Taxation · November 2022

BASED ON OCTOBER 31, YEAR END (a) AbdulRaman Limited Computation of capital allowances Motor vehicle Office Ranching and Plantation furniture plantation equipment expenditure Building Total Initial allowance 50 25 30 95 15 Annual allowance 25 20 50 - 10 N N N N N N Assessment year 2021 (9 months) Cost 2,040,500 355,000 447,600 - 2,843,100 Initial allowance (1,020,250) (88,750) (134,280) - 1,243,280 Annual allowance (191,297) (39,938) (117,495) - 348,730 1,592,010 W.D.V. c/f to A.Y 2022 828,953 226,312 195,825 - - Assessment year 2022 Cost - - - 70,000 2,081,000 2,151,000 Initial allowance - - - - (66,500) (312,150) 378,650 Annual allowance - Old asset (255,063) (53,250) (156,660) - - 464,973 - New asset - - - - (176,885) 176,885 - 1,020,508 W.D.V. c/f to A.Y 2023 573,890 173,062 39,165 3,500 1,591,965 Assessment year 2023 Cost - - - 1,037,000 - 1,037,000 Initial allowance - - - (985,150) - 985,150 Annual allowance - Old asset (255,063) (53,250) - - (176,885) 485,198 - New asset - - - - - - 1,470,348 ________ ________ _______ ______ __________ W.D.V c/f to AY 2024 318,827 119,812 39,165 55.350 1,415,080 150

Notes: i. Based on the provisions of Finance Act, 2019, there would not be any gap or overlapping period anymore, except for transitional purposes only. ii. Certain expenses included in preliminary expenses have been capitalised as qualifying capital expenditure (plantation) in accordance with the provisions of para (1) of Schedule 2 of CITA (as amended). The capitalised costs consist: N - Cost of initial clearing and cultivation 70,000 - Cost of labour and technical expertise on the first planting 56,060 - Cost of nursery plant from Federal Ministry of Agriculture 191,540 - Cost of nursery plant from IART 130,000 447,600

iii. Stamp duties and registration expenses have been disallowed as they are incurred in bringing the company into existence and not for the purpose of producing the profits assessable to tax. iv. Gratification to local chiefs and heads of families have been disallowed because the expenditure was not incurred wholly and exclusively for the purpose of providing the company’s profit or loss. v. There would be no restriction in capital allowances to be claimed in any period because companies in agricultural production are exempted from such restriction.

(b) Computation of adjusted profits For 2021 and 2022 assessment years 2021 2022 N N Net profit for accounts 32,654,000 92,013,000 Add: Disallowable expenses:

- Preliminary expenses 132,000 132,000 - Depreciation 492,000 900,000 Adjusted profit 33,278,000 93,045,000 151

(c) Computation of income tax liabilities For 2021 and 2022 assessment years Assessment year 2021 (1/2/2020 – 30/10/2020) N Adjusted profit 33,278.000 Capital allowances (1,592,010) Total profit 31,685,990 Companies income tax (20% of total profit) 6,337,198 Tertiary education tax (2% of assessable profit) 665,560 Assessment year 2022 (1/11/2020 – 31/10/2021) Adjusted profit 93,045,000 Capital allowances (1,020,508) Total profit 92,024,949 Companies income tax (30% of total profit) = 27,607,347.60 Tertiary education tax (2% of assessable profit) 1,860,900

Workings

(i) Determination of basis period (BP) based on Finance Act, 2019 YOA B.P for assessments B.P for capital allowances 2021 1/2/2020 – 31/10/2020 1/2/2020 – 31/10/2020 2022 1/11/2020 – 31/10/2021 1/11/2020 – 31/10/2021 2023 1/11/2021 – 31/10/2022 1/11/2021 – 31/10/2022

Examiner’s report The question tests candidates’ knowledge of the taxation of agricultural companies, taking into consideration the relevant provisions of Finance Acts 2019, 2020 and 2021. This being a compulsory question, about 100% of the candidates attempted the question. The performance of the candidates was poor. The commonest pitfalls of the candidates were their inability to capitalise some of the preoperational expenses in line with the provisions paragraph 1 of Schedule 2 of CITA (as amended). Additionally, some them could not prorate the initial allowance and were unable to identify the relevant basis periods. 152 Candidates are advised to read widely and be conversant with the provisions of the Finance Acts and other relevant tax laws before sitting for subsequent examinations to enhance better performance. Making guide QUESTION 1 BASED ON OCTOBER 31 YEAR END Marks Marks a. Computation of capital allowance Heading ½ Assessment year 2021 Cost (3 ticks @ ½ mark each) 1½ Initial allowance (3 ticks @ ½ mark each) 1½ Annual allowance (3 ticks @ ½ mark each) 1½ Total capital allowance (1 tick) ¼ Assessment year 2022 Cost (2 ticks @ ¼ mark each) ½ Initial allowance (2 ticks @ ¼ mark each) ½ Annual allowance: - Old asset (3 ticks @ ¼ mark each) ¾ - New asset (1 tick @ ½ mark each) ½ Total capital allowance (1 tick) ¼ Assessment year 2023 Cost (1 tick) ½ Initial allowance (1 tick) ½ Annual allowance: - Old asset (3 ticks @ ¼ mark each) ¾ - New asset (1 tick) ¼ Total capital allowance ¼ 10

b. Computation of adjusted profits for relevant assessment years Heading 1 Assessment year 2021 Net profit per accounts 1 Add: Disallowable expenses: - Preliminary expenses 1 - Depreciation 1 Adjusted profit 1½ Assessment year 2022 Net profit per accounts 1 Add: Disallowable expenses: - Preliminary expenses 1 - Depreciation 1 - Adjusted profit 1½ 10 153

c. Computation of income tax liabilities for relevant assessment Years Heading 1 Assessment year 2021 1 Adjusted profit 1 Capital allowances 1 Total profit ½ Companies income tax (20% of total profit) ½ Tertiary education tax (2% of assessable profit) ½ Assessment year 2022 1 Adjusted profit 1 Capital allowances 1 Total profit ½ Companies income tax (30% of total profit) ½ Tertiary education tax (2% of assessable profit) ½ 10 Total 30

a. Zaki Limited

(i) Computation of basis periods Year Basis period 2019 1/3/2017 - 28/2/2018 2020 1/3/2018 - 28/2/2019 2021 1/3/2019 - 28/2/2020 2021(Cessation) 1/3/2020 - 30/4/2020

(ii) Computation of assessable profits Year Basis period Assessable Profit N 2020 1/5/2018 – 28/02/2019 20,000,000 2021 1/3/2019 – 28/02/2020 5,000,000 2021 1/3/2020 – 30/4/2020 100,000

Note: If the company had ceased business on any date from July 1, 2020 to December 31, 2020, the year of cessation would have been 2022 assessment year.

b. (i) The two forms of stamp duties are:

• Ad-valorem These are duties that vary with the amount of consideration and are in accordance with a scale prescribed by the Act. The Commissioner of Stamp Duties or adjudicator will need to know the amount involved in 154 the transaction. This will enable him determine the appropriate duty to be paid. Examples of instruments that are assessed based on ad-valorem basis are: ➢ Deed of assignment; ➢ Sales agreement; ➢ Tenancy or lease agreement; ➢ Insurance policies; ➢ Contract agreements; ➢ Vending agreement; ➢ Charter-party; ➢ Contract notes; ➢ Legal mortgage and debenture loans; ➢ Share capital of companies; and ➢ Promissory notes.

• Fixed duties These are duties that do not vary with the consideration for the document being stamped. Examples of instruments assessed by fixed duties are:

• Power of Attorney (POA);

• Certificate of occupancy (C of O);

• Appointment of receiver;

• Memorandum of understanding (MOU);

• Joint venture agreements (JVA);

• Ordinary agreements and receipts;

• Guarantor forms; and

• Proxy form.

(ii) Instruments exempted Instruments that are specifically exempted are as follows:

• Those relating to agreements between the Federal Government and other foreign governments;

• Instruments relating to reconstruction and amalgamation; subject to specified condition under section 104(1) of the Act;

• Transactions and sales of properties of a company under liquidation arising from a compulsory winding up by a court or creditors’ voluntary winding up;

• Based on Central Bank circular number CBN/GEN/DMB/02/006 dated January 15, 2016, titled “Currency and Remittance of Statutory Charges or Receipts to Nigerian Postal Service under the Stamp Duties Act”, the following transactions are exempted from stamp duties: Transactions relating to savings accounts holders, salary accounts or students savings accounts; 155 Payments for goods supplied or services rendered if the amount is under N1,000, payment of salaries or wages, pensions, gratuities, etc;

• Section 56 of the Finance Act, 2019, exempts the following “exempt receipts” and “general exemptions” from stamp duties; General exemptions which include the following: ❖ Shares, stocks or securities transferred by a lender to its approved agent or a borrower in furtherance of a regulated securities lending transactions; ❖ Shares stocks or securities returned to a lender or its Approved agent by a borrower in pursuant to a regulated securities lending transaction; and ❖ All document relating to a regulating transactions carried Out under regulations issued by the Securities and Exchange Commission; and ❖ Share transfer based on FIRS information circular on “clarifications on the provisions of the Stamp Duties Act” No: 2020/05 dated April 29, 2020.

Examiner’s report The question tests candidates’ knowledge of computations of assessable profits of a company in cessation, chargeable transactions subject to ad- valorem and fixed duties, and instruments exempted from stamp duties. About 50% of the candidates attempted the question and the performance was poor. The commonest pitfalls of the candidates were their inability to ascertain the relevant basis periods for a company in cessation and were also unable to state the instruments that are exempted from stamp duties. Candidates are advised to pay attention to the amendments to tax laws and effects on tax computations in their preparations for future examinations. Exempt receipts ❖ Receipts given by any person in a regulated securities lending transaction carried out under regulations issued by the Securities and Exchange Commission Payments and deposits for self to self-transactions whether inter or intra-bank; and 156

Marking guide a (i) Computation of basis periods for the relevant years of Assessment Marks Marks Heading (2 ticks @1/2 mark each) 1 Assessment year 2019 Year 1 Basis period 1 Assessment year 2020 Year 1 Basis period 1 Assessment year 2021 Year 1 Basis period 1 Assessment year 2021 (ceasation) Year 1 Basis period 1 9

(ii) Computation of assessable profits for the relevant years of Assessment Assessment year 2020 Basis period ½ Assessable profit ½ Assessment year 2021 Basis period ½ Assessable profit ½ Assessment year 2021 (ceasation) Basis period ½ Assessable profit ½ 3 b i. Ad-valorem instruments (½ mark for any correct transaction subject to a maximum of 5 points) 2½ Fixed duty instruments (½ mark for any correct transaction subject to a maximum of 5 points) 2½ 5

ii. Instruments exempted from stamp duties (1 mark for each correct instrument subject to a maximum of 3 points) 3 Total 20 157

a. Objectives of the NTP The National tax policy provides the fundamental guidelines for the orderly development of the Nigerian tax system. The policy is expected to achieve the following specific objectives, among others:

(i) Guide the operation and review of the tax system;

(ii) Provide the basis for future tax legislations and administration;

(iii) Serve as a point of reference for all stakeholders on taxation;

(iv) Provide benchmark on which stakeholders shall be held accountable; and

(v) Provide clarity on the roles and responsibilities of stakeholders in the tax system.

b. The tax system usually involves a tripartite aspect, namely the tax policy, tax laws, and tax administration.

i. Tax policy The tax policies are general statements of intention, which guide the thinking and the action of all concerned towards the realisation of the set goals. They usually include:

• Movement of emphasis from income tax to consumption tax that is less prone to tax evasion;

• Pursuance of a tax law regime with the aim of reducing Individual tax burden, widening the tax net and encouraging savings and investments; and

• Introduction of the self-assessment scheme to encourage taxpayer participation in the tax assessment process, which is considered to be realistic in approach. The policy can also include movement from coercive method of taxation to voluntary compliance as in the case of Nigeria in recent time.

ii. Tax laws The tax laws include the following notable tax legislations in Nigeria:

• Personal Income Tax Act Cap. P8 LFN 2004;

• Companies Income Tax Act Cap. C21 LFN 2004 (as amended);

• Petroleum Industry Act 2021;

• Capital Gains Tax Act Cap. C1 LFN 2004 (as amended);

• Value Added Tax Act Cap. V1 LFN 2004 (as amended);

• Education Tax Act Cap. E4 LFN 2004(as amended);and

• Stamp Duties Act Cap. S8 LFN 2004. 158 In Nigeria, the Constitution vests the legislation of income tax, whether personal or corporate on the Federal Government in order to promote uniformity. However, the three tiers of government share the administration of the various taxes. Tax laws are reviewed periodically in line with the changes in social, political and economic conditions of the country. The power to impose tax in Nigeria is within the exclusive legislative authority of the Federal Government. There are various machineries set up by the government to ensure strict compliance of these laws; non-compliance attracts penalties and fines.

iii. Tax administration This involves practical interpretation and application of the tax laws. The bodies charged with the administration of tax in Nigeria are the Federal, State and Local governments. The tax authorities of these tiers of government derive their formation from the relevant laws which include: ❖ The Federal Inland Revenue Service (FIRS), sections 1, 2, and 3 of the Federal Inland Revenue Establishment Act (FIRSEA) 2007; ❖ The State Internal Revenue Service (SIRS), sections 87 of Personal Income Tax Act Cap P8 LFN 2004 (as amended); and ❖ The Local Government Revenue Committee, section 90 of Personal Income Tax Act Cap P8 LFN 2004 (as amended).

Examiner’s report The question tests candidates’ knowledge of the specific objectives of the National tax policy (NTP) 2017, and the tripartite structure of the Nigerian tax system. About 90% of the candidates attempted the question but the performance was average. The commonest pitfall of the candidates was their inability to explain the specific objectives of the National tax policy (NTP) 2017. Candidates are advised to familiarise themselves with the provisions of the National tax policy (NTP) 2017 and also read ICAN Pathfinders and Study Text in their preparations for subsequent examinations. 159

Marking guide

a. Specific objectives the National tax policy is designed to achieve Marks Marks (1 mark for each objective subject to a maximum of 5 points) 5

bi. Explanation of tax policy General statements of intention 1 Guide towards realisation of set goals 1 Any 3 examples 3 5

ii. Explanation of tax laws (1 mark for each tax law mentioned subject to a maximum of 5points) 5

iii. Explanation of tax administration: Involves practical interpretation and application of the tax laws 2 3 bodies charged with the administration 3 5 Total 20

a. Types of capital allowances are:

(i) Initial allowance (IA) This is a relief that is granted to a business that has incurred a qualifying capital expenditure in the basis period of the year or in the year the qualifying expenditure was incurred. Initial allowance is granted to give an immediate relief from the huge expenditure incurred by the business. Initial allowance has the following attributes: • It is claimable only once throughout the useful life of the asset;

• It is determined by applying initial allowance rate on asset’s cost; and

• Initial allowance is never prorated on account of the basis period being less than twelve months. However, if the relevant tax authority establishes that the asset has been put to private use, the amount of initial allowance that will be allowed as a deduction from profit shall be restricted to the proportion attributable to the business use of the assets.

(ii) Annual allowance (AA) This relief is granted annually on the residue of qualifying capital expenditure incurred on the qualifying capital expenditure after deducting initial allowance. Annual allowance has the following attributes: 160 ▪ It is granted annually over the useful life of the asset; ▪ It is determined by dividing the cost of the assets less initial allowance over the assets useful life, taking into consideration the specified rates; ▪ Annual allowance shall be prorated where the basis period of a year of assessment is less than twelve months; ▪ Annual allowance is calculated on straight line basis; and ▪ A book value of N10 shall be deducted from annual allowance claimable in the last year of the assets life and retained until the asset is disposed off.

(iii) Investment allowance This is an incentive granted to a business that incurred qualifying capital expenditure on plant and machinery. Investment allowance has the following features: ▪ It is granted only once in the life of the asset; ▪ It is granted only on plant and machinery; and ▪ It is granted at the rate of 10%; ▪ Initial allowance is never prorated on account of the basis period being less than twelve months. However, if the relevant tax authority establishes that the asset has been put to private use, the amount of initial allowance that will be allowed as a deduction from profit shall be restricted to the proportion attributable to the business use of the assets; and ▪ It is never used in determining the tax written down value of the asset. In other words, investment allowance does not impact the tax written down value of the asset. However, it should be added to other capital allowances i.e. IA and AA, and deducted from assessable profit.

(iv) Balancing adjustments These shall arise upon the disposal of a qualifying capital expenditure in a year of assessment. The disposal may result in either:

• Balancing allowance This is arrived at when the tax written down value of the qualifying capital expenditure is greater than the sale proceeds at the time of disposal. Balancing allowance shall be added to other capital allowances that is IA and AA and deducted from assessable profit; or

• Balancing charge This is arrived at when the tax written down value of a qualifying capital expenditure is less than the sale proceeds at the time of disposal. Balancing charge being a gain shall be 161 added to assessable profit. However, since balancing charge is a claw back of capital allowances previously enjoyed on the disposal asset, the amount to be added back to profit shall not exceed the relief previously enjoyed. Consequently, the excess of balancing charge being capital gains shall be assessed under the Capital Gains Tax Act.

(b) i. Big City Enterprises Limited Determination of basis periods for assessment and capital allowances Assessment Years Basis period Assessable profit N Capital allowances N 2021 1/1/2020 – 30/6/2020 8,500,000 Motor vehicle and office equipment 2022 1/7/2020 – 30/6/2021 22,400,000 Furniture and fittings

ii. Computation of income tax payable Assessment year 2021 N N Adjustment profit 8,500,000 Capital allowances (see workings) 6,018,750 But limited to 662/3 of adjusted profit (5,666,667) (5,666,667) Unutilised capital allowances c/f 352,083 _______ Total profit 2,833,333 Companies income tax payable (20% of total profit) = N566,666.60 Tertiary education tax payable (2% of assessable profit) N 170,000.00 Assessment year 2022 Adjusted profit 22,400,000 Capital allowances - b/f 352,083

- For the year 1,817,500 (2,169,583) (See workings) Total profit 20,230,417 Companies income tax payable (30% of total profit) N 6,069,125.10 Tertiary education tax payable (2% of assessable profit) N448,000,00 162

Workings Computation of capital allowances Motor vehicle Office Furniture Total equipment and fitting Initial allowance (%) 50 50 25 Annual allowance (%) 25 25 20 N N N N Assessment year 2021 Cost 8,400,000 2,300,000 10,700,000 Initial allowance (4,200,000) (1,150,000) 5,350,000 Annual allowance (525,000) (143,750) 668,750 _________ 6,018,750 W.D.V c/f to A.Y. 2022 3,675,000 1,006,250 Assessment year 2022 Cost 1,200,000 Initial allowance (300,000) 300,000 Annual allowance (1,050,000) (287,500) (180,000) 1,517,500 __________ ________ ________ 1,817,500 W.D.V c/f to A.Y. 2023 2,625,000 718,750 720,000

b. iii. An initial or an annual allowance in respect of qualifying expenditure incurred in respect of any asset shall only be made to a company for a year of assessment if at the end of its basis period for that year, it was the owner of that asset and that asset was in use for the purposes of a trade or businesses carried on by that company.

Examiner’s report The question tests candidates’ knowledge of commencement principles, computation of capital allowances and explanation of “in use” in relation to capital allowances, and computation of companies income tax payable. About 75% of the candidates attempted the question but performance was fair. The commonest pitfall of the candidates was their inability to identify the basis periods for assessments and capital allowances. Also, they could not explain the meaning of “in use” in relation to capital allowances. Candidates are advised to read ICAN Study Text and Pathfinders when preparing for subsequent examinations to ensure better performance in future. 163

Marking guide

a. Types of capital allowances Marks Marks (1 mark for any correct capital allowance subject to a maximum of 3 points) (1 mark for explanation of a correct capital allowance subject to a maximum of 3 points) 3 3 6 b i. Basis periods for assessment and capital allowances Assessment year 2021 Year 1 Basis period 1 Assessment year 2022 Year 1 Basis period 1 4 ii. Computation of income tax payable Assessment year 2021 Year ¼ Adjusted profit ¼ Capital allowances ¼ Limited to 662/3 of adjusted profit ¼ Unutilised capital allowances c/f ¼ Total profit ½ Companies income tax payable (20% of total profit ½ Tertiary education tax payable (2% of assessable profit) ¼ Assessment year 2022 Year ¼ Adjusted profit ¼ capital allowances - b/f ¼ - For the year ¼ Total profit ¼ Companies income tax payable (30% of total profit) ¼ Tertiary education tax payable (2% of assessable profit) ¼ 164

Workings: Assessment year 2021 Year ¼ Cost (2 ticks @ ¼ each) ½ Initial allowance (2 ticks @ ¼ each) ½ Annual allowance (2 ticks @ ¼ each) ½ Capital allowance ¼ Assessment 2022 Year ¼ Cost ¼ Initial allowance ¼ Annual allowance(3 ticks @ ¼ each) ¾ Total allowance ¼ 8

iii. Meaning of “in use” The asset was in use at the end of the basis period for that year 1 The asset was in use for the purposes of trade or business carried out by the company 1 2 Total 20

(a) Most often, the terms “e-business” and “e-commerce” are used interchangeably; however, they are not synonymous. E-commerce refers to buying and selling online, while e-business encompasses all business conducted online. Therefore, e-commerce can be viewed as a subset of e- business. Below are the differences between e-commerce and e-business: S/N E-commerce E- business i. E-commerce involves commercial transactions done over the internet. E- business is the conduct of business process on the internet.

ii. E-commerce is use of electronic transmission medium that caters for buying and selling of products and services. In addition, ’e-business’ also includes the exchange of information directly related to buying and selling of products. iii. Activities that essentially involve monetary transaction are termed “e-commerce”. This includes activities like procurement of raw materials or goods, customer education, looking for suppliers, etc. iv. E-commerce usually requires the use of just a website. E-business involves the use of CRM’s, ERP’s that connect different business processes. 165

v. E-commerce involves the mandatory use of the internet. E-business could involve the use of internet, intranet, or extranet. vi. E-commerce is narrower concept and restricted to buying and selling. E-business is a broader concept that involves market surveying, supply chain and logistics management, and using data mining.

(b) i. Objectives of tax identification number (TIN) Tax identification number (TIN) is a unique nine-digit number allocated to taxpayers with a view to identifying an individual, business or any other entity in tax returns and other documents filed with the tax authorities. The major objectives of introducing TIN, as specified in Joint Tax Board Bulletin 2011 include:

• Creating closer linkage between tax authorities in Nigeria;

• Aiding cooperation and information sharing amongst the tax authorities; and

• Increasing revenue generation accruing to all tiers of the government.

ii. Items to be contained in returns to be filed by companies to FIRS Section 55 of the CITA, Cap C21, LFN 2004 (as amended) provides that all companies (including businesses granted exemption from incorporation) to at least once a year without notice or demand from the Federal Inland Revenue Service (FIRS), file a return with the FIRS in a prescribed form and containing prescribed information together with the following documents:

• Audited financial statements;

• Income tax and capital allowance computation schedules;

• Completed copy of Companies Income Tax (Form IR3C-4Coy);

• Completed copy of Tertiary education tax (Form 4D EDT);

• Evidence of payment of companies income tax liability; and

• Evidence of payment of Tertiary education tax liability. 166

Examiner’s report The question tests candidates’ understanding of the taxation of “e-commerce” and “e-business”. About 55% of the candidates attempted the question but performance was poor. The commonest pitfalls of the candidates were their inability to state the differences between “e-commerce” and “e-business”. In addition to the foregoing, some candidates could not state the objectives of taxpayers identification number (TIN). Candidates are advised to read widely before sitting for the Institute’s examinations.

Marking guide Marks Marks a. Differences between “e-commerce” and “e-business” (1 mark for each explanation subject to a maximum of 10 points) 5

i. Objectives of tax identification number (TIN) (1½ marks for each of the three major objectives stated) 4½ Identification of an individual taxpayer ½ 5

ii. Items required to be contained in returns filed by companies with FIRS (1 mark for each content subject to a maximum of 5 points) 5 Total 15 167

(a) Employment Employment is an agreement between an employer and an employee that the employee will provide certain services on the job and in the employer’s designated workplace to facilitate the accomplishment of the employer organisation’s goals and mission, in return for compensation. The agreement can be verbal, implied or an official employment contract. In employment, the employer determines where, when, how, why and what of the work that is performed by the employee. The degree of input, autonomy and self-directedness that an employee experiences on a job is a by-product of an employer’s philosophy of management and employment. Employment ends at the prerogative of the employer or the employee. Vocation A vocation is a specified business, occupation, profession, or trade to which a person is specially drawn or for which he or she is suited, trained or qualified. Vocation can either be an activity that serves as an individual’s regular source of livelihood or as an activity engaged in especially as a means of passing time. Profession A profession refers to an occupation that requires specialized education, knowledge, training and ethics. Although professionals make their living in what they do, this paid work is often more than just a job or occupation alone. Whether the occupation is law, medicine, plumbing, writing, interior design or accounting, those who are in it are expected to meet and maintain common standards. Professions are, ideally, made up of people who should have high ethical standards, special knowledge and skills. The responsibility of people in certain occupations to the public is an important distinction from those who may participate in the fields on an amateur or non-professional basis. For example, if a home owner hires a non-licensed plumber to save money, he or she wouldn’t be able to hold this person to the same standards as a licensed professional in the same industry. 168

(b) Cash emoluments Cash emoluments are the remuneration that an employee receives from the employer in cash. Cash emoluments include salary, wages, fee, allowance or other gain or profit from employment, including compensations, bonuses, premiums, benefits, and share of profits received by an employee. Benefits–in–kind (BIK) Benefits-in-kind mean those expenses incurred by an employer in the provision of benefits to the employee. Such benefits often include: furnished living accommodation; gardener/stewards (domestic servants), use of official car for private purposes by employees; installation of air conditioners or generator in an employee’s residence, etc. These benefits are regarded as part of the employee’s taxable income if these relate to services rendered by the employee. Benefits-in-kind will also include such benefits which are usually provided to the spouse, family, servant, dependent or guest of the employee.

(c) The following are the general rules for quantifying benefits-in-kind on the use of assets, etc: i. Use of assets owned acquired by the employer The employee is deemed to have derived income equal to 5% of the cost of assets if known or 5% of the market value at the date of acquisition and where the cost is not known, to be determined by the tax authorities. Assets rented or hired by the employer The employee is deemed to have derived an income equal to the annual amount of the rent or hire expended by the employer on the asset. Where an employee has made any refund in respect of the asset rented or hired by the employer for the employee’s benefit, the employee shall be deemed to have derived income equal to the difference between the amount incurred by the employer and any amount refunded by the employee. 169

ii. Provision of residential accommodation by the employer If an employer provides residential accommodation for the benefit of an employee anywhere in Nigeria and the employee pays no rent for the premises, or pays a rent which is less than the annual value of the premises, the employee is deemed to have derived income each year equal to the annual rateable value of the premises less any rent paid by the employee. The annual rateable value of any premises is that value as determined by the relevant tax authority for purposes of local rate.

iii. Provision of domestic staff by the employer Where an employer engages the service of domestic staff (such as driver, steward, washman, housemaid, gardener, etc.) for the exclusive benefit of an employee, the cost incurred in form of salary by the employer for the use of the domestic staff by the employee shall be deemed as income in the hands of the employee and taxed accordingly. The income of a domestic staff shall only be deemed as income in the hands of the employee only where the domestic staff is not a permanent employee of the employer, that is, a contract staff.

Examiner’s report The question tests the candidates’ knowledge of the taxation of individuals with emphases on explanations of “employment”, “vocation”, “profession”, “cash emoluments”, and benefits-in- kind. Over 80% of the candidates attempted the question but performance was average. The commonest pitfall was the candidates’ inability to explain the general rules for quantifying “benefits-in-kind”. Candidates are advised to read relevant study materials in order to perform well in future examinations. 170 171

Marking guide Marks Marks a. Explanation of “employment”, “vocation” and “profession” Employment Employment is an agreement between an employer and an employee. Agreement can be verbal, implied or an official employment contract. The employer dictates the terms. Employment ends at the prerogative of the employer or the employee (1 mark for any correct point subject to a maximum of 2 points) 2 Vocation Definition 1 Nature of vocation 1 Profession Definition 1 Explanation 1 6

b. Explanation of “cash emoluments” and “benefits-in-kind” Cash emoluments Definition/explanation ½ Examples ½ Benefits-in-kind Definition ½ Examples ½ 2

c. Rules for qualifying “benefits-in-kind”

i. Use of asset owned or acquired, by the employer Employee’s deemed derived income is equal to 5% of the cost of asset or 1 5% if the market value at the date of requisition 1 Assets rented or hired by the employer Employee’s deemed derived income is equal to the amount of the rent or hire expended by the employer, ½ Where the employee’s makes a refund, the employee’s deemed derived income is equal to the difference between the amount incurred by the employer and any amount refunded by the employee. ½ 3

ii. Provision of residual accommodation by the employer Employee’s deemed derived income is equal to the annual rateable value of the property less any rent paid by the employee. 2

iii. Provision of domestic staff by the employer Employee’s deemed income shall be the cost incurred in form of salary by the employer for the use of the domestic staff. 1 The income of the domestic staff shall only be deemed as income in the hands of the employee only where the domestic staff is not a permanent employee of the employer, that is, a contract staff. 1 2 Total 15 172

(a) Ultimate beneficiaries of withholding tax The Companies Income Tax Act and Personal Income Tax Act clearly specify the ultimate government beneficiary of withholding taxes. These are the state governments through the agency of the State Internal Revenue Service (SIRS) and the Federal government through the Federal Inland Revenue Service (FIRS). Therefore, the administration of withholding tax is within the purview of both the FIRS and the SIRS.

(b) Contents of WHT returns/payment schedule Each withholding tax cheque, being paid to the Revenue must be accompanied with a payment schedule, which is a list of those who suffered the deductions that make up the cheque. 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.

(c) Penalty for late remittance and non-deduction of withholding tax from payments Section 82 of CITA 2004 (as amended) specifies that where any person who being obliged to deduct any tax under section 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 FIRS within 21 days from the date the amount was deducted or the time the duty to deduct 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, fails to remit to the SIRS within 30 days, withholding tax withheld from payments due to individuals, shall be guilty of an offence punishable on conviction and shall be liable to a fine of N5,000, in addition to the tax deductible or deducted, but not remitted, plus interest at the prevailing commercial rate. 173

(d) Currency of deduction 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.

Examiner’s report The question tests the candidates’ knowledge of ultimate beneficiaries of withholding tax, filing of returns/payment schedule, penalties, and currency of payment for withholding tax. About 80% of the candidates attempted the question and the performance was good. The commonest pitfall was candidates’ lack of knowledge of the penalties payable for non deduction and late remittance of withholding tax to the appropriate tax authorities. Candidates are advised to pay attention to this particular aspect of the syllabus.

Marking guide Marks Marks a. Ultimate beneficiaries of withholding tax State Internal Revenue Service 1½ Federal Income Revenue Service 1½ 3

b. Withholding tax returns/payment schedule (1 mark for any correct item subject to a maximum of 5 points) 5

c. Penalties for the late remittance and non deduction of withholding tax Companies Penalty of 10% per annum of the tax withheld or not remitted Individuals Penalty/fine of N5,000 plus interest at the prevailing commercial rate 1½ 1½ 3

d. Currency of deduction/remittance Currency of transaction 4 Total 15 174 THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA