 + 5/12 x N1,875,000) 31/12/2016 = N2,012,500 + N781,250 (Actual) N2,973,750 or Preceding year basis 1/8/2014 - 31/7/2015 = N4,320,000 N4,320,000 N5,882,500 Assuming business ceases on March 31, 2016 Assessment Basis Assessable year period profit N 2018 1/1/2018 – 31/3/2018 281,250 Higher of 2017 1/1/2017 – 31/12/2017 (Actual) (7/12 x N1,875,000) +(5/8 x N750,000) = N1,093,750 + N468,750 = N1,562,500 49 or Preceding year basis 1/8/2015 – 31/7/2016 3,450,000 3,450,000 3,731,250 A comparison of the assessable profits for the two dates of cessation reveals the following: Date of Cessation 31/12/17 31/3/2018 N N 2018 - 281,250 2017 1,562,500 3,450.000 2016 4,320,000 4,320,000 5,882,500 8,051,250 It is advisable that the company should cease business on December 31, 2017, because the assessable profits totalling N5,882,500, is lower than the assessable profits of N8,051,250, if the company ceases business on March 31, 2018 .

EXAMINER’S REPORT The question tests candidates’ knowledge of the principles of cessation of business. Candidates had a poor understanding of the question. The commonest pitfall was the lack of understanding of how to compute the tax liabilities of the two option dates. Candidates are advised to be familiar with computations in a situation whether to cease business on a particular date or later.

Marking Guide Marks Heading 1 1 mark for each of the correct 4 assessment years 4 1 mark for each of the correct basis periods 5 Cessation of business on 31/12/2017

- Assessable profit for 2017 assessment year 1 - Options for 2016 assessment year - Actual 1 - Preceding year 1 Cessation of business on 31/3/2018

- Assessable profit for 2018 assessment year 1 - Options for 2016 assessment year - Actual 1 - Preceding year 1 Comparison between the two dates of cessation

- ½ mark for each of the 6 results 3 Recommendation on when to cease business 1 20 50

(a) Solomon, Musa and Chinnedu in partnership Computation of partners’ income for 2016 assessment year SOLOMON MUSA CHINNEDU BAKARE N N N N Salary (5 months) 337,500 Salary (7 months) 236,250 Salary ( 12 months) 540,000 405,000 Interest on capital 10,547 50,625 35,513 20,672 Share of profit (see workings) 562,500 1,856,250 928,125 787,500 910,547 2,446,875 1,368,638 1,044,422 Basis period is 1/1/14 - 31/5/14 1/1/13 – 31/12/13 1/1/13 - 31/12/13 1/6/14 - 31/12/14 Actual PYB PYB Actual Workings:

i. Solomon is deemed to have ceased business on 31/5/2016, having retired on same date. Accordingly, applying the cessation provisions, he is assessed in 2016 tax year on his income from the partnership for the period, 1/1/16 – 31/5/16, as follows: N Salary (5/12 x N810,000) 337,500 Interest on capital (N337,500 x 7.5% x 5/12) 10,547 Share of profit - N5,400,000 Year end 31/12/16 = N5,400,000 x 5/12 x 0.25 562,500 The Internal Revenue Service may revise Solomon’s assessment for 2015 tax year to actual if this will produce higher assessable income than the preceding year basis on which he would have hitherto have been assessed.

ii. Bakare will be deemed to have commenced business on June 1, 2016, being the date of his admission into the partnership. Consequently, the commencement provision will apply for 2016 assessment year, and will therefore be assessed on actual basis, that is, income of the period 1/6/2016 – 31/12/2016, namely: N Salary (7/12 x N405,000) 236,250 Interest on capital (N472,500 x 7.5% x 7/12) 20,672 Share of profit N5,400,000 (Y/E 31/12/2016) N5,400,000 x 7/12 x 0.25 (profit share) 787,500

iii. Both Musa and Chinnedu, the continuing partners, will continue to be assessed on preceding year basis. Consequently, for 2016 assessment year, their assessable income is the share of each of them from the partnership income for the year ended 31/12/2015 namely: 51 N N Adjusted profit 31/12/2015 3,712,500 Solomon (N3,712,500 x 0.25) 928,125 Musa (N3,712,500 x0.5) 1,856,250 Chinnedu (N3,712,500 x0.25) 928,125 3,712,500 4b. It is true that partnership income is subject to commencement rules. The commencement rules are as follows:

(i) The assessable income of the year of commencement shall be the profit from date of commencement to the end of the year of assessment;

(ii) The assessable income for the second year of assessment, that is, the succeeding year of commencement shall be the profit from the day of commencement to a period of 12 months thereafter, that is; the profit of the first twelve months from commencement;

(iii) The assessable income for the third year of assessment after commencement shall be profit of the business for the year ended in the preceding year of assessment; and

(iv) A retiring partner’s income will be determined by preference to cessation rules while new partner joining the partnership will have his case determined by the reference to commencement rules. Continuing partners will be assessed on preceding year basis.

EXAMINER’S REPORT The question tests candidates’ knowledge of the computation of partnership tax liability. Candidates had a good understanding of the question though some candidates were unable to differentiate between partnership agreement and commencement rule. Candidates are advised to pay attention to the computations of tax liabilities when there are abnormal basis periods.

Marking Guide Marks Marks (a) Computation of salary for each of the 4 partners – 1 mark for each partner 4 Computation of interest on capital for each of the 4 partners - 4 1 mark for each partner 4 Computation of share of profit for each of the 4 partners at 1 mark each 4 Computation of total income for each of the 4 partners at 1 mark each 4 16

(b) 1 mark for each of the 4 commencement rules 4 4 20 52

(a) Mandy Construction Limited Computation of companies income tax liability for 2017 assessment year N N Net Loss as per accounts (343,600,000) Add: Loss on disposal of property, plant and equipment 4,352,400 Depreciation 5,184,700 9,537,100 Adjusted/(Assessable loss) (334,062,900) Capital allowances 1,065,000 Relieved 0 Unrelieved capital allowance c/f 1,065,000 Total profits Nil Companies income tax payable Nil Tertiary education tax payable (2% of assessable profit) Nil Minimum tax computation

(i) Highest of: N N ❖ 0.5% of gross profit 0.005 x N1,251,789,000 6,258,945 ❖ 0.5% of net assets 0.005 x N3,441,041,000 17,205,205 ❖ 0.25% of paid-up share capital 0.0025 x N25,000,000 62,500 ❖ 0.25% of Revenue .0025 x N500,000 1,250

(ii) 0.125% of revenue in excess of N500,000 Actual revenue = N5,656,000,000 Revenue in excess of N500,000 = N5,655,500,000 (0.00125 x N5,655,500,000) 7,069,375 A hi Add: The highest of (1) – (3) above 17,205,205 24,274,580 The minimum tax liability is N24,274,580. 53

(b) According to CITA, the minimum tax provision shall not apply to :

(i) A company carrying on agricultural trade or business;

(ii) A company with at least 25% imported equity capital;

(iii) A company that has not been in operation for more than four calendar years (that is, for the first 4 calendar years of its commencement of business)

EXAMINER’S REPORT The question tests candidates’ knowledge of the computations of companies income tax, tertiary tax and minimum tax liability. Candidates had a fair knowledge of the question. The commonest pitfall was the inability of the candidates to compute minimum tax liability and identify companies that are exempted from minimum tax regulation. Candidates are advised to pay attention to the computation of minimum tax liability and be familiar with minimum tax regulation.

Marking Guide Marks Marks (a) Heading ½ Net loss per accounts ½ Loss on disposal of property, plant and equipment ½ Depreciation ½ Subtotal ½ Adjusted profit ½ Capital allowances ½ Total profit ½ Companies income tax payable 1 Tertiary education tax payable ½ Minimum tax computations: ½ Gross profit basis 1 Net assets basis 1 Paid up share capital basis 1 0.25% on N500,000 revenue 1 0.125% on excess of revenue over N500,000 1 Identification of which of the bases is the highest 1 12

(b) 1 mark for each of the three companies that are exempt from minimum tax regulation 3 3 15 54

(a)(i) Main features of withholding tax include:

• Rate applicable is a function of the type of transaction and whether it is carried out by an individual or a company;

• Payment of withholding tax is statutory on a person making the payment;

• It is an advance payment of income tax which is utilised as tax credit against income tax liability of the year to which the income relates. It is not a separate tax;

• Withholding tax represents the final tax on franked investment income in the hands of the recipients; and

• Withholding tax being an advance payment of income tax cannot be used later as credit for any other tax such as tertiary education tax and value added tax.

(ii) The relevant tax authorities in relation to withholding tax in Nigeria are:

• Federal Inland Revenue Service for corporate entities;

• State Internal Revenue Service for individuals; and

• Federal Inland Revenue Service for residents of the Federal Capital Territory, Abuja, members of the Nigeria Armed Forces and Police, and officers of the Nigerian Foreign Service. 6(b) The Royal Commission on the taxation of profit and income gave a summary of considerations that influence the identification of the badges of trade and they include: (i) The subject matter of the realisation; (ii) The length of period of ownership; (iii) The frequency or number of similar transactions; (iv) Supplementary work on or in connection with the property realised; (v) The circumstances that were responsible for the realisation; and (vi) The motive. 55

EXAMINER’S REPORT The question tests candidates’ knowledge of the rules relating to withholding tax and the determination of trade for tax purposes. Candidates displayed a good understanding of the question, but some candidates were unable to enumerate the considerations of what constitute a trade and identify the features of withholding tax. Candidates are advised to study withholding tax rules and the determination of what constitutes a trade for tax purposes.

Marking Guide Marks Marks (a)i. 1 mark for each of any 3 features of withholding tax 3 3

ii. 1 mark for each of the 3 tax authorities in relation to withholding tax 3 3 6 (b) 1½ marks for each of the 6 considerations that influence the determination of when an activity constitutes a trade 9 9 15 56

(a) The following actions would be taken as remedy to the disputed tax assessment:

(i) The consultant will review the accounts and documents which were earlier sent to the tax office to determine whether there was a genuine reason for the increase in the assessment. If there is any genuine reason for the increase in the assessment, the taxpayer will be advised not to pursue the disputed assessment, but to make payment without further delay;

(ii) However, if there is no ground or basis for the variation in the assessment, then a valid notice of objection will be written to FIRS within 30 days of the receipt of the notice of assessment. The notice of objection will contain the grounds of objection;

(iii) The tax consultant will expect the FIRS to see reasons and amend the assessment, which if satisfactory, would be amended. On the other hand, where the FIRS refuses to amend the assessment, a notice of refusal to amend should be written and sent to the taxpayer; and

(iv) Within 30 days upon the receipt of the notice of refusal to amend from the tax authority, a notice of appeal would be filed with the Tax Appeal Tribunal.

(b) The transactions in respect of which a tax clearance certificate must be produced are as follows:

(i) Application for government loan for industry or business; (ii) Application for contract awards; (iii) Application for certificate of occupancy; (iv) Application for trade license; (v) Appointment or election into public offices; (vi) Application for transfer of real property; (vii) Application for registration as a contractor: (viii) Application for foreign exchange or exchange control permission to remit funds outside Nigeria; (ix) Application for firearms license; (x) Application for import and export license; (xi) Application for government distributorship; (xii) Application for allocation of market stall; (xiii) Application for plot of land; (xiv) Stamping of guarantor’s form for Nigerian passport; (xv) Application for the approval of building plan; (xvi) Registration of motor vehicle; (xvii) Change of ownership of vehicle by vendor; (xviii) Application for agent license; and (xix) Application for pool and gaming and license. 57

EXAMINER’S REPORT The question tests candidates’ knowledge of the process of objections, appeals in tax dispute resolutions and transactions which necessitate the submission of tax a clearance certificate. Candidates displayed a good knowledge of the question but some candidates were unable to explain how to register an objection to a tax assessment and file an appeal. Candidates are advised to pay attention to objections to tax assessments and appeal process.

Marking Guide Marks (a) 2 marks for each of the 4 steps to be taken to resolve a disputed assessment 8

(b) 1 mark for each of the 7 transactions which will necessitate the submission of tax clearance certificates 7 15 58 THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA