Taxation · November 2023

Nura Imam Enterprises Computation of income tax liability For assessment year 2022 N N Net profit per accounts 21,855,600 Add: Disallowable expenses: Allowance paid to the proprietor’s cousin 720,000 Salary paid to the domestic staff of the proprietor 600,000 Rent paid for space occupied as the private residence of the proprietor 180,000 Cost of renewing a long lease 240,000 Cost of defending traffic offence 180,000 Cost of defending a tax appeal 320,000 Donation to proprietor’s church 350,000 Medical expenses on the proprietor’s sister 220,000 Amount misappropriated by the Chief Accountant 1,270,000 Allowance for doubtful debts 311,000 Depreciation 1,650,000 6,041,000 27,896,600 Deduct: Non-taxable income Profit on sale of property, plant and equipment (PPE) 925,000 Dividend (gross) 624,800 1,549,800 Adjusted profit 26,346,800 Deduct: Capital allowances 1,240,000 Income from trade 25,106,800 Gratuity 4,000,000 Total income 29,106,800 Tax exempt items: Life assurance premium 1,200,000 Gratuity 4,000,000 (5,200,000) Gross income 23,906,800 Consolidated relief allowance: (N200,000 or 1% of N23,906,800, whichever is higher, plus 20% of N23,906,800) (5,020,428) Chargeable income 18,886,372 147 Tax payable N K First N300,000 @ 7% 21,000.00 Next N300,000 @ 11% 33,000.00 Next N500,000 @ 15% 75,000.00 Next N500,000 @ 19% 95,000.00 Next N1,600,000 @ 21% 336,000.00 Next N15,686,372 @ 24% N18,886,372 3,764,729.28 Tax payable 4,324,729.28

NOTE: The rental income was received gross which means no withholding tax was suffered at source, hence, no set off is available on the rental income in accordance with section 79 of CITA (as amended)

Examiner’s Report The question tests the candidates’ knowledge of the computation of personal income tax. This being a compulsory question, about 100% of the candidates attempted the question. The performance of the candidates was good. The commonest pitfall of the candidates was their inability to 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 Marks Marks Heading - Name of enterprise

- Computation of income tax liability - Assessment year 2022 1 1 1 Net profit per accounts 1 Disallowable expenses: (1 mark for each correct expense) Non – taxable income: (1 mark for each correct income) Capital allowances Gratuity 11 2 1 1 Tax exempt items: (1 mark for each correct item) Consolidated relief allowance: 2

- N200,000 or 1% of N23,906,800 1 148

- 20% of N23,906,800 1 - Correct amount (N5,020,428) 1 3 Tax payable: (1 mark for each correct answer) Total 6 30

a. Rules on a change of accounting date Whenever a company fails to make up its accounts to its normal year-end, the assessable profits of the company for the year of assessment in which that failure occurs as well as the following two years shall be computed on such basis as the Service in its discretion may determine.

b. The manner in which the FIRS exercises its discretion, in practice, is as follows:

i. Determine the year of assessment in which the company failed to make up accounts to its normal year-end;

ii. Identify the two (2) years of assessment next following (i) above;

iii. Compute the assessable profits for the three (3) years of assessment in (i) and (ii) above using the existing accounting dates, that is, the old accounting dates;

iv. Compute the assessable profits for the three (3) years of assessment in (i) and (ii) above using the new accounting dates;

v. Obtain the sum of the assessable profits for the three (3) years for each of the computations in (iii) and (iv) above; and

vi. Choose the higher of the assessable profits for the 3 years in (v) above.

Note: The provision in Section 29(2) CITA confers on FIRS the discretion to determine the basis of assessment on a change of accounting date. In exercising this discretion, the FIRS may assess the year of change and the two following assessment years on actual basis instead of preceding year basis. This, it will do, if using the basis, produces a higher assessable profits of the three (3) years put together. 149

c. Forward Nigeria Limited Computation of the assessable profits For the relevant assessment years Accounting year 2014 2015 2016 2017 N N N N Adjusted profit 2,700,000 3,300,000 4,200,000 3,600,000 Deduct: Income overstated 0 (250,000) (280,000) 0 Expenditure understated (160,000) (150,000) Revised adjusted profit 2,540,000 3,050,000 3,920,000 3,450,000 Computation based on old accounting date Year of assessment Basis period Assessable profit N 2016 1/7/14 - 30/6/15 3,050,0000 2017 1/7/15 - 30/6/16 1,500,000 +(9/12 × N3,920,000) 4,440,000 2018 1/7/16 – 30/6/17 (3/12×N3,920,000)+(9/12×N3,450,000) (N980,000 + N2,587,500) 3,567,500 11,057,500 Computation based on new accounting date Year of assessment Basis period Assessable profit N 2016 1/10/14 - 30/9/15 (9/12 × N3,050,000) + N1,500,000 3,787,500 2017 1/10/15 - 30/9/16 3,920,000 2018 1/10/16 – 30/9/17 3,450,000 11,157,500 The tax authority will assess 2016 to 2018 assessment years using the new accounting date as the computed total of assessable profits which amounted to N11,157,500 is higher than that based on old accounting basis (N11,057,500). 150

Examiner’s report The question tests the candidates’ knowledge of the rules of change in accounting date, practice of the Revenue, and computation of the relevant assessments based on change in accounting date. About 60% of the candidates attempted the question but the performance was average. The common pitfalls of the candidates were their inability to explain the practice of the Revenue when a taxpayer changes his accounting date. Some of the candidates could not compute the assessable profits for all the relevant assessment years based on the rules of change in accounting date. Candidates are advised to read relevant texts on taxation, ICAN Pathfinders and Study Text.

Marking guide Marks Marks a. Provision of the law when a business changes its accounting date - year of assessment in which the failure occurs 2 - As well as the following two Years 2 - Computation of assessable profits on such basis as the Board in its discretion may determine 1 5

b. Practice of the Revenue (½ mark for each of the correct six points) 3

c. Computation of assessable profits for all the relevant years of assessment Heading 1/4 Computation of the revised adjusted profits 1/4 Adjusted profit (½ mark for each correct figure) 2 Income overstated (½ mark for each correct figure) 1 Expenditure understated (½ mark for each correct amount 1 Computation based on old accounting date: Year of assessment (1/4 mark for each correct year) ¾ Basis period (½ mark for each correct year) 1½ Assessable profit (½ mark for each correct year) 1½ Computation based on new accounting date: Year of assessment (1/4 mark for each correct year) ¾ Basis period (½ mark for each correct year) 1½ Assessable profit (½ mark for each correct year) 1½ 12 Total 20 151

a. i. Composition of Joint Tax Board (JTB) The JTB consists of:

• Executive Chairman of the Federal Inland Revenue Service as Chairman;

• A representative from states of the federation with experience in tax;

• The Secretary, who shall be ex-officio appointed by the Federal civil service

• Commission; and

• The Legal Adviser of the FIRS who acts as the Legal Adviser to the JTB.

ii. Functions of State Board of Internal Revenue (SBIR) The functions of SBIR are as follows:

• Ensuring the effectiveness and optimum collection of all taxes and penalties due to the government under relevant laws;

• Making recommendations where appropriate to the JTB on tax policy, tax reform, tax legislation, tax treaties and exemptions as may be required from time to time;

• Appointing, promoting, transferring and discipline of employees of the State Internal Revenue Service (SIRS);

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

• 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.

iii. Taxes and levies to be collected by Local Governments These include:

• Shops and kiosks rates;

• Tenement rates;

• On and off liquor license fees;

• Slaughter slab fees;

• Marriage, birth and death registration fees;

• Naming of street registration fee, excluding any street in the State Capital;

• Right of occupancy fees on lands in rural areas, excluding those collectible by the Federal and State Governments;

• Market taxes and levies excluding any market where State Finance is involved;

• Motor park levies;

• Domestic animal license fees;

• Bicycle, truck, canoe, wheelbarrow and cart fees, other than a

• mechanically propelled truck;

• Cattle tax payable by cattle farmers only;

• Road closure levy; 152

• Radio and television license fees (other than radio and television transmitter);

• Radio license fee (to be imposed by the local government of the State in which the car is registered);

• Illegal parking fees;

• Public convenience, sewage and refuse disposal fees;

• Customary burial ground permit fees;

• Religious places establishment permit fees;

• Signboard and advertisement permit fees; and

• Wharf landing charge, where applicable.

b. The roles and responsibilities of the following stakeholders in the revised National Tax Policy (NTP), 2017 are as follows:

i. The government All levels and arms of government, ministries, extra-ministerial departments and agencies where applicable shall:

• Implement and regularly review of tax policies and laws;

• Provide information on all revenue collected on a quarterly basis;

• Ensure adequate funding, administrative and operational autonomy of tax authorities; and

• Ensure a reasonable transition period of between three and six months before implementation of a new tax.

ii. The taxpayers A taxpayer is a person, group of persons or an entity that pays or is liable to tax. The taxpayer is the most critical stakeholder and primary focus of the tax system. The taxpayer shall consider tax responsibilities as a civic obligation and constant duty that must be discharged as and when due. The taxpayer shall be entitled to:

• Relevant information for the discharge of tax obligations;

• Receive prompt, courteous and professional assistance in dealing with tax authorities;

• Raise objections to decisions and assessments and receive response within a reasonable time;

• A fair and impartial appeal; and

• Self-representation or by any agent of choice, provided an agent acting for financial reward shall be an accredited tax practitioner.

iii. Revenue agencies Any agencies responsible for the collection and administration of revenue shall:

• Treat the taxpayer as a customer;

• Ensure efficient implementation of tax policies, laws and international treaties;

• Facilitate inter-agency co-operation and exchange of information; 153

• Undertake timely audits and investigations;

• Undertake tax awareness and taxpayers’ education; and

• Establish a robust process to prevent, detect and punish corrupt tax officials

Examiner’s report The question tests candidates’ knowledge of the composition and functions of the organs of tax administration with emphases on Joint Tax Board, State Board of Internal Revenue, and Local Government Revenue Committee. Additionally, candidates are expected to explain the roles and responsibilities of the government, taxpayers, and revenue agencies under the revised National tax policy (NTP), 2017. About 70% of the candidates attempted the question but the performance was average. The commonest pitfall of the candidates was their inability to explain the roles and responsibilities of the government, taxpayers, and Revenue agencies under the revised National tax policy (NTP), 2017. 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.(i) Composition of the Joint Tax Board (1 mark for each member subject to a maximum of 3 members) 3

(ii) Functions of the State Board of Internal Revenue (1 mark for each function subject to a maximum of 3 functions) 3

(iii) Levies and taxes collectible by Local Government Revenue Committee (1 mark for each levy subject to a maximum of 5 levies) 5 11

b. Roles and responsibilities of stakeholders in National Tax Policy (NTP) (i) The government (1 mark for each role subject to a maximum of 3 roles) 3 (ii) The taxpayers (1 mark for each role subject to a maximum of 3 roles) 3 (iii) Revenue agencies (1 mark for each role subject to a maximum of 3 roles) 3 9 Total 20 154

a. Olalomi Children Settlement Computation of net income assessable in the hands of the trustees N N Income: Rental Income (gross) 398,900 Dividend (gross) 196,000 Profit on sale of non-current assets 600,000 Trading income 210,000 Capital allowance (87,600) 122,400 Total income 1,317,300 Less authorised payments: Administrative expenses 106,000 Fixed annuity 42,000 Other allowable expenses 23,000 Trustee’s remuneration

- Fixed (2 trustees) 50,000 - Variable (2.5/102.5 × (N1,317,300 – N221,000) 26,739 247,739 Computed income 1,069,561 Discretionary payments:

- Olami 10,000 - Olambe 34,000 - Olaide 29,000 (73,000) Net computed income 996,561 Distribution to beneficiaries:

- Olami (1/4 ×N996,561) 249,140.25 - Olambe (1/4 ×N996,561) 249,140.25 - Olaide (1/4 ×N996,561) 249,140.25 (747,420.75) 249,140.25 Less Franked investment income: Dividend (196,000.00) Amount taxable in the hands of trustees 53,140.25

b. Computation of assessable income of each beneficiary Olami Olambe Olaide N N N Fixed annuity 14,000 14,000 14,000 Discretionary payment 10,000 34,000 29,000 Share of distributable Income 249,140.25 249,140.25 249,140.25 Assessable income 273,140.25 297,140.25 292,140.25 155

Examiner’s report The question tests the candidates’ knowledge of the taxation of trustees and beneficiaries in a settlement. About 70% of the candidates attempted the question but performance was fair. The common pitfalls of the candidates were their inability to compute the variable remuneration of the trustees and instead of computing the fixed remuneration for two trustees as stated in the question, they computed for one trustee. Candidates are advised to read ICAN Study Text and Pathfinders as this topic is adequately covered in them.

Marking guide Marks Marks a. Net income assessable in the hands of the trustees

- Name of company ½ - Computation of net income assessable in the hands of the trustee ½ - Rental income ½ - Dividend (gross) ½ - Profit on sale of non-current assets ½ - Trading income ½ - Capital allowance ½ Authorised payments: Administrative expenses 1 Fixed annuity 1 Other allowable expenses 1 Trustees’ remuneration – Fixed 1 - Variable 1½ Discretionary payments: - Olami ½ - Olambe ½ - Olaide ½ Distribution to beneficiaries: - Olami ½ - Olambe ½ - Olaide ½ Dividend 1 Amount taxable in the hands of the trustee 1 14 b. Assessable income in the hands of each beneficiary Names: Olami ½ Olambe ½ Olaide ½ Fixed annuity (½ mark for each correct amount) 1½ Discretionary payment (½ mark for each correct amount) 1½ Share of distributable income (½ mark for each correct amount) 1½ 6 Total 20 156

a. Instruments exempted from stamp duties Instruments that are specifically exempted are as follows: (i) Those relating to agreements between the Federal Government and other foreign governments; (ii) Instruments relating to reconstruction and amalgamation, subject to specified condition under section 104(1) of the Act;

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

• Payments and deposits for self to self-transactions whether inter or intra-bank; and

• Payments for goods supplied or services rendered if the amount is under N1,000, payment of salaries or wages, pensions, gratuities, etc;

(v) Section 56 of the Finance Act, 2019, exempts the following “exempt receipts” and “general exemptions” from stamp duties;

• Exempt receipts: Receipts given by any person in a regulated securities lending transaction carried out under regulation issued by the Securities and Exchange Commission

• 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 transaction;

• 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 documents relating to a regulated securities lending transactions carried out under regulations issued by the Securities and Exchange Commission; and

(vi) Share transfer based on FIRS information circular on “clarifications on the provisions of the Stamp Duties Act” No: 2020/05 dated April 29, 2020. 157

b. When Electronic documents are regarded as received in Nigeria Documents, receipts or instruments executed outside Nigeria but received in Nigeria must be presented for stamping in accordance with sections 7(3)(a), 23(3) and 47 of the SDA, within: (i) 10days in the case of charter parties; (ii) 30days in the case of instruments subject of ad valorem stamp duties; or (iii) 21days in any other instance. For an electronic document, receipt or instrument executed outside Nigeria to be regarded as received in Nigeria, it must be:

(i) Retrieved or accessed in or from Nigeria; (ii) Stored or an electronic copy of it is also stored on a device (including a computer, magnetic storage, etc) and brought into Nigeria; or (iii) Stored or an electronic copy of it is also stored on a device or computer in Nigeria

c. Duty on contracts It is the responsibility of any corporate body or Ministry, department or agency (MDA) to charge stamp duty at a rate of 1% of the contract value excluding value added tax (VAT) on all contracts issued to third party vendors. Thereafter, the stamp duties collected should be remitted to the Service.

d. Electronic money transfer levy Section 89A of the Stamp Duties Act (as amended) states that: “There is imposed a levy, to be referred to as the Electronic Money Transfer Levy, on electronic receipts or electronic transfer for money deposited in any deposit money bank or financial institution, on any type of account to be accounted for and expressed to be received by the person to whom the transfer or deposit is made; (i) The levy shall be imposed as a singular and one-off charge of N50 on electronic receipts or electronic transfers of money in the sum of N10,000 or more; (ii) The Minister of Finance shall, subject to the approval of the National Assembly, make regulations for the imposition, administration, collection and remittance of the levy, including regulations relating to the auditing, accounting, allocation and distribution of arrears of the relevant stamp duties and Electronic Money Transfer Levies collected between 2015 and 2019 fiscal years within 30 days of the date when this Act becomes effective. Provided that Electronic Money Transfer Levies subsequently collected shall be distributed within 30 days following the month of collection. 158

(iii) Notwithstanding any formula that may be prescribed by any other law, the revenue accruing by virtue of the operation of this section, shall, on the basis of derivation, be distributed as follows:

• 15% to the Federal Government and the Federal Capital Territory, Abuja; and

• 85% to state governments.

Examiner’s report The question tests the candidates’ knowledge of the provisions of Stamp Duties Act Cap. S8 LFN 2004 (as amended) in relation to exempted instruments, when electronic documents are regarded as received in Nigeria, duty on contracts, and electronic money transfer levy. About 50% of the candidates attempted the question and performance was fair. Many of the candidates could not explain when electronic documents are regarded as received in Nigeria. Candidates are advised to read the Stamp Duties Act 2004 (as amended), the Institute’s Pathfinder and ICAN Study Text when preparing for the Institute’s examinations.

Marking guide Marks Marks a. Three instruments exempted from stamp duties (1 mark each for any instrument exempted subject to a maximum of 3 instruments) 3

b. When electronic documents are regarded as received in Nigeria (1 mark each for any condition subject to a maximum of 3 conditions) 3

c. Duty on Contracts

- Responsibility of any corporate body or ministry, department or agency to charge stamp duty 1

- Stamp duty to be calculated at 1% of the contract value excluding VAT 1

- Stamp duties collected should be remitted to the Service 1 3

d. Electronic money transfer levy (3 marks each for any point subject to a maximum of 2 points) 6 Total 15 159

a. Functions of the Nigeria Customs Service Board The Board shall be responsible for:

(i) Formulating the general policy guidelines for the Nigeria Customs Service; and (ii) Administering the Customs and Excise Management Act and accordingly, the Board shall-

• Subject to the general control of the Minister, control and manage the administration of the customs and excise laws; and

• Collect the revenues of customs and excise and account for them in such manner as the Minister shall from time to time, direct. Powers of the Board The Board shall have power:

(i) To appoint persons to hold or act in all the offices in the Service, including power to make appointments on promotion or transfer and to confirm appointments; and (ii) To dismiss and exercise other disciplinary control over persons appointed pursuant to (i) above.

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; (xi) The cheque number and date; (xii) The name of the bank through which remittance was effected; and (xiii) The period covered. 160

Examiner’s report The question tests the candidates’ knowledge of the functions and powers of Nigeria Customs Service Board and contents of a withholding tax (WHT) returns / payment schedule. Over 80% of the candidates attempted the question and performance was above average. The commonest pitfall was the candidates’ inability to explain the functions and powers of the Nigeria Customs Service Board. Candidates are advised to read relevant study materials and The Nigeria Customs Service Act, 2023, in order to enhance performance in future examinations.

Marking guide Marks a. Functions and powers of the Board (1 mark for each correct answer) 5 b. Contents of a WHT returns/payment schedule (2 marks for each correct point subject to a maximum of five points) Total 10 15

a. Possible reasons why a business could cease business include:

i. Government legislation – the Federal Government may declare the activities of a business illegal and thus this may lead to the end of such business; ii. Permanent dearth or inability of sourcing raw materials; iii. Loss of major market due to stiff competitors or economic prices; iv. Inability to settle the debt owed by the company; v. Loss of key personnel with technical know-how; vi. Agreement by the management of the company; vii. Liquidity problem; viii. Mismanagement of fund; ix. Complying with the order of the court through an application of creditors or debenture holders of the company; x. Failing objectives – continuous decline in profits; xi. Natural disaster, for example, fire, earthquake or flood disaster; xii. Death of all shareholders; e.t.c. 161

b. Raposa Nigeria Limited Computation of net terminal adjusted profit N The net terminal adjusted profit was 500,000

NOTE:

(i) Bad debts recovered in October 2021 must have been captured in the relevant accounting year.

(ii) Amount spent in recovering the debt must also have been captured in the same accounting year.

(iii) The expenditure of N350,000 was actually passed through the books before the year of cessation. Given the fact that the transactions occurred before the date of cessation, informed the decision to ignore same in the computation of the net terminal adjusted profit.

c. Raposa Nigeria Limited Computation of assessable Profit For the relevant assessment years N 2017 1/11/17 – 31/12/17 (2 months) (2/23 × N2,100,000) 182,609 2018 1/11/17 – 30/10/18 (12/23 × N2,100,000) 1,095,652 2019 1/11/17 – 30/9/18 (12/23 × N2,100,000) 1,095,652 2020 1/10/18 – 30/9/19 (12/23 × N2,100,000) 1,095,652 2021 1/10/19 – 30/9/20 2,400,000 2022 1/10/20 – 30/9/21 3,640,000 2023 1/10/21 – 30/9/22 6,300,000 2023 1/10/22 – 31/12/22 500,000 162

Examiner’s report The question tests the candidates’ knowledge of the possible reasons why a business could cease business, computations of net terminal adjusted profit, and assessable profits for the relevant assessment years on cessation of business. About 70% of the candidates attempted the question but the performance was below average. The common pitfall was that the candidates adjusted the terminal adjusted profit with pre – date of cessation transactions which would have been reflected in the relevant accounting years. Additionally, they could not compute assessable profits for all the relevant years of assessment. Candidates are advised to pay attention to this particular aspect of the syllabus when preparing for future examinations.

Marking guide Marks Marks a. Reasons why a business may cease trading (1 mark for each reason subject to a maximum of 3 reasons) 3

b. Computation of net terminal adjusted profit

- Net terminal adjusted profit (N500,000) 2 Treatments: Bad debts 1 Cost of recovery of bad debts 1 Expenditure of N350,000 1 Transactions before the date of cessation 1 6

c. Computation of assessable profits for all the relevant years of assessment Assessment year (1/4 mark for each correct assessment year) 2 Basis period (1/4 mark for each correct basis period) 2 Assessable profit (1/4 mark for each correct amount) 2 6 Total 15 163 THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA