Taxation · November 2024

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