Taxation · 2024

a. (i) The relevant tax authority of Mr. Ola Alao is Ogun State Internal Revenue Service.

(ii) MR. OLA ALAO INCOME TAX COMPUTATION FOR ASSESSMENT YEAR 2021 N N Gross salary 2,448,000 Bonuses - May 29, 2021 92,000

- September 24, 2021 162,000 254,000 Add benefits in kind: Cost of using car (N8,000,000 x 5%) 400,000 Night guard 480,000 Rent paid for Alao 600,000 1,480,000 Total earned income 4,182,000 Tax exempt items: Pension contribution (N8% of 2,448,000) 195,840 Life assurance premium 240,000 National insurance health contribution 420.000 National housing fund contribution 480,000 (1,335,840) Gross income 2,846,160 Consolidated relief allowance (N200,000 + 20% of N2,846,160) (769,232) Chargeable income 2,076,928

(iii) Tax payable N : K First N300,000 at 7% 21,000.00 Next N300,000 at 11% 33,000.00 Next N500,000 at 15% 75,000.00 Next N500,000 at 19% 95,000.00 Next N476,928 at 21% 100,154.88 2,076,928 Tax payable 324,154.88 150

b. 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 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

(iv) 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.

Examiner’s report The question tests the candidates’ knowledge of the identification of the relevant tax authority, computation of personal income tax, and differentiation between contract of employment and contract for employment. This being a compulsory question, about 100% of the candidates attempted the question and their performance was above average. The common pitfalls of the candidates were their inability to:

i) State the correct relevant tax authority of the taxpayer based on his residence as some even referred to FIRS as the relevant tax authority of the individual; 151

ii) Annualise the tax exempt items;

iii) Take into consideration the date of payment in the determination of each of the bonuses to be treated as part of income; and

iv) Differentiate between “contract of employment” and “contract for employment”. Candidates are advised to read widely and be conversant with the provisions of the Personal Income Tax Act Cap. P8 LFN 2004 (as amended) and other tax laws before sitting for subsequent examinations to enhance better performance.

Marking guide Marks Marks a. (i) Identification of the relevant tax authority Ogun State Internal Revenue Service 2

(ii) Computation of the chargeable income of Mr. Alao Name Income tax computation For assessment year 2019 1 ½ ½ Total earned Income: Gross salary 1 Bonuses - May 29, 2021

- September 24, 2021 1 1 Add: benefits-in-kind: Cost of using car 1 Night guard 1 Rent for Alao 1 Tax exempt items: Approved pension scheme contribution 2 Life assurance premium 2 National and insurance health contribution 2 National housing fund contribution 2 Consolidated relief allowance: N200,000 N2,146,160 1 1 Chargeable income 1 19

(iii) Computation of income tax payable by Mr. Alao First N300,000 @ 7% - N21,000 1 Next N300,000 @ 11% - N33,000 1 Next N500,000 @ 15% - N75,000 1 Next N500,000 @ 19% - N95,000 1 Next N676,928 @ 21% - N142,154.88 1 5 152

b. Differentiation between a contract of employment and contract for employment (i) Definition of employment 1 (ii) Definition for employment 1

(iii) 1 mark each for any distinction subject to a maximum of 2 points 2 4 Total 30

a. Adidas Nigeria Limited Computation of assessable profits For assessment years 2020, 2021 and 2022 Old basis New basis Assessment year Basis period Based on the foregoing, the Revenue would assess on the new basis, since this would produce higher assessable profits for 2020 – 2022 assessment years. Consequently, final assessable profits will be as follows: Assessment year Basis period Assessable Profits N 2020 1/1/19 – 31/12/19 25,873,810 2021 1/1/20 – 31/12/20 32,742,857 2022 1/1/21 – 31/12/21 44,100,000 102,716,667

Workings: Old basis Assessable profits i) 2021 assessment year N N

- 1/11/2019 – 31/10/2020 = 12/14 x N38,200,000 32,742,857

ii) 2022 assessment year

- 1/11/2020 – 31/12/2021 = 2/14 x N38,200,000 5,457,143 - 1/11/2021 – 31/10/2021 = 10/12 x N44,100,00 36,750,000 42,207,143 74,950,000 Assessable profit Basis period Assessable profit N N 2020 1/11/2018 – 31/10/2019 24,500,000 1/1/2019 – 31/12/2019 25,873,810 2021 1/11/2019 –31/10/2020 (wi) 32,742,857 1/1//2020 – 31/12/2020 32,742,857 2022 1/11/2020 – 31/10/2021 (wii) 42,207,143 1/1/2021 – 31/12/2021 44,100,000 99,450,000 102,716,667 153 New basis iii) 2020 assessment year 1/1/2019 – 31/10/2019 = 10/12 x N24,500,000 20,416,667 1/11/2019 – 31/12/2019 = 2/14 x N38,200,000 5,457,143 25,873,810

iv) 2021 assessment year 1/1/2020 – 31/12/2020 = 12/14 x N38,200,000 32,742,857 58,616,667

b. Adidas Nigeria Limited Computation of tax liabilities For assessment years 2020, 2021 and 2022 Assessment year 2020 N Assessable profit 25,873,810 Capital allowances (850,000) Total profit 25,023,810 Companies income tax payable (20% of total profit) N5,004,762.00 Tertiary education tax payable (2% of assessable profit) N517,476.20 Assessment year 2021 N Assessable profit 32,742,857 Capital allowances (720,000) Total profit 32,022,857 Companies income tax payable (20% of total profit) N 6,404,571.40 Tertiary education tax payable (2% of assessable profit) N654,857.14 Assessment year 2022 N Assessable profit 44,100,000 Capital allowances (600,000) Total profit 43,500,000 Companies income tax payable (30% of total profit) N13,050,000.00 Tertiary education tax payable (2.5% of assessable profit) N1,102,500.00

Note The Finance Act, 2021, became effective on January 1, 2022, but based on the circular issued by the Federal Inland Revenue Service, all audited financial statements with accounting years ended from July 1, 2021 to December 31, 2021, should reflect the provisions of the Act, hence the application of tertiary education tax rate of 2½% for A.Y. 2022. 154

Examiner’s report The question tests the candidates’ knowledge of the computation of assessable profits and income tax liabilities of companies based on change in accounting date. About 70% of the candidates attempted the question but the performance was average. The common pitfalls of the candidates were their inability to ascertain the relevant assessment years based on the rules of change in accounting date. In addition to the foregoing, some of the candidates could not compute the assessable profits and apply the correct rates of tax, taking into consideration the turnover, in the determination of companies income tax liabilities for all the relevant assessment years. Candidates are advised to read relevant texts on taxation, ICAN Pathfinders and Study Text.

Marking guide Marks Marks a. Computation of assessable profits Heading - Name of enterprise

- Computation of assessable profit - Assessment years 1 ½ ½ Assessment years (correct identification of the assessment years) (½ mark for each assessment year) Basis periods (¼ mark for each correct basis period) 1½ 1½ Assessable profits: Old basis – (1 mark for each correct profit) New basis – (1 mark for each correct profit) 3 3 Final assessable profits: (1 mark for each correct profit) 3 14

b. Computation of tax liabilities Assessment year 2020 Assessable profit Capital allowances CIT payable TET payable ½ ½ ½ ½ Assessment year 2021 Assessable profit Capital allowances CIT payable TET payable ½ ½ ½ ½ 155 Assessment year 2022 Assessable profit Capital allowances CIT payable TET payable ½ ½ ½ ½ 6 Total 20

a. (i) Digital transactions Section 6 (6A) of PITA as amended by Finance Act, 2020, states that the Minister by Order can determine what constitutes the significant economic presence of a non-resident individual, executor or trustee. For the purpose of section 13(2)(c) of CITA, a company, other than a Nigerian company, shall have a significant economic presence in Nigeria in any accounting year, where it derives gross turnover, or income of more than N25 million or its equivalent in other currencies, in that year, from any or combination of the following:

• Streaming or downloading services of digital contents, including but not limited to movies, videos, music, applications, games and e-books to any person in Nigeria;

• Transmission of data collected about Nigerian users which has been generated from such users’ activities on a digital interface, including website or mobile applications;

• Provision of intermediation services through a digital platform, website or other online applications that link suppliers and customers in Nigeria;

• Provision of goods or services directly or through a digital platform;

• Uses Nigeria domain name (ng) or registers a website address in Nigeria; or

• Has a purposeful and sustained interaction with persons in Nigeria by customising its digital page or platform to target persons in Nigeria, including reflecting the prices of its products or services in Nigerian currency or providing options for billing or payment in Nigerian currency. 156 The activities carried out by connected persons shall be aggregated in determining the N25 million threshold, where necessary. Any company, other than a Nigerian company, covered under a multilateral agreement to address the tax challenges arising from the digitalisation of the economy, to which Nigeria is a party, shall be treated in accordance with that agreement or arrangement.

(ii) Services A company other than a Nigerian company (foreign entity), carrying on a trade or business comprising the furnishing of services of technical, professional, management or consultancy nature, shall have a significant economic presence in Nigeria in any accounting year, where it earns any income or receives any payment from:

• A person resident in Nigeria; or

• A fixed based or agent of a company, other than a Nigeria company (foreign entity). Services of a technical nature means any services of a specialised nature (including advertising services, training or the provision of personnel) that are not professional, management or consultancy services. It should be noted, however, that a company shall not have a significant economic presence in Nigeria in relation to a payment, where the payment is made:

• To an employee of the person making the payment under a contract of employment; or

• For teaching in an educational institution or for teaching by an educational institution; or

• By a foreign fixed base of a Nigerian company. In addition to the above, where an individual, executor, or trustee outside Nigeria carries on a trade or business that includes the furnishing of technical, management, consultancy or professional services to a person resident in Nigeria, the gains or profits of the trade or business shall be deemed to be derived from and taxable in Nigeria to the extent that the individual, executor or trustee has significant economic presence in Nigeria. 157

b. The trust of Alhaji Yanko Abdulahi Computation of income assessable to tax in the hands of the trustee For assessment year 2022 N N Rental income (gross) 2,400,000 Profit from trading activities 32,160,800 Capital allowances (1,260,000) 30,900,800 Interest received (gross) 840,000 Other income 630,500 Total income 34,771,300 Deduct: Allowable expenses: Yahaya’s fixed annuity 148,000 Allowable expenses 62,000 Trustee’s remuneration: Fixed 25,000 Variable (2/102 of N34,771,300 – N148,000 – N62,000 – N25,000) 677,182 912,182 Computed income Less: discretionary payments Distributable income 33,859,118 300,000 33,559,118 Deduct: 60% of the distributable income between Yahaya and Binta in the ratio of 3:2, respectively 20,135,471 Amount assessable to tax in the hands of the trustee 13,423,647

Examiner’s report The question tests candidates’ knowledge of what constitutes a significant economic presence in respect of digital transactions and services, and the computation of the income of a trust that is assessable to tax in the hands of a trustee. About 50% of the candidates attempted the question but the performance was poor. The commonest pitfall of the candidates was their inability to explain what constitutes a significant economic presence in relation to digital transactions and services. Candidates are advised to read Finance Acts, make use of the Institute’s Pathfinders, and Study Text in their preparations for subsequent examinations. 158

Marking guide Marks Marks a. What constitutes a significant economic presence

(i) Digital transactions (1 mark for each correct answer) (ii) Services (1 mark for each correct answer) 4 4 8

b. Computation of the income of the trust assessable to tax in the hands of the trustee Heading - Name

- Computation of income assessable to tax Profit from trading activities Capital allowances Interest received gross Other Income Allowable expenses: (1 mark for each correct answer) Discretionary payments Share of the beneficiaries Amount assessable to tax in the hands of the trustee ½ ½ 1 1 1 1 4 1 1 1 12 Total 20

a. Pkikan Nigeria Limited Computation of minimum tax liability For assessment year 2022 N Gross turnover 1,300,000 Managing Director (400,000) Net turnover 900,000 Minimum tax liability is 0.5% of turnover. Therefore, the minimum tax liability is 0.5% of N900,000 = N4,500

b. The main reason that has informed the computation of minimum tax liability of a company in any relevant assessment year is to ensure that no company escapes the payment of tax except those specifically exempted. The computation of minimum tax liability could arise when a company: i) Makes loss or no total profit; ii) Has a total profit which results in no tax payable; iii) Has a tax payable that is less than the minimum tax payable; and iv) Makes a turnover of N25 million and above. 159

c. The companies exempted from the computation of minimum tax liability are:

- A company in agricultural trade or business; - Any company that has not been in business up to four (4) calendar years; and - A company that earns a gross turnover of less than N25 million in the relevant year of assessment.

Examiner’s report The question tests the candidates’ knowledge of the computation of minimum tax liability, reasons that informed the computation, and companies that are exempted from this computation. About 50% of the candidates attempted the question and performance was fair. Most of the candidates computed minimum tax liability using the old method and displayed poor knowledge of the reasons behind the computation of minimum tax liability. Candidates are advised to read Finance Acts, ICAN Study Text and Pathfinders as this topic is adequately covered in them.

Marking guide Marks Marks a. Computation of minimum tax liability Heading - Income

- Computation of minimum tax liability - For assessment year 2022 1 1 1 Gross turnover Managing Director Net turnover Computation of minimum tax liability 0.5% N900,000 N4,500 2 2 2 1 2 2 14

b. Reasons behind the computation of minimum tax liability 1 mark for the main reason 1 mark each for any correct reason subject to a maximum of 2 reasons 1 2 3

c. Companies exempted from the computation of minimum tax liability 1 mark each for any correct answer 3 Total 20 160

a. Havillah Manufacturing Limited Computation of net VAT payable to FIRS For the year ended September 30, 2021 N N Output VAT Local sales (N141,900,000 @ 7.5%) 10,642,500 Input VAT Opening inventory (N24,915,000 - N24,750,000) x 100/107.5 153,488 Purchase of raw materials 94,600,000 Freight charges 20,570,000 Other direct materials 13,530,000 128,853,488 Closing inventory (N40,865,000 x 100/107.5) (38,013,953) Cost of goods 90,839,535 Input VAT (N90,839,535 @ 7.5%) (6,812,965) VAT payable 3,829,535 VAT remitted (2,173,180) Net VAT payable 1,656,355

NOTE – The export sales were excluded from the computation because export sales are VAT exempt items.

b. VAT exempt goods include:

i. All medical and pharmaceutical products; ii. Basic food items; iii. Books and educational materials; iv. Baby products; v. Plant, machinery and goods imported for use in the Export Processing Zone or Free Trade Zone; provided that 100% production of such company is for export, otherwise tax shall accrue proportionately or the profits of the company; vi. Plant, machinery and equipment purchased for utilisation of gas in downstream petroleum operations; vii. Tractors, ploughs and agricultural equipment and implements purchased for agricultural purposes; viii. Oil export wrongly written as all exports; ix. Fertilizers locally produced, agricultural and veterinary medicine, farming machinery and farming transportation equipment; x. Vegetable oil; xi. Motorcycle (CKD)/Bicycle (SKDs) and their spare parts; xii. Life insurance; 161

xiii. Locally manufactured sanitary towels, pads or tampoons; xiv. Commercial aircrafts, commercial aircraft engines and commercial aircraft spare parts; xv. Residential rent; and xvi. Petroleum products, including aviation and motor spirit, kerosene, natural gas, other liquid petroleum gases and gaseous hydrocarbons.

c. VAT exempt services include:

i. Medical services; ii. Services rendered by micro-finance banks and mortgage institutions; iii. Tuition relating to nursery, primary, secondary and tertiary education; iv. Airline transportation tickets issued and sold by commercial airlines registered in Nigeria; v. Hire, rental or lease of tractors, ploughs and other agricultural equipment for agricultural purpose; vi. Plays and performances conducted by educational institutions as part of learning; vii. All exported services; viii. Shared passenger transport service which is made available for public use but this does not include hired or rented vehicles; ix. Training and education organised by not-for-profit or public educational institutions; x. Interest on loans, advances, overdrafts. and savings; xi. Interest on bank deposits; and xii. Renewable energy.

Examiner’s report The question tests the candidates’ knowledge of the computation of net VAT payable to FIRS, goods and services that are VAT exempt. About 50% of the candidates attempted the question and performance was fair. Many candidates could not ascertain the VAT included in opening and closing inventories and considered the input VAT on capital expenditure as part of allowable input VAT instead of adjusting for it, hence their inability to compute correctly the net VAT payable by the company. Candidates are advised to be conversant with the provisions of Value Added Tax Act Cap. V1 LFN 2004 (as amended), and other relevant Finance Acts. 162

Marking guide Marks Marks a. Computation of net VAT payable by Havillah manufacturing Limited Heading - Name

- Computation of net VAT payable to FIRS - For the year ended September 30, 2021 ½ ½ ½ Local rates Opening inventory Workings of opening inventory: N24,915,000 N24,750,000 100/107.5 1 1 ½ ½ ½ Purchase of raw materials Freight charges Other direct materials Closing inventory Input VAT VAT remitted Net VAT payable ½ ½ ½ 1 1 1 ½ 10 b. Identification of VAT exempt goods (½ mark each for any correct answer subject to a maximum of 5 (five) points) 2½ c. Identification of VAT exempt goods (½ mark each for any correct answer subject to a maximum of 5 (five) points) 2½ Total 15

a. The Federal Inland Revenue Service Board comprises:

(i) Executive Chairman, who shall be a person experienced in taxation, to be appointed by the President and subject to the confirmation of the Senate;

(ii) Six members with relevant qualifications and expertise, to be appointed by the President to represent each of the six geo-political zones;

(iii) A representative of the Attorney General of the Federation; (iv) The Governor of the Central Bank of Nigeria or his representative; (v) The representative of the Minister of Finance not below the rank of a Director; (vi) The Chairman of the Revenue Mobilisation Allocation and Fiscal Commission or his representative who shall be any of the Commissioners representing the 36 states of the Federation; (vii) The Group Managing Director of the NNPC or his representative who shall not be below the rank of a Group Executive Director of the corporation or its equivalent; 163

(viii) The Comptroller-General of the Nigeria Customs Service or his representative, not below the rank of Deputy Comptroller-General;

(ix) Registrar-General of the Corporate Affairs Commission or his representative not below the rank of a Director; and (x) The Chief Executive Officer of the National Planning Commission or his representative not below the rank of a Director.

b. The Federal Inland Revenue Service shall:

(i) Assess persons, including companies, enterprises chargeable with tax;

(ii) Assess, collect, account and enforce payment of taxes as may be due to the government or any of its agencies;

(iii) Collect, recover and pay to the designated account any tax under any provision of this act or any other enactment or law;

(iv) In collaboration with the relevant ministries and agencies, review the tax regimes and promote the application of tax revenue to stimulate economic activities and development;

(v) In collaboration with the relevant law enforcement agencies, carry out the examination and investigation with a view to enforcing compliance with the provisions of the Act;

(vi) Make from time to time, a determination of the extent of financial loss and such other losses by government arising from tax fraud, evasion and such other losses (or revenue forgone) arising from tax waivers and other related matters;

(vii) Adopt measures to identify, trace, freeze, confiscate or seize proceeds derived from tax fraud or evasion;

(viii) Adopt measures which include compliance and regulatory actions, introduction and maintenance of investigation and control techniques on the detection and prevention of non-compliance;

(ix) Collaborate and facilitate rapid exchange of information with relevant national or international agencies or bodies on tax matters;

(x) Undertake exchange of personnel or other expert with complementary agencies for purposes of comparative experience and capacity building;

(xi) Establish and maintain a system for monitoring international dynamics of taxation in order to identify suspicious transactions and the perpetrators and other persons involved;

(xii) Provide and maintain access up-to-date and adequate data and information on all taxable persons, individuals, corporate bodies or all agencies of government involved in the collection of revenue for the purposes of efficient, effective and correct tax administration and to prevent tax evasion or fraud; 164

(xiii) Maintain database, statistics, records and reports on persons, organisations, proceeds, properties, documents or other items or assets relating to tax administration including matters relating to waivers, fraud or evasion;

(xiv) Undertake and support research on similar measures with a view to stimulating economic development and determine the manifestation, extent, magnitude and effects of tax fraud, evasion and other matters that affect effective tax administration and make recommendations to the Government on appropriate intervention and prevention measures;

(xv) Collate and continually review all policies of the Federal Government relating to taxation and revenue generation and undertake a systematic and progressive implementation of such policies;

(xvi) Liaise with the office of the Attorney-General of the Federation, all government security and law enforcement agencies and such other financial supervisory institutions in the enforcement and eradication of tax related offences;

(xvii) Issue taxpayer identification number to every taxable person in Nigeria in collaboration with State Boards of Internal Revenue and Local Government Councils; (xviii) Carry out and sustain rigorous public awareness and enlightenment campaign on the benefits of tax compliance within and outside Nigeria;

(xix) Carry out oversight functions over all taxes and levies accruable to the Government of the Federation and as may be required, query, subpoena, sanction and reward any activities pertaining to the assessment, collection of and accounting for revenues accruable to the Federation;

(xx) Provide assistance in the collection of revenue claims or any other administrative assistance in tax matters with respect to any agreement or arrangement made between the Government of the Federal Republic of Nigeria and the Government of any country or other persons or bodies as may be deemed necessary in that regard; and

(xxi) Carry out such other activities as are necessary or expedient for the full discharge of all or any of the functions under this Act.

c. The following could result in tax disputes with the Revenue:

(i) Taxpayer’s inability to submit acceptance certificate relating to property, plant and equipment; (ii) Inadequate documentation of allowable expenses for tax purposes; (iii) Understatement or splitting of income; (iv) Non/late filing of tax returns; (v) Inability of the taxpayers to submit documents relating to Output and Input VAT; (vi) Non remittance of withholding tax deducted at source; 165

(vii) Delay in the payment of refunds relating to excess withholding tax deducted at source; (viii) Non-recognition of allowable expenses by the tax officials; and (ix) Inability of the relevant tax authority to grant tax exempt items, etc.

Examiner’s report The question tests the candidates’ knowledge of the composition, duties and functions of the Federal Inland Revenue Service, and the explanation of the basis for tax dispute that may arise with the Revenue. About 80% of the candidates attempted the question but performance was average. The commonest pitfall was the candidates’ inability to explain the composition, functions and duties of the Federal Inland Revenue Service (FIRS). Candidates are advised to be conversant with the provisions of the Federal Inland Revenue Service (Establishment) Act, 2007 (as amended).

Marking guide Marks a. Composition of the Federal Inland Revenue Service Board (1 mark each for any correct member subject to a maximum of 5 (five) members) 5

b. Duties and functions of the Federal Inland Revenue Service (1 mark each for any correct answer subject to a maximum of 5 (five) points) 5

c. Basis of tax dispute with the Revenue (1 mark each for any correct answer subject to a maximum of 5 points) 5 Total 15

a. Professional issues that can be handled by a firm of Chartered Accountants include:

(i) Filing of tax returns; (ii) Tax planning and management; (iii) Ensuring compliance with the tax laws; (iv) Tax dispute resolution; (v) Registration of a company with both FIRS and SIRS; (vi) Computation of taxes according to the relevant tax laws; (vii) Computation of personal income tax liability for a taxpayer; (viii) Tax advisory services; (ix) Obtaining tax clearance certificates for employees and companies; (x) Attending to tax queries, audit and investigation; (xi) Obtaining acceptance certificates in respect of capital expenditure; 166

(xii) Internal audit risk and compliance services; (xiii) Forensic audit; (xiv) Accounting advisory services; (xv) Financial risk management; (xvi) IT assurance; (xvii) Cyber investigation; (xviii) Assets verification services; (xix) Training and capacity building; (xx) Management consultancy; (xxi) Receivership and bankruptcy; (xxii) Registration of businesses and incorporation of companies; (xxiii) Provision of company secretarial services; (xxiv) Statutory audits and assurance; (xxv) Consultancy services relating to offer for sale; (xxvi) Mergers and acquisitions; (xxvii) Corporate financing; (xxviii) IT consulting services; (xxix) Business advisory; and (xxx) Audit advisory services.

b. Sources of Nigerian tax laws The tax system in Nigeria is administered through statutes rather than common law. The sources of Nigerian tax laws are:

(i) Customary laws These are the native laws and customs, governing the taxation of incomes, goods and properties of persons or communities within an ethnic group. Included under this heading, is the Islamic law, which is the basis of moslem laws that are usually applicable in the Northern part of Nigeria. Examples of taxes collected under the customary laws are:

• Ishakole: Payable in Yoruba land, to titular heads of communities or obas on the produce from farmland;

• Osusu-nkwu: Applicable in the Eastern part of Nigeria;

• Zakkat tax payable by adherents of the Islamic faith, on their wealth, which has been in their possession for a full year. Such wealth includes money, properties, etc. The Islamic law provides the basis for determining the amount of tax payable and to whom payable.

(ii) Statute laws These are tax legislations passed by Acts of the National and State assemblies and bye-laws by local government authorities in a democratic government or decrees or edicts under a military government. These legislations confer necessary powers on the taxing authorities to impose taxes on the citizens that is, individuals, companies, trusts, settlements, etc. 167 Examples of such tax legislations are: Personal Income Tax Act P8 LFN 2004 (as amended); Companies Income Tax Act Cap C21 LFN 2004 (as amended); Value Added Tax Act Cap VI LFN 2004 (as amended); Petroleum Industry Act, 2021; and Various Finance Acts.

(iii) Case laws This is the doctrine of stare decisis, that is, judicial precedents. Under this doctrine, judgements pronounced by superior courts of records, namely: High Courts, Appeal Courts, and the Supreme Court, on principles of tax laws and their interpretations of the provisions of tax statutes, are binding on the lower courts. In view of the fact that Nigerian tax laws had their origin from the English tax laws, it would not be out of place to state that the principles of English common law pronounced upon by the judges in England and interpreted by them, also form another source of Nigerian tax laws. This position is buttressed by the decision in the case of Aderawos Timbers Trading Co. Limited v Federal Inland Revenue Service Board (1966) LL.R 195, (1969) ALL NLR 247. In this case, it was held that the decisions of English courts can be invoked for the purpose of interpreting Nigerian tax statutes where the expression and terms used are similar and substantially the same as those used in English Statutes.

(iv) Circulars issued by and practices of the Inland Revenue. (v) Opinions of tax experts and authors insofar as the courts take judicial notice of them. (vi) Budget and pronouncement of relevant ministries. (vii) The Constitution of the Federal Republic.

c. Allowable expenses The allowable expenses in the ascertainment of assessable profits of companies include:

i. A sum payable by way of interest on money borrowed and employed as capital in acquiring the income;

ii. Interest on loan for developing an owner occupier residential house;

iii. Rents payable in respect of land and buildings occupied for the purpose of acquiring the income;

iv. Expenses for repairs of premises, plant, machinery or fixtures employed in acquiring the income, or for the renewal, repair, or alteration of any implement, utensil or article so employed: Provided that, if the premises, plant, machinery, fixtures, implement, utensils or articles are used in part for domestic or private purposes, so much of the expenses as relates to such use shall not be so deducted; 168

v. Bad debts incurred in any trade, business, profession or vocation, proved to have become bad during the period for which the income is being ascertained and doubtful debts to the extent that they have become bad during the said period and notwithstanding that such bad or doubtful debt were due and payable prior to the commencement of such period: Provided that: All sums recovered during the said period on account of amounts previously written off or allowed in respect of bad or doubtful debts shall for the purpose of this Act be deemed to be income of the trade, business, profession or vocation of that period;

vi. A contributory pension or an abatement deducted from the salary or pension of a public officer under the Pension Act or any approved scheme within the meaning of the Act, and any contribution, other than penalty, made under the provisions of any Act establishing a National Provident Fund or other retirement benefit schemes for employees throughout Nigeria;

vii. Contributions to approved pension, provident or other retirement benefits, funds under the Pension Reform Act 2004. (now Pension Reform Act 2014);

viii. In the case of income from trade, business, profession or vocation, any expenses or part thereon, incurred for that period wholly and exclusively for the purpose of trade, business, profession or vocation;

ix. Any expense which is proved to the satisfaction of the relevant tax authority, to have been incurred by the individual on research, for the period, including the amount of levy paid by him to the National Science and Technology Fund;

x. Where the income is chargeable, only by reason of it being brought into or received in Nigeria, nothing in this section shall confer a right to any deduction from the amount of that income so brought into or received in Nigeria.

xi. Legal expenses relating to:

• General legal advisory services;

• Retainer’s fees;

• Renewal of short-term lease; and

• Any legal cost incurred in protecting or defending the business.

xii. Specific allowance for bad and doubtful debts; and

xiii. Donations to accredited bodies, taking the relevant restrictions into consideration. 169

Examiner’s report The question tests the candidates’ knowledge of tax and other professional issues that are handled by firms of chartered accountants, main sources of Nigerian tax laws, and allowable expenses in the ascertainment of assessable profits of companies. About 90% of the candidates attempted the question but the performance was average. Many of the candidates could not state professional issues that are handled by a firm of chartered accountants whilst some could not explain the sources of Nigerian tax laws. Candidates are advised to adequately cover the syllabus and read the Institute’s Pathfinders and Study Texts when preparing for future examinations.

Marking guide Marks a. Stating professional issues that can be handled by a firm of Chartered Accountants (1 mark each for any correct point subject to a maximum of 5 (five) points) 5 b. Stating main sources of Nigerian tax laws (1 mark each for any correct point subject to a maximum of 5 (five) points) 5 c. Stating allowable expenses in the ascertainment of assessable profits of companies (1 mark each for any correct allowable expense subject to a maximum of 5 (five) expenses) 5 Total 15 170 THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA

ABC Limited Computation of income tax liabilities For assessment years 2021 and 2022

a) Assessment year (A.Y) Basis period 2021 1/7/2020 – 30/11/2020 2022 1/12/2020 – 30/11/2021

b) Computation of adjusted profit Year ended November 30, 2021 Period ended November 30, 2020 (A.Y 2022) (A.Y 2021) N N N N Net profit per accounts 23,764,840 14,064,300 Add: disallowable expenses Cost of new plant not captured in property, plant and equipment (PPE) 0 125,000 Cost of furniture excluded in PPE 0 182,000 Donations - M.D’s church 400,000 250,000 - XYZ Club 120,000 100,000 Allowance for doubtful debts 320,000 210,000 Income tax provision 425,000 387,000 Legal and other professional charges: Cost of new lease 0 85,000 Cost of defending a tax appeal 120,000 0 Cost of renewing long lease 0 36,000 Cost of defending traffic offence 0 48,000 Depreciation 903,500 2,288,500 423,500 1,846,500 26,053,340 15,910,800 Dividend received (gross) (432,100) (432,100) Adjusted profit 25,621,240 15,478,700

c) Computation of income tax liabilities Assessment year 2021 N Adjusted profit 15,478,700 Capital allowances (2,121,177) Total profit 13,357,523 Companies income tax payable (20% of total profit) N2,671,504.60 Tertiary education tax payable (2% of assessable profit) N309,574.00 156 Assessment year 2022 N Adjusted profit 25,621,240 Capital allowances (2,028,425) Total profit 23,592,815 Companies income tax payable (30% of total profit) N7,077,844.50 Tertiary education tax payable (2.5% of assessable profit) N 640,531.00

NOTE Minimum tax computation is not applicable because the company is not up to 48 calendar months in business. Computation of capital allowances Plant Furnitur e Fixtures and Fittings Motor vehicles Total Initial allowance (%) 50 25 25 50 Annual allowance (%) 25 20 20 25 Investment allowance (%) 10 0 0 0 N N N N N Assessment year 2021 Cost 2,480,000 520,000 650,000 3,650,000 Cost- Assets excluded in PPE 125,000 182,000 0 307,000 2,605,000 702,000 650,000 3,957,000 Initial allowance (1,302,500) (175,500) (162,500) 1,640,500 Annual allowance Investment allowance (135,677) (43,875) (40,625) 220,177 260,500 __________ ________ ________ 2,121,177 W.D.V. c/f to A.Y 2022 1,166,823 482,625 446,875 Assessment year 2022 Addition – cost 0 0 0 2,400,000 2,400,000 1,166,823 482,625 446,875 2,400,000 Initial allowance 0 0 0 (1,200,000) 1,200,000 Annual allowance (325,625) (105,300) (97,500) (300,000) 828,425 2,028,425 W.D.V. c/f to A.Y. 2023 841,198 377,325 349,375 900,000 157

Examiner’s report The question tests the candidates’ knowledge of the computation of taxes payable by a company. This being a compulsory question, about 100% of the candidates attempted the question and their performance was above average. The common pitfalls of the candidates were their inability to:

i) Capture the costs of plant and furniture omitted in PPE as disallowable expenses; ii) Reflect these costs as additions to the relevant assets in the computation of capital allowances for assessment year (A.Y.) 2021; and iii) Prorate the annual allowance in A.Y. 2021. Candidates are advised to read widely and be conversant with the provisions of the Companies Income Tax Act Cap. C 21 LFN 2004 (as amended) before sitting for the subsequent examination to enhance better performance.

Marking guide Marks Heading - Name of company

- Computation of income tax liabilities - Assessment years ¼ ¼ ¼ Basis period (½ mark for each of the 2 correct basis periods) 1 Computation of adjusted profit Net profit accounts (½ mark for each of the 2 points) Disallowable expenses (1 mark for each of the 16 points) Dividend received (gross) (1 mark for each of the 2 points) 1 16 2 Assessment year 2021 Adjusted profit Capital allowances Total profit Companies income tax payable Tertiary education tax payable ½ ½ ½ ¼ ¼ Assessment year 2022 Adjusted profit Capital allowances Total profit Companies income tax payable Tertiary education tax payable ½ ½ ½ ½ ½ 158 Computation of capital allowances Heading Assessment year 2021 Cost (1/4 mark each for any correct cost) Assets disallowed (capital in nature) Initial allowance ( ¼ mark each for any correct allowance) Annual allowance (¼ mark each for any correct allowance) Investment allowance 1/4 3/4 2/4 ¾ ¾ ¼ Assessment year 2022 Cost – Addition Initial allowance Annual allowance (¼ mark each for any correct allowance) Total ¼ ¼ 1 30

Mr. Apa Eniapampa Computation of chargeable income For 2021 assessment year Earned income: N N Income from employment: Basic salary 68,350,000 Bonus 12,000,000 80,350,000 Income from trade 5,200,000 85,550,000 Add: Unearned income Interest received from National Rural Bank 2,000,000 87,550,000 Less: Tax exempt item: Life assurance premium 10,000,000 Gross income 77,550,000 Less: Consolidated relief allowance (1% of N77,550,000 or N200,000, whichever is higher, +20% of N77,550,000) 16,285,500 Chargeable income 61,264,500

NOTE The dividend received from an approved unit trust scheme is tax exempt, hence the exclusion in the computation. 159

Examiner’s report The question tests the candidates’ knowledge of the computation of personal income tax (PIT) of an employee. About 80% of the candidates attempted the question but the performance was fair. The commonest pitfall of the candidates was their inability to compute the correct consolidated relief allowance (CRA). Candidates are advised to read relevant texts on taxation, ICAN Pathfinders and Study Text.

Marking guide Marks Heading - Name of company 1 - Computation of income tax liabilities 1 - Assessment year 1 Basic salary 2½ Bonus 2½ Income from trade 2½ Interest 2½ Life assurance premium 2½ Computation of consolidated relief allowance: - 1% of N77,550,000 1 - N200,000 1 - whichever is higher ½ - 20% of N77,550,000 2 Total 20 160

a) Opion Nigeria Limited Computation of monthly VAT payable (A) (B) (C) (D) (E) (F) (D) – (F) Month of transaction Gross turnover Sales returns Gross turnover (Net) Output VAT (07.5%) Cost of sales Input VAT (07.5%) Monthly VAT remittable N’000 N’000 N’000 N’000 N’000 N’000 N’000 Jan. 2021 2,500 200 2,300 172.50 1,880 141.00 31.50 Feb. 2021 2,250 150 2,100 157.50 1,650 123.75 33.75 March 2021 2,100 100 2,000 150.00 1,520 114.00 36.00 April 2021 2,000 2,000 150.00 1,430 107.25 42.75 May 2021 1,850 1,850 138.75 1,300 97.50 41.25 June 2021 1,720 1,720 129.00 1,190 89.25 39.75 July 2021 1,600 1,600 120.00 1,072 80.40 39.60 Aug. 2021 1,500 1,500 112.50 985 73.88 38.62 Sept. 2021 1,480 1,480 111.00 980 73.50 37.50 Oct. 2021 1,450 1,450 108.75 980 73.50 35.25 Nov. 2021 1,510 1,510 113.25 1,065 79.88 33.37 Dec. 2021 1,485 ____ 1,485 111.38 1,065 79.88 31.50 Total 21,445 450 20,995 1,574.63 15,117 1,133.79 440.84

Note: Cost of sales = Opening inventory + purchases – closing inventory 161

b) Opion Nigeria Limited Computation of monthly VAT penalties Month Jan Feb March April May June July Aug Sept Oct Nov Dec Monthly total N N N N N N N N N N N N N Jan. 2021 - - - - - - - - - - - - - Feb. 2021 50,000 - - - - - - - - - - - 50,000 March 2021 25,000 50,000 - - - - - - - - - 75,000 April 2021 25,000 25,000 50,000 - - - - - - - - 100,000 May 2021 25,000 25,000 25,000 50,000 - - - - - - - - 125,000 June 2021 25,000 25,000 25,000 25,000 50,000 - - - - - - - 150,000 July 2021 25,000 25,000 25,000 25,000 25,000 50,000 - - - - - - 175,000 Aug. 2021 25,000 25,000 25,000 25,000 25,000 25,000 50,000 - - - - - 200,000 Sept. 2021 25,000 25,000 25,000 25,000 25,000 25,000 25,000 50,000 - - - - 225,000 Oct. 2021 25,000 25,000 25,000 25,000 25,000 25,000 25,000 25,000 50,000 - - - 250,000 Nov. 2021 25,000 25,000 25,000 25,000 25,000 25,000 25,000 25,000 25,000 50,000 - - 275,000 Dec. 2021 25,000 25,000 25,000 25,000 25,000 25,000 25,000 25,000 25,000 25,000 50,000 - 300,000 Total 300,000 275,000 250,000 225,000 200,000 175,000 150,000 125,000 100,000 75,000 50,000 - 1,925,000 162

Examiner’s report The question tests candidates’ knowledge of filing of monthly value added tax (VAT) returns and the penalties payable for non-filing of same. About 50% of the candidates attempted the question but the performance was poor. Most of the candidates did not adjust for sales returns in the ascertainment of net gross turnover for the months of January to March 2021 before computing the output VAT. Additionally, they found it difficult to ascertain the penalties payable for late filing of monthly VAT returns. Candidates are advised to make use of the Institute’s Pathfinders and Study Text in their preparations for subsequent examination.

Marking guide Marks Marks a) Computation of monthly VAT payable Heading - Name of company

- Computation of monthly VAT payable Computation of monthly VAT: Input VAT (½ mark each for any correct answer) Output VAT (½ mark each for any correct answer) ½ ½ 6 6 13

b) Computation of monthly VAT penalties Heading - Name of company

- Computation of monthly VAT penalties Computation of monthly VAT penalties: (½ mark each for any correct amount) Total ½ ½ 6 7 20 163

Stakeholders and their responsibilities as per the National tax policy (NTP), 2017 (a) The government All levels and arms of government, ministries, extra-ministerial departments and agencies where applicable shall: (i) Implement and regularly review tax policies and laws; (ii) Provide information on all revenue collected on a quarterly basis; (iii) Ensure adequate funding, administrative and operational autonomy of tax authorities; and (iv) Ensure a reasonable transition period of between three and six months before implementation of a new tax.

(b) The taxpayer 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:

(i) Relevant information for the discharge of tax obligations;

(ii) Receive prompt, courteous and professional assistance in dealing with tax authorities; (iii) Raise objections to decisions and assessments and receive response within a reasonable time; (iv) A fair and impartial appeal; and

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

(c) Professional bodies, tax practitioners, consultants and agents They shall:

(i) Act in accordance with professional code of conduct and ethics; (ii) Not aid and abet tax evasion and corrupt practices; and (iii) Actively promote effective tax compliance.

(d) Media and advocacy groups They shall: (i) Promote tax education and awareness; (ii) Articulate, protect and advance tax payers right; (iii) Advance accountability and transparency in the utilisation of tax revenue; (iv) Ensure accurate, objective and balanced reporting in accordance with 164 their professional code of conduct and ethics; and (v) Ensure that aspiring political office holders clearly understand the tax policy and the Nigeria tax system and are able to articulate their plans for the tax system to which they will be held accountable.

Examiner’s report The question tests the candidates’ knowledge of the other stakeholders the government must collaborate with and their responsibilities to ensure the success of the National tax policy (NTP). About 80% of the candidates attempted the question but performance was fair. Many of the candidates displayed poor knowledge of National tax policy (NTP), 2017, as they could not explain the responsibilities of the various stakeholders. Candidates should be conversant with the provisions of the relevant tax laws and circulars.

Marking guide Marks Marks a) The government 1¼ marks each for any correct answer 5

b) The taxpayer 1¼ marks each for any correct answer subject to a maximum of 4 points 5

c) Professional bodies tax practitioners consultants and agents - Acting in accordance with professional code of conduct and ethics 2 - Not aiding and abetting tax evasion and corrupt Practices 2 - Actively promoting effect tax compliance 1 5

d) Media and advocacy groups 1¼ marks for any correct answer subject to a maximum of 4 points 5 Total 20

Taxation of a SEC lending based on the provisions of CITA (as amended)

(a) Dividend and interest received The relevant provisions of the Act as they apply to dividend and interest received are as follows: 165

i) Section 9 of CITA (as amended) Under section 9(1) (c) of the Act, gross dividend and interest received by a lender and borrower, being income, are taxable.

ii) Section 23 of CITA (as amended) Despite the provision of section 9 (1) (c) of CITA which regards gross dividend and interest received by a lender and borrower as taxable, section 23(1)(t) and (u) of the Act, provides that dividend received by a lender from a borrower or by an agent from a borrower under SEC Lending is a franked investment income, hence it is not subject to further tax in the hand of the lender. Given the provisions of section 23(1) of the Act, interest received by an agent from a lender under SEC lending is tax exempt in the hand of the agent.

iii) Section 24 of CITA (as amended) Interest paid by a lender to an agent or a borrower under a SEC Lending is an allowable deduction under section 24(1)(l) of the Act.

iv) Section 27 of CITA (as amended) Dividend generated by a borrower, and paid to an agent or lender under SEC Lending will not be an allowable deduction to the borrower in accordance with section 27(1) (l) of the Act.

v) Section 78 of CITA (as amended) The interest received by a borrower from a lender is liable to withholding tax deduction as provided under section 78 of the Act. Where the borrower receives beneficial interest from the lender through the agent, the responsibility to deduct withholding tax rests with the agent. Where the agent remits interest to the borrower, the agent is to deduct withholding tax.

vi) Section 80 of CITA (as amended) Under this section of the Act, payment of a dividend from a borrower to an agent shall not be subject to deduction of withholding tax.

vii) Fees, rights, bonuses and other benefits Under section 9(1)(h) of CITA, rights, bonuses, profits, fees and other benefits received by a borrower or lender under a SEC Lending are taxable income. 166

(b) Dividend and interest received by an individual under a SEC Lending Given the fact that the above stated exemptions and concessions provided in CITA relate to persons taxable under CITA, dividend and interest received under SEC Lending by individuals are not tax exempt.

(c) Documents and transactions that are exempt from stamp duties are:

(i) All documents issued by the Securities and Exchange Commission (SEC) in relation to a SEC Lending;

(ii) Shares, stocks or securities returned to a lender or its recognised agent by a borrower in accordance with the rules of Securities and Exchange Commission (SEC) Lending; (iii) Receipts given by any person under a Securities and Exchange Commission (SEC) Lending; and

(iv) Shares, stocks or securities transferred by a lender to its agent or borrower in furtherance of a Securities and Exchange Commission (SEC) Lending.

Examiner’s report The question tests the candidates’ knowledge of taxation of regulated securities lending transactions in respect of dividend and interest received, fees, and other benefits for individuals and companies. About 35% of the candidates attempted the question and performance was poor. The commonest pitfall of the candidates was their inability to explain the taxation of dividend, interest received, and other fees in respect of regulated securities lending transactions. Candidates are advised to cover the syllabus adequately before sitting for ICAN examination.

Marking guide Marks a) Taxation of dividend and interest received - CITA (1 mark for any correct point) 7 b) Tax treatment of dividend and interest received by an individual- PITA (2 marks for correct discussion of tax/statement of dividend and interest received by an individual) 2 c) Documents and transactions exempt from stamp duties (1½ marks for any correct point) 6 Total 15 167

(a) Tax-exempt deductions based on Personal Income Tax (Amendment) Act, 2011 The following deductions are tax exempt:

(i) National housing fund contribution The National Housing Fund Act Cap LFN 2004, provides that a Nigerian earning an income of ₦3,000 and above per month in either the public or private sector of the economy shall contribute 2.5 per cent of his basic monthly salary to the Fund. Employers who fail to deduct or remit are liable to pay a penalty of ₦50,000 whilst self-employed persons are to pay ₦5,000 or one year imprisonment on conviction or both. The employer is to deduct the contribution from the employee’s monthly salary and remit to the Federal Mortgage Bank of Nigeria within one month of making the deduction. The Act mandates the Federal Mortgage Bank of Nigeria to collect, manage and administer the fund. Contributions made to the fund are tax deductible.

(ii) National health insurance scheme The National Health Insurance Scheme (NHIS) was set up by The National Health Insurance Act, Cap N42 LFN 2004, for the purpose of providing health insurance which shall entitle persons insured under the scheme and their dependants the benefits of prescribed good quality and cost effective health services as set out in the Act. The Act provides that an employer who has a minimum of ten employees may, together with every person in his employment, pay contribution under the scheme, at such rate and in such manner as may be determined, from time to time, by the Governing Council for the Scheme. In the public sector (Federal), the employer is expected to pay 3.25%, while the employee pays 1.75% which translate to 5% of the employee’s consolidated salary. In the case of the private sector and other tiers of government, the employer is expected to pay 10% while the employee pays 5% representing 15% of the employee’s basic salary. The employer may decide to pay the entire contribution. Sometimes, the employer may also undertake extra contributions for additional cover to the benefit package. An employer under the scheme shall cause to be deducted from an employee’s wages the negotiated amount of any contributions payable by the employee. The employer’s contributions and the contributions in respect of its employees are to be paid into the account of a designated health maintenance organisation. Contributions to the scheme are tax deductible. 168

(iii) Life assurance premium A deduction of the annual amount of any premium paid by the individual during the year preceding the year of assessment to an insurance company in respect of insurance on his life or the life of his spouse.

(iv) National pension scheme The Pension Reform Act 2014 (PRA), established a uniform contributory pension scheme for payment of retirement benefits of employees. The scheme applies to all employees in both the public and private sectors who are in employment in an organisation in which there are 15 or more employees. The rate of contribution to the scheme shall be a minimum of 8% of employee’s monthly emolument (i.e. basic salary, housing allowance and transport allowance) as contribution for employees in the public and private sectors and 10% of the monthly emoluments as employer’s contribution. However, contributions made by an employee to the scheme shall be tax deductible. Notwithstanding the foregoing mode of contribution to the scheme, an employer may agree or elect to bear the full burden of the scheme, provided that in such a case, the employer’s contribution shall not be less than 20% of the monthly emoluments of the employee. It is pertinent to state that the tax relief is only limited to pension contributions to schemes, provident or retirement benefits fund that are recognised under the Pension Reform Act, 2014.

(v) Gratuities Gratuity is money paid to an employee who is retiring or leaving his employer after several years of service. Gratuity is tax deductible.

(b) Computation of consolidated relief allowance “Gross emolument” means wages, salaries, allowances (including benefits- in-kind), gratuities, superannuation and any other income derived solely by reason of employment. “Gross income” means income from all sources less non-taxable income, income on which no further tax is payable, tax-exempt items listed in paragraph (2) of the sixth schedule, all allowable business expenses and capital allowance – section 33 (2) and (3) of PITA 2004 (as amended). Consolidated relief allowance (CRA) is granted at the higher of ₦200,000 or 1% of gross income plus 20% of gross income. 169

Examiner’s report The question tests the candidates’ knowledge of four tax exempt deductions and computations of consolidated relief allowance (CRA), taking into consideration the provisions of Personal Income Tax ( Amendment) Act, 2011(as amended). About 85% of the candidates attempted the question but performance was poor. The commonest pitfall was the candidates’ inability to explain the tax exempt deductions in the computation of personal income tax. Candidates are advised to read ICAN Study Texts and Pathfinders.

Marking guide Marks Marks a) Tax-exempt deductions (3 marks for any correct answer subject to a maximum of 4 points) 12 b) Computation of consolidated relief allowance: Definition of gross emolument Definition of gross income N200,000 1% of gross income 20% of gross income Total ½ ½ ½ ½ 1 3 15

a. The term “Contract of Supplies” covers all forms of supplies, deliveries, or the like through competitive bidding tenders, LPOs or other arrangements, whether oral or written. The term does not cover the across counter cash sales or supplies in the ordinary course of sales. Contract, which is outright sale and purchase of goods and property in the ordinary course of business are exempted from withholding tax. Section 73 of CITN and Section 81 of PITA empowered the Finance Minister to add to the above list from time to time through official gazette.

b. Challenges bedeviling the withholding tax scheme in Nigeria Since the introduction of withholding tax into the Nigerian tax system, the scheme has been bedeviled by so many challenges. Some of the challenges affecting the withholding tax scheme include:

(i) It could discourage hard work by Revenue Officers as it is self- accounting in nature;

(ii) Bureaucracy in the process of claiming withholding tax credit; 170

(iii) Penalty for failure to deduct - Taxpayers who are essentially obliged under the income tax law to register for income tax, does so as an unpaid agent of the relevant tax authority. Therefore, penalising the tax agent for failure to deduct withholding tax may be considered as counter-productive considering that the tax agent is not paid for assisting the relevant tax authority in this regard;

(iv) Appropriate WHT rate to apply to transactions - In some cases, tax agents are in dilemma as to determine and apply WHT rate correctly on different transactions; and

(v) Bureaucracy in the process of withholding tax refund - Taxpayers are subjected to rigorous audit process before refunds are made to them.

c. On November 30, 2020, the Tax Appeal Tribunal (TAT), Lagos Zone, in the case of Tetra Pak West Africa Limited Vs Federal Inland Revenue Service, ruled that sales in the ordinary course of business shall not be liable to withholding tax (WHT). The TAT laid the following criteria in ascertaining what constitutes “sales in the ordinary course of business”:

(i) The inclusion of the transaction/activity in the objects of the memorandum of association;

(ii) The nature and practice of the taxpayer’s business and industry;

(iii) The history of the taxpayer in relation to the activity; and

(iv) The frequency of the type of transaction.

Examiner’s report The question tests the candidates’ knowledge of “contract of supplies”, challenges bedeviling withholding tax scheme, and criteria laid out in the Tax Appeal Tribunal judgement for the ascertainment of what constitutes ’sales in the ordinary course of business”. About 65% of the candidates attempted the question but the performance was average. Many of the candidates could not explain the criteria laid out in the judgement of the Tax Appeal Tribunal for the ascertainment of what constitutes sales in the ordinary course of business. Candidates are advised to adequately cover the syllabus and read the Institute’s Pathfinders and Study Text when preparing for future examination. 171

Marking guide Marks Marks a) Explanation of the term “Contract of suppliers”

- Definition 2 - Stating tax exemption of sale and purchase of goods in the ordinary course of business 2 - Stating that the Finance Minister has the prerogative to elongate the list 1 5

b) Challenges bedeviling the withholding tax system (1 mark each for any correct solution) 5

c) Criteria in the ascertainment of what constitutes “sales in the ordinary course of business” - Inclusion of the transaction in memorandum of Association 2 - Nature and practice of the taxpayer’s business and Industry 1 - History of the taxpayer’s in relation to the activity 1 - Frequency of the type of transaction 1 5 Total 15 172 THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA