Taxation · May 2023

a) Fadeke, Femi, Kola and Gbenga Computation of computed income of the partnership For the year ended December 31, 2021 (Assessment year 2022) N N Net profit for the year 87,091,900 Add: Allowance for doubtful debts 310,000 Donation to a church in the home town of Fadeke 50,000 Allowance paid to the domestic staff of Femi 240,000 Repairs and maintenance of the residence of each partner 840,000 Depreciation 1,240,600 2,680,600 Adjusted profit 89,772,500 Capital allowances (980,000) Computed income 88,792,500

b) Computation of partners’ income tax liabilities Fadeke Femi Kola Gbenga Total N N N N N Share of profit 22,198,125 22,198,125 22,198,125 22,198,125 88,792,500 Interest on loan 300,000 240,000 180,000 150,000 870,000 Interest on capital 1,250,000 1,250,000 1,250,000 1,250,000 5,000,000 Passage and leave allowance 660,000 660,000 660,000 660,000 2,640,000 Partner’s salary 1,200,000 1,200,000 1,200,000 1,200,000 4,800,000 Rent 1,440,000 0 0 0 1,440,000 Tax exempt items 27,048,125 25,548,125 25,488,125 25,458,125 103,542,500 Life insurance premium (96,000) 0 0 0 (96,000) Gross income 26,952,125 25,548,125 25,488,125 25,458,125 103,446,500 Consolidated relief allowance N200,000 or 1% of gross income, whichever is higher plus 20% of gross income (5,659,946) (5,365,106) (5,352,506) (5,346,206) (21,723,764) Chargeable income 21,292,179 20,183,019 20,135,619 20,111,919 81,722,736 Income tax liability First N300,000 @ 7% 21,000 21,000 21,000 21,000 84,000 Next N300,000 @ 11% 33,000 33,000 33,000 33,000 132,000 Next N500,000 @ 15% 75,000 75,000 75,000 75,000 300,000 Next N500,000 @ 19% 95,000 95,000 95,000 95,000 380,000 Next N1,600,000 @ 21% 336,000 336,000 336,000 336,000 1,344,000 Next N18,092,179 @ 24% 4,342,123 4,342,123 Next N16,983,019 @ 24% 4,075,925 4,075,925 Next N16,935,619 @ 24% 4,064,549 4,064,549 Next N16,911,919 @ 24% 4,058,861 4,058,861 Income tax payable 4,902,123 4,635,925 4,624,549 4,618,861 18,781,458 158 Withholding tax: Rent (144,000) (144,000) Interest on loan (30,000) (24,000) (18,000) (15,000) (87,000) Net income tax payable 4,728,123 4,611,925 4,606,549 4,603,861 18,550,458

Examiner’s report The question tests candidates’ knowledge of the computation of income of a partnership and the income tax liabilities of partners. This being a compulsory question, about 100% of the candidates attempted the question. The performance of the candidates was average. The commonest pitfalls of the candidates were their inability to identify allowable expenses in the determination of computed income of the partnership and compute the consolidated relief allowance. Candidates are advised to read widely and be conversant with the provisions of the Personal Income Tax Act Cap. P8 LFN 2004 (as amended) before sitting for subsequent examinations to enhance better performance.

Marking guide

a) Computation of the income of the partnership Marks Marks Heading - Name

- Computation of computed income - Assessment years Net profit Allowance for doubtful debts Donation to church Domestic allowance Repairs and maintenance Depreciation Capital allowances ½ ½ ½ ½ ½ ½ ½ ½ ½ ½ 5 159

b) Computation of partners’ income tax liabilities Share of profit – (½ mark each for any correct amount) Interest on loan – (½ mark each for any correct amount) Interest on capital - (½ mark each for any correct amount) Postage and leave allowance - (½ mark each for any correct amount) Partners’ salary - (½ mark each for any correct amount) Rent Life insurance premium Consolidated relief allowance – (¼ mark each for any correct amount) Income tax liability: (1/2 mark each for any correct amount) Withholding tax - Rent

- Interest on loan (1/4 mark for each correct amount) Total 2 2 2 2 2 ¼ ¼ 1 12 ½ 1 25 30

(a) Contract of employment and contract for employment The Personal Income Tax Act Cap. P8 LFN 2004 (as amended) defines employment to include any appointment or office, whether public or otherwise, for which remuneration is payable, and “employee” and “employer” shall be construed accordingly. However, the Labour Act 1994, defines a contract of employment as “any agreement whether written or verbal, expressed or implied, whereby one person agrees to serve the employer as a worker.” A contract for employment is an agreement whereby a person is engaged as an independent contractor, such as a self-employed person or vendor engaged for a fee to carry out an assignment or a project for the company. In a contract for employment, there is no employer-employee relationship in the contract and the self- employed person is not covered by the Labour Act. An individual under a contract of employment is commonly referred to as an employee, while an individual under a contract for employment is referred to as an independent contractor or self-employed person. The following distinctions can be drawn between a contract of employment and a contract for employment:

i. An individual under a contract of employment earns remuneration (that is, salary), while an individual under a contract for employment earns profit;

ii. An individual under a contract of employment is assessed to tax on 160 actual year basis, while an individual under a contract for employment is assessed to tax on preceding year basis;

iii. A self-employed person is required to register for value added tax, while an employee is not required to do so; and An employee has the right not to be unlawfully dismissed and to receive redundancy payment and other employment rights, while a self-employed person does not have such rights.

(b) Residence of different categories of individuals Liability to income tax is often determined according to whether a person receiving income is resident in a State for a particular year of assessment. A taxpayer is therefore liable to the tax authority of the territory in which he is deemed to be resident for a year of assessment. The following rules guide the determination of residence: (i) An individual whether in employment or whose only sources of income are unearned income is deemed to be resident for a year of assessment in the territory in which he has a place available for his domestic use in Nigeria on the first day of January of the assessment year, and does not include any hotel, rest house or other place at which he is temporarily lodging;

(ii) An executor is deemed to be resident in the territory in which the deceased individual was last deemed to be resident or would have been deemed to be resident if the law had been in force prior to the date of his death;

(iii) A trustee of any trust or settlement is deemed to be resident where all the income of the settlement or trust for a year of assessment arises. Where the income arises in more than one territory or where the tax authority cannot be determined, the Federal Inland Revenue Service is the tax authority;

(iv) Partners in partnership are deemed to be resident where the principal office or the place of the partnership is situated on the first day of that year or is first established during the year;

(v) A village or an indigenous community is deemed to be resident in the territory in which the community is found;

(vi) An itinerant worker is deemed to be resident where he is found in a year of assessment;

(vii) An individual not being a person assessable by FIRS (S. 2, 1 (b) ) who holds a foreign employment on the 1st day of January in a year of assessment or who first becomes liable to income tax in Nigeria for that year by reason of his entering that employment during that year, shall be deemed to be resident for that year in the territory in which the 161 principal office of his employer is situated on that day or on the day his foreign employment commences as the case may be; and

(viii) An individual whose only source of earned income arising in Nigeria on the 1st day of January in a year of assessment was a pension, or who had a place or principal place on that day shall be deemed to be resident for that year in the territory in which that place or principal place of residence was situated on that day.

Examiner’s report The question tests candidates’ knowledge of the differences between “contract of employment” and “contract for employment”, and rules guiding the determination of residence of individuals for tax purposes. About 60% of the candidates attempted the question but the performance was average. The commonest pitfalls of the candidates were their inability to differentiate between “contract of employment” and “contract for employment”. Some of the candidates could not explain the rules guiding the determination of residence of individuals for tax purposes. Candidates are advised to read widely by making use of relevant texts on taxation of individuals, ICAN Pathfinder and Study Text.

Marking guide Marks a) Differentiation between “contract of employment” and “contract for employment” (2 marks each for any correct point subject to a maximum of 4 points) 8

b) Explanation of the rules guiding the determination of residence for six different categories of individuals for tax purposes (2 marks each for any correct point subject to a maximum of 6 points) Total 12 20 162

a) Final and conclusive assessment An assessment raised on a company is said to be final and conclusive where:

i. No valid objection or appeal has been lodged against the amount of total profit assessed on a company within the time statutorily allowed for that purpose; or

ii. The amount of total profit has been agreed by the taxpayer after his objection; or

iii. The amount of total profit has been determined on appeal.

b) i. Time limit for objection and appeal If any company disputes a tax assessment raised on it by the tax authority, it may give a notice of objection, to the Federal Inland Revenue Service, seeking a review or revision of the assessment. However, the time limit for objection is within thirty days from the date of service of the notice of assessment. Also, a company aggrieved by an assessment or demand notice made upon it by the FIRS or aggrieved by any action or decision of the FIRS, such as refusal to amend an assessment; may appeal against such decision or assessment or demand notice within thirty days from the date on which a copy of the order or decision which is being appealed against is made, or deemed to have been made by the FIRS.

ii. Contents 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: ➢ Be in writing, delivered in persons, by courier service or via electronic mail and addressed to the Chairman, Federal Inland Revenue Service; ➢ State the grounds of objection, namely:

• Amount of assessable and total profits of the company for the relevant assessment year; and

• Amount of tax which the taxpayer claims is payable for the year of assessment. ➢ Be raised within thirty days of the date of service of the notice of assessment. 163

iii. Amendment of assessment and refusal to amend If any company disputes an assessment raised on it by the FIRS, it may apply to the FIRS, by notice of objection in writing, delivered in person, by courier service, email or any other electronic means, as directed by the Service, to review and revise the assessment made upon it. Therefore, the company must ensure that its objection: ➢ Is made within thirty days from the date of service of the notice of assessment; and ➢ Contains the ground of objection to the assessment, that is:

• The amount of assessable and total profits of the company for the relevant year of assessment; and

• The amount of tax payable for the year, which the company claims should be stated on the notice of assessment. On receipt of the notice of objection referred to above, the FIRS may require the company giving the notice of objection to furnish such particulars as the FIRS may deem necessary and to produce all books or other documents relating to the profits of the company, and may summon any person who may be able to give evidence relating to the assessment to attend for examination by an officer of the FIRS on oath or otherwise. In the event of any company assessed, which has objected to an assessment made upon it, agreeing with the FIRS as to the amount at which it is liable to be assessed, the assessment shall be amended accordingly, and notice of the tax payable shall be served upon such company. However, if the company fails to agree the amount at which the company is liable to be assessed with the FIRS, the FIRS shall give notice of refusal to amend the assessment as desired by such company and may revise the assessment to such amount as the FIRS may, according to the best of its judgement, determine and give notice of its revised assessment and of the tax payable together with the notice of refusal to amend the revised assessment.

Examiner’s report The question tests candidates’ knowledge of when an assessment can be final and conclusive. Additionally, candidates are expected to explain objection and appeal procedures. About 50% of the candidates attempted the question but the performance was average. The commonest pitfall of the candidates was their inability to explain the amendment of assessment and notice of refusal to amend (NORA). 164 Candidates are advised to read widely and make use of the Institute’s Pathfinder and Study Text in their preparations for subsequent examinations.

Marking guide Marks Marks a) When an assessment is final and conclusive i No valid objection 1 ii. No valid appeal 1 iii. Time statutorily allowed (30 days) 1 iv. Total profit agreed by the taxpayer after objection 1 v. Total profit has been determined on appeal 1 5 b) i. Time limit for objection and appeal Notice of objection 1 Time limit for objection (30 days after the date of receipt of assessment) 1 Appeal against such decision or assessment 1 Time limit for appeal against such decision or assessment (30 days after the date of receipt of refusal to amend) 1 4 ii. Contents of a notice of objection ➢ Be in writing ½ ➢ Addressed to the Chairman (FIRS) ½ ➢ State grounds of objection

- Amount of assessable and total profits 1 - Amount of tax payable 1 ➢ Notice of objection to be raised within 30 days of the date of service of notice of assessment 1 4 iii. Amendment of assessment and notice of refusal of amend (NORA) ➢ Notice of objection must be in writing and delivered in person, courier servicer or any electronic device 1 ➢ Objection to be filed within 30days from the date of service of the notice of assessment 1 ➢ Grounds of objection:

- Amount of assessable and total profits 1 - Amount of tax payable 1 ➢ Furnishing of such particulars as the FIRS may deem necessary 1 ➢ Agreeing with the FIRS as to the amount at which it is liable to be assessed 1 ➢ FIRS shall give notice of refusal to amend the assessment 1 7 Total 20 165

a) Wizzy – Baddo Limited Determination of basis periods for assessable profit Year of assessment Basis period 2021 1/9/2020 - 31/12/2020 2022 1/1/2021 – 31/12/2021 Determination of basis periods for qualifying capital expenditure (QCE) Year of assessment Basis period 2021 1/9/2020 - 31/12/2020 2022 1/1/2021 – 31/12/2021 166

b) Computation of capital allowances for 2021 and 2022 assessment years Assessment year

Examiner’s report The question tests the candidates’ knowledge of the determination of basis periods and computations of capital allowances on commencement of business. About 70% of the candidates attempted the question but performance was fair. The commonest pitfalls of the candidates were their inability to ascertain the basis periods and prorate annual allowance on commencement of business. Candidates are advised to read ICAN Study Text and Pathfinders when preparing for subsequent examinations to ensure better performance in future. I.A AA Inv. A Land and building 15% 10% Motor vehicle 50% 25% Machinery 50% 25% 10% Furniture 25% 20% Delivery van 50% 25% Capital allowances 2021 (1/9/20 - 31/12/20) W.D.V c/f to A.Y 2022 Cost I.A AA Inv A N 5,467,500 (820,125) (154,913) (154,913) 4,492,462 N 10,000,000 (5,000,000) (416,667)

- ________ 4,583,333 N 4,375,000 (2,187,500) (182,292) - 2,005,205 N

- - - N

- - - N - 8,00,625 753,872 437,500 9,198,997 2022 (1/1/21 – 31/12/21) Cost - - - 3,458,000 4,750,000 - I.A - - - (864,500) (2,375,000) 3,239,500 AA (464,738) (1,250,000) (546,875) (518,700) (593,750) 3,374,063 W.D.V c/f to A.Y. 2023 4,027,724 3,333,333 1,458,333 2,074,800 1,781,250 6,613,563 167

Marking guide

(a) Basis periods for assessable profits and QCE Marks Marks Name of company ½ Heading - assessable profit ¼ 2021 assessment year ½ 2022 assessment year ½ Basis period - 1/9/2020 – 31/12/2022 ½ - 1/1/2021 – 31/12/2021 ½ Heading - qualifying capital expenditure (QCE) ¼ 2021 assessment year ½ 2022 assessment year ½ Basis period - 1/9/2022 – 31/12/2022 ½ - 1/1/2021 – 31/12/2021 ½ 5 (b) Computation of capital allowances Heading - Computation of capital allowances ½ - 2021 and 2022 assessment years ½ 2021 assessment year ½ Cost (½ mark each for any correct amount) 1½ Initial allowance (½ mark for any correct amount) 1½ Total of initial allowance 1 Annual allowance (½ mark for each correct amount) 1½ Total of annual allowance ½ 2022 assessment year ½ Cost (½ mark each for any correct amount) 1 Initial allowance (½ mark for any correct amount) 1 Total of initial allowance 1 Investment allowance 1 Annual allowance (½ mark for any correct amount) 2½ Total of annual allowance ½ 15 Total 20

(a) The 1999 Constitution of the Federal Republic of Nigeria seeks to eliminate multiple taxation at all levels of government as provided for in Part II, Paragraphs 7 to 10, which state that:

i. In the exercise of its powers to impose any tax or duty on: ➢ Capital gains, incomes or profits or persons other than companies; and ➢ Documents or transactions by way of stamp duties. The National Assembly may, subject to such conditions as it may prescribe, provide that the collection of any such tax or duty or the administration of the law imposing it, shall be carried out by the government of a state or other authority of a state. 168

ii. Where an Act of the National Assembly provides for the collection of tax or duty on capital gains, incomes or profit or the administration of any law by an authority of a state in accordance with paragraph 7 thereof, it shall regulate the liability of persons to such tax or duty in such manner as to ensure that such tax or duty is not levied on the same person by more than one state.

iii. A House of Assembly may, subject to such conditions as it may prescribe, make provisions for the collection of any tax, fee or rate or for the administration of the law providing for such collection by a local government council.

iv. Where a law of a House of Assembly provides for the collection of tax, fee or rate or for the administration of such law by a local government council in accordance with the provisions hereof, it shall regulate the liability of persons to the tax, fee or rate in such manner as to ensure that such tax, fee or rate is not levied on the same person, in respect of the same liability by more than one local government council. Other possible solutions to multiplicity of taxes in Nigeria include: i. Streamlining the number of taxes in Nigeria in view of the low yields of many of the taxes. This will involve the review of current statutory provisions in Nigeria; ii. Reviewing all the existing taxes in Nigeria and harmonise where necessary, as recommended by various study groups; iv. Reviewing the Constitution to address the overlap in taxing rights and limit the number of taxes that can be imposed by different levels; iv. Abolishing any unorthodox method of tax collection and implementing technology for tax administration; and v. Limiting the number of revenue agencies.

(b) The possible causes of multiple taxation in Nigeria are:

i. The number of taxes which local governments have constitutional rights to collect is a major cause of multiple taxation;

ii. Lack of funding, particularly, for most States may result in multiple taxation where the Service attempts to source for funds through levying of tax notwithstanding whether such tax is being levied either by the Federal or local governments;

v. Some of the State governments deliberately deny their local governments the revenue due to them. Consequently, a local 169 government as a way of survival, desperately and aggressively focuses on any revenue drive that will generate revenue to them;

iv. Lack of tax education and awareness;

v. All the tiers of government usually fail to adequately fund their departments and agencies;

vi. Multiplicity of revenue agencies;

vii. Overlapping taxing rights as contained in the Constitution and the Taxes and Levies (Approved List for Collection) Act, Cap. T2 LFN, 2004; and

viii. Manual tax administration system and unorthodox tax collection.

Examiner’s report The question tests candidates’ understanding of the possible causes, and constitutional and other possible solutions to the elimination of multiple taxation. About 80% of the candidates attempted the question but performance was fair. The commonest pitfalls of the candidates were their inability to explain the constitutional provisions on how to eliminate multiple taxation. Candidates are advised to read widely before sitting for the Institute’s examinations and be abreast of developments in tax matters.

Marking guide Marks Marks (a) Elimination of multiple taxes For stating that: - The 1999 Constitution of the Federal Republic of Nigeria seeks to eliminate multiple taxation;

- The National Assembly provides for the collection of any duty or tax and it shall be carried out by the government of a State or any other authority;

- An Act of National Assembly regulates the liability of persons to specified taxes and such taxes shall not be levied on the same person by more than one State;

- A House of Assembly makes provisions for the collection of specified taxes, levies, etc; and 1 1 1 1 170

- A House of Assembly shall ensure that the tax is not levied on the same person in respect of the same liability by more than one local government council. 1 Other possible solutions (1 mark each for any correct solution) 5 10

(b) Causes of multiple taxation (1 mark each for any 5 correct solutions) 5 15

(a) Fountain Hotels Limited VAT remittable to the Federal Inland Revenue Service (FIRS) In respect of July 2022 transactions Output VAT N N VAT on outdoor catering (70% of N600,000) 420,000 VAT on drinks (80% of N360,000) 288,000 VAT on foodstuff (80% of N240,000) 192,000 900,000 Less Input VAT VAT on drinks (75% of N150,000 ) 112,500 VAT on foodstuff (75% of N210,000) 157,500 (270,000) Amount remittable 630,000

NOTE Based on the provisions of the Finance Act, 2019, VAT remittance is now “cash based” as against “invoice based”.

(b) i. Revenue VAT This is the tax payable on the sale of taxable goods or services which is ultimately paid by the final consumer of the goods or services. 171

ii. Zero-rated supplies and services Certain goods and services are classified as zero-rate. These goods and services are within the ambit of VAT Act, but the applicable rate is 0%. These include: - Non oil exports; - Goods and services purchased by diplomats; and - ’Humanitarian donor funded project includes project undertaken by non- government organisations, religious and social clubs or societies recognised by law whose activity is not for profit and in the public interest.

iii. VAT on export All exported goods and services are exempted from VAT. This is in line with the concept of destination principle, which allows for value added taxes to be retained by the country where the taxed product is being sold / consumed.

Examiner’s report The question tests the candidates’ knowledge of computation of VAT remittable to Federal Inland Revenue Service (FIRS), taking into consideration hotel services rendered on credit and credit purchases made. Over 80% of the candidates attempted the question and performance was above average. The commonest pitfall was the candidates’ inability to compute VAT remittable to Federal Inland Revenue Service (FIRS), taking into consideration hotel credit services rendered and credit purchases made. Candidates are advised to read relevant study materials, VAT Act and circulars issued by FIRS for subsequent examinations.

Marking guide

(a) Remittance of VAT to FIRS Marks Marks Heading - Name ½ - VAT remittable to FIRS ½ - In respect of July 2022 transactions ½ Output VAT - Outdoor catering 1½ - VAT on drinks 1½ - VAT on foodstuff 1½ Output VAT - VAT on drinks 1½

- VAT on foodstuff 1½ 9 172

(b) i. Revenue VAT (1 mark each for any two points) 2 ii. Zero-rated supplier and services (1 mark each for any two points) 2

iii. VAT on export Exemption of exported goods from VAT 1 Concept of destination principle 1 6 Total 15

(a) Special tax incentives for enterprises in an export processing zone – section 18(1) of Nigeria Export Processing Zones Act Cap. N107 LFN 2004 (as amended). Approved enterprises within the zones shall be entitled to the following incentives:

i. Legislative provisions pertaining to taxes, levies, duties and foreign exchange regulations shall not apply within the zones;

ii. Repatriation of foreign capital investment in the Zones at any time with capital appreciation of the investment;

iii. Remittance of profits and dividends earned by foreign investors in the zones;

iv. No import or export licenses’ shall be required;

v. Up to 25% of production may be sold in the customs territory against a valid permit and on payment of appropriate duties;

vi. Rent-free land at construction stage; thereafter rent shall be as determined by the authority;

vii. Up to 100% foreign ownership of business in the zones allowable; and

viii. Foreign managers and qualified personnel may be employed by companies operating in the zones. Export processing zone allowance – section 35 of CITA (as amended)

i. An export processing zone allowance is granted to a company, which has incurred expenditure in its qualifying building and plant equipment in an approved manufacturing activity in an export processing zone. The rate is 100% capital allowance in any assessment year but the company will not be entitled to an investment allowance. Only the tax 173 written down value of the assets shall be carried forward at the end of the tax holidays.

ii. The profit or gains of a 100 percent export oriented undertaking established within and outside an export free zone shall be exempt from tax for the first three consecutive assessment years provided that;

• The undertaking is 100 percent export oriented;

• The undertaking is not formed by splitting or breaking up or reconstructing a business already in existence;

• It manufactures, produces and exports articles during the relevant year and the export proceeds form 75 per cent of its turnover;

• The undertaking is not formed by transfer of machinery or plants previously used for any purpose to the new undertaking or where machinery or plant previously used for any purpose is transferred does not exceed 25 per cent of the total value of the machinery of the undertaking; and

• The undertaking repatriates at least 75 per cent of the export earnings to Nigeria and places it in a domiciliary account in any registered and licensed bank in Nigeria.

b. Companies registered and operating in the zone shall comply with the provisions of section 55(1) of CITA (as amended) and render returns in the manner prescribed therein, to the Federal Inland Revenue Service, in order to enjoy the exemption from taxes, levies, duties and foreign exchange regulations in accordance with section 8 of the Act and relevant provisions of BOFIA 2020. All penalties prescribed in CITA and the Federal Inland Revenue Service (Establishment) Act, 2007, may apply to such companies in the event of non-compliance with section 55(1) of CITA.

Examiner’s report The question tests the candidates’ knowledge of the special tax incentives and penalties for enterprises operating in an export processing zone. About 80% of the candidates attempted the question but the performance was below average. The commonest pitfall was the candidates’ inability to explain special tax incentives for enterprises operating in an export processing zone. 174 Candidates are advised to pay attention to this particular aspect of the syllabus.

Marking guide Marks a. Special tax incentives (2 marks each for any six incentives) 12

b. Penalties for non-compliance with Section 55 (1) of CITA (as amended) Penalties prescribed in CITA and FIRS (Establishment) Act, 2007 3 Total 15 175 THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA