Taxation · May 2025

a XYZ Nigeria Limited Computation of total tax liabilities for assessment year 2024 N'000 N'000 Net profit as per accounts 31,025 Add: disallowable expenses: Depreciation 17,875 Legal cost - Issue of ordinary shares 2,500 Installation of new machine 3,750 Extension and partitioning of office apartment 1,500 25,625 56,650 Less: Non-taxable income: Profit on sale of equipment 4,950 Dividend from Nigerian company 2,100 7,050 Adjusted profit 49,600 Balancing charge 2,740 52,340 Capital allowances (10,325) Total profit 42,015 Companies income tax (CIT) (30% of N42,015,000) 12,604,500 Tertiary education tax (TET) (3% of N49,600,000) 1,488,000 Total tax liabilities 14,092,500 Assessment based on dividend 5% of 5,000,000 shares at N1.00 each = N250,000 CIT on dividend paid at 30% = N 75,000 Given the fact that the tax liability based on total profit is higher than that based on dividend, the CIT payable is N12,604,500.

(b) Other bases of assessing companies to income tax in Nigeria apart from the normal basis are as follows:

i. Dividend assessment: Section 19 (1) of CITA 2004 (as amended) provides that where a dividend is paid out as profit on which no tax is payable due to:

• no total profits; or

• total profits which are less than the amount of dividend which is paid, whether or not the recipient of the dividend is a Nigerian company. 167 The provisions of Section 19 (1) shall not apply to dividends paid out of the retained earnings of a company, provided that the dividends are paid out of profits that have been subjected to tax under this Act, the Petroleum Profits Tax Act or the Capital Gains Tax Act.

ii. Minimum tax: is pegged at a flat rate of 0.5% of turnover less franked investment income, which would be applicable to the following companies;

• companies with no total profit, or

• whose computed tax is less than the minimum tax.

iii. Turnover assessment For a trade or business, where the Revenue feels that the trade or business produces either no assessable profit or assessable profit that is less than expected of the trade or business or the true assessable profit cannot be ascertained, the Board may raise assessment on the following basis:

• if it is a Nigerian company, a reasonable percentage of the turnover; and

• if it is a non-Nigerian company, that part of the turnover attributable to the fixed base of the business or that part of the profit attributable to the business or trade carried on through a Nigerian representative.

(c) The five fundamental principles of ethics as specified by the International Ethics Standards Board for Accountants (IESBA) are as follows:

i. Integrity: A professional accountant shall comply with the principles of integrity, which requires an accountant to be straightforward and honest in all professional and business relationships.

ii. Objectivity: A professional accountant shall comply with the principle of objectivity, which requires an accountant not to compromise professional or business judgement because of bias, conflict of interest or undue influence of others.

iii. Professional competence and due care: A professional accountant shall comply with the principles of professional competence and due care, which requires an accountant to:

• attain and maintain professional knowledge and skill at the level required to ensure that a client or employing organisation receives 168 competent professional service, based on current technical and professional standards and relevant legislation; and

• act diligently and in accordance with applicable technical and professional standards.

iv. Confidentiality: A professional accountant shall comply with the principle of confidentiality, which requires an accountant to respect the confidentiality of information acquired as a result of professional and business relationships.

v. Professional behaviour: A professional accountant shall comply with the principle of professional behaviours, which requires an accountant to comply with relevant laws and regulations, and avoid any conduct that the accountant knows or should know might discredit the profession. A professional accountant shall not knowingly engage in any business, occupation or activity that impairs or might impair the integrity, objectivity or good reputation of the profession, and as a result would be incompatible with the fundamental principles.

Examiner’s report Part (a) of the question tests the candidates’ knowledge of the computation of taxes payable by a company whilst part (b) relates to the other bases of assessing companies to income tax apart from the normal basis. In part (c), candidates are expected to explain the fundamental principles of ethics as specified by the International Ethics Standards Board for Accountants (IESBA). This being a compulsory question, about 100% of the candidates attempted the question and their performance was above average. The commonest pitfalls of the candidates were their inability to:

a) identify allowable and disallowable expenses; and

b) explain other bases of assessing companies to income tax apart from the normal basis. 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 subsequent examinations to enhance better performance. 169

Marking guide

a. Computation of total tax liabilities Marks Marks Heading - Name of enterprise ½

- Computation of total tax liabilities for assessment year 2024 ½ Net profit as per accounts 1 Depreciation 1 Legal cost - Issue of ordinary shares 1 Installation of new machine 1 Extension and partition of office apartment 1 Profit on sale of equipment 2 Dividend from Nigerian company 2 Balancing charge 2 Capital allowance 2 CIT computation 1 TET computation 1 Assessment based on dividend 5% of 5,000,000 ordinary shares of N1 each = N25,000 1 CIT or dividend paid at 30% = N75,000 1 Conclusion 2 20

b. Other bases of assessing companies to income tax Dividend assessment 1 Section 19 (1) of CITA 2004 (as amended) ¼ No total profits ¼ Total profits which are less than the amount of dividend ¼ Dividends paid out of retained earnings ¼ Minimum tax 1 Companies with no total profit ¼ Companies with computed tax less than the minimum tax ¼ Turnover assessment 1 If it is a Nigerian company, a reasonable percentage of the turnover ¼ If it is a non-Nigerian company, that part of the turnover attributable to the fixed base ¼ 5

c. Integrity ½ Explanation ½ Objectivity ½ Explanation ½ Professional competence and due care ½ Explanation ½ 170 Confidentiality ½ Explanation ½ Professional behaviour ½ Explanation ½ 5 Total 30 171

Abudukar, Ariwaya & Associates Computation of adjusted profit For 2025 year of assessment N’000 N’000 Net profit as per accounts 72,450 Add: disallowable expenses: Depreciation 41,250 Donation to Ebonyi Social Club 500 Rent paid for residential houses - Engr. Abudukar 5,450 Medical expenses 1,250 Interest on loan to partners

- Engr. Abudukar (10/18 x N1,980,000) = 1,100,000 - Chief Ariwaya (8/18 x N1,980,000) = 880,000 1,980 50,430 122,880 Less: Non-taxable income: Profit on sale of motor vehicle 5,330 Adjusted profit 117,550 Balancing charge 1,795 Capital allowances: Initial 7,715 Annual 14,080 (21,795) Divisible profit 97,550 Share of profit:

- Engr. Abudukar (1/2 x N97,550,000) = N48,775,000 - Chief Ariwaya (1/2 x N97,550,000) = N48,775,000 Computation of tax liabilities for the partners for 2025 assessment year Engr. Abudukar Chief Ariwaya N N Share of profit 48,775,000 48,775,000 Less tax exempt: Life assurance 0 0 Gross income 48,775,000 48,775,000 Less CRA (20% of gross income + higher of (N200,000 or 1% of gross income) (10,242,750) (10,242,750) Chargeable income 38,532,250 38,535,250 172 Computation of tax payable Tax Table N'000 N'000 1st N300,000 @ 7% 21,000 21,000 Next N300,000 @ 11% 33,000 33,000 Next N500,000 @ 15% 75,000 75,000 Next N500,000 @ 19% 95,000 95,000 Next N1,600,000 @ 21% 336,000 336,000 Above N3,200,000@ 24% 8,479,740 8,479,740 9,039,740 9,039,740 WHT deducted on gross fees (5,912,500) (5,912,500) Net tax payable 3,127,240 3,127,240

Examiner’s report The question tests the candidates’ knowledge of the computation of partners’ income tax liabilities. About 85% of the candidates attempted the question but the performance was fair. Some of the candidates treated the insurance premium paid by Chief Ariwaya on behalf of his family as tax exempt whereas the Finance Act 2023 only allows premium paid on behalf of the taxpayer and his spouse. Additionally, the withholding tax deducted on gross fees was not captured in the ascertainment of net tax payable by the partners. Candidates are advised to read relevant texts on taxation of income of partners in partnerships, ICAN Pathfinders, and Study Text.

Marking guide Marks Computation of partners’ income tax liabilities Heading - Name of the partnership ½ - Computation of adjusted profit ½ - 2025 year of assessment ½ Net profit as per accounts ½ Depreciation ½ Donation to Ebonyi Social Club ½ Rent paid for residential house – Engr. Abudukar ½ Medical expenses ½ Interest on loan to partners - Engr. Abudukar ½ - Chief Ariwaya ½ Profit on sale of motor vehicle ½ Balancing charge ½ Capital allowances - Initial ½ 173

- Annual ½ Share of profit - Engr. Abudukar 1 - Chief Ariwaya 1 Computation of tax liabilities for the partners Share of profit (1/2 mark each) 1 Gross income (1/2 mark each) 1 CRA (1/2 mark each) 1 Computation of tax payable N21,000 ((1/2 mark each) 1 N33,000 ((1/2 mark each) 1 N75,000 ((1/2 mark each) 1 N95,000 ((1/2 mark each) 1 N336,000 ((1/2 mark each) 1 N8,479,740 ((1/2 mark each) 1 WHT deducted on gross fees (1 mark each) 2 Total 20

(a) Post cessation transactions are deemed to have taken place on the last day of business, hence all sums received or paid after the date of cessation are captured as part of cessation activities. (b) ABC Nigeria Limited Computation of assessable profit for 2023 - 2024 YOAs Year of assessment Basis period Assessable profit N'000 2023 01/01/22 - 31/12/22 16,800 2024 01/01/23 - 31/12/23 30,000 2024 01/01/24 - 30/04/24 wk 1 16,730 Workings: N'000 Profit on cessation 9,800 Receivables recovered 2,750 Sale of stolen vehicle recovered 9,650 Trade creditor settled (2,970) Lawyer's commission (2,500) Assessable profit 16,730 174

(c) In line with provisions of Finance Act 2019, on cessation of business, companies will file returns on or before 6 months after the date of cessation of business while individuals will file returns 3months after cessation. Therefore, ABC Nigeria Limited, will file two returns for 2024 YOA because the company ceased operations on April 30 and the tax liability will be paid before the end of the year.

Examiner’s report Part (a) of the question tests the candidates’ knowledge of the treatment of post cessation transactions for tax purposes whilst part (b) requires them to compute the income tax liabilities of a company on cessation of business. In part (c), they are expected to explain how the provisions of Finance Act 2019, will affect the company. About 45% of the candidates attempted the question and the performance was poor. Some of the candidates could not explain the treatment of post cessation transactions for tax purposes. Candidates are advised to read the Finance Acts, Institute’s Pathfinder, and Study Text in their preparations for subsequent examinations.

Marking guide Marks Marks a. Explanation of how post cessation transactions will be treated for tax purposes 4

b. Computation of assessable profit for the relevant assessment years Heading - Name of company ¼

- Computation of assessable profit for the relevant years ¼ Year of assessment: 2023 1 2024 1 2025 1 Basis period: 2023 1 2024 1 2025 1 Assessment profit: 1 2023 1 2024 - Workings Profit on cessation ½ Receivables recovered ½ 175 Sale of stolen vehicle recovered ½ Trade creditor settled ½ Lawyer’s commission ½ 11

c. Explanation of how the provisions of Finance Act, 2019, on cessation of business affect ABC Nigeria Limited Correct explanation of the provisions 5 Total 20

Success Nigeria Limited Computation of tax liabilities For 2025 assessment year N N Net profit as per accounts 55,440,000 Add: Bad debt recovered 3,200,000 Commission received 2,400,000 5,600,000 61,040,000 Add disallowed expenses: Building fund 1,600,000 Senior staff club house 3,200,000 Depreciation 7,200,000 12,000,000 Adjusted profit 73,040,000 Capital allowance (2,750,000) Total profit 70,290,000 Companies income tax = 30% of N70,290,000 = N21,087,000 Tertiary education tax = 3% of N73,040,000 = N2,191,200

(b) Allowable donations In ascertaining the profits or losses of a company chargeable to tax for any period, there shall be deducted, donations made during that period by the company. 176 The conditions for allowing such donations are as follows: (i) donations must be made to any of the funds, bodies, institutions in Nigeria contained in the Fifth schedule to CITA; (ii) donations must be made out of profit, that is, donations shall not be allowed in circumstances where it will increase the loss of a company or convert its profit into a loss; (iii) donations must not be of a capital nature except donation to a university or other tertiary or research institutions; (iv) donations must not exceed 10% of the company’s total profits for an assessment year before any deduction for donation. In the case of donation to tertiary or research institution, up to 15% of total profit or 25% of tax payable in the year whichever is higher; (v) donations made by companies in cash or kind to any fund set up by the Federal Government or any state government, or to any agency designated by the Federal Government or to any similar Fund or purpose in consultation with any Ministry, department or agency of the Federal Government, in respect of any pandemic, natural disaster or other exigency shall be allowed as deductions as follows:

• the cost of in-kind donations made to the Government and any designated agency shall be allowed as deductions; or

• where companies have either procured or manufactured items for contribution, the cost of purchase, manufacture or supply of such in kind contributions shall be allowed as deductions. Provided that requisite documentation evidencing the donation and the cost thereof are provided to the relevant tax authority and demonstrated to be wholly, reasonably, exclusively and necessarily incurred in relation to the procurement, manufacture or supply of the in-kind contributions; and

(vi) the amounts allowable for deduction in respect of (v) above, in any year of assessment shall be limited to 10% of assessable profits after deduction of other allowable donations made by the company.

(c) Every incorporated company carrying on business in Nigeria is required to file with the Federal Inland Revenue Service (FIRS) the following returns annually:

(i) self -assessment return in the prescribed form; (ii) audited accounts; (iii) tax and capital allowances computations; and 177

(iv) evidence of payment of the whole or part of the tax due into a bank designated for the collection of the tax. The prescribed form of return shall contain a declaration duly signed by a director or the company secretary, stating that:

• the return contains a true and correct statement of the company’s profits computed in accordance with the provisions of CITA and rule made hereunder; and

• particulars given in the return are true and complete

Examiner’s report Part (a) of the question tests the candidates’ knowledge of the computation of taxes payable by a company whilst part (b) requires them to explain the allowability of donations for tax purposes. The candidates are expected to explain the returns to be filed by every incorporated company to the Federal Inland Revenue Service. About 80% of the candidates attempted the question but performance was fair. Some of the candidates displayed poor knowledge of the conditions under which a donation charged against income is allowable for ascertaining the profit of a business. Candidates should be conversant with the provisions of the relevant tax laws and circulars, and should ensure they cover the syllabus adequately when preparing for subsequent examinations.

Marking guide Marks Marks a. Computation of taxes payable by the company Heading - Name of company ½ - Computation of tax liabilities ¼ - For 2025 assessment year ¼ Net profit per accounts 1 Bad debts recovered 1 Commission received 1 Building fund 1 Senior staff club house 1 Depreciation 1 Capital allowance 1 Companies income tax 1 Tertiary education tax 1 10 178

b. Allowable donations (1 mark each for any point subject to a maximum of 5 points) 5 c. Explanation of the returns to be filed by every incorporated company (1 mark each for any point subject to a maximum of 5 points, including the bullets) 5 Total 20

(a) i. Tax incidence: It is an economic term for the division of a tax burden between buyers and sellers. It does reveal the person that will pay the tax liability. For instance, if the government decided to impose an increased tax rate on cigarettes, the producers may increase the sale price by the full amount of the tax. If the consumers still purchased cigarettes on the same amount after the price increase, it will be said that the tax incidence fell entirely on the buyers.

ii. Tax burden: This is the amount of income, property or consumption tax levied on an individual or business. Tax burdens vary depending on several factors including income level, jurisdiction, and current tax rates. Income tax burdens are typically satisfied by deductions from an individual’s pay slip each time he or she is paid.

iii. Tax impact: This is the effect of a tax on the production or consumption of the product being taxed. For example, the tax impact of raising the levy on tobacco might be a reduction in tobacco sales.

iv. Tax shift: This is also referred to as tax swap. It is a change in taxation that eliminates or reduces one or several taxes and establishes or increases others, while keeping the overall revenue the same.

v. Tax base: This is a measure upon which the assessment or determination of tax liability is based. It is that position of a taxpayer’s income or property, which is expected to suffer tax.

(b) i. A persons in employment is deemed to be resident for a year of assessment in the territory in which he has a place available for his domestic use in Nigeria on the first day of January of the assessment 179 year, and does not include any hotel, rest house or other place at which he is temporarily lodging.

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

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

iv. An itinerant worker is deemed to be resident where he is found in a year of assessment. In the case of an itinerant worker, tax may be imposed for any year by any State in which the itinerant works for a minimum of twenty (20) days in at least three (3) months of every assessment year.

Examiner’s report Part (a) of the question tests the candidates’ knowledge of basic concepts in taxation whilst part (b) requires them to explain the rules of residence as they relate to individuals. About 85% of the candidates attempted the question and performance was good. The commonest pitfall of some of the candidates was their inability to explain the rules of residence as they relate to individuals. Candidates are advised to be conversant with the rules of residence relating to the taxation of income of an individual. 180

Marking guide Marks Marks a. Explanation of basic concepts in taxation Stating the basic concepts (½ mark for each of the five concepts) 2½ Explanation of the basic concepts (1½ marks for each of the five explanations) 7½ 10

b. Rules of residence A person in employment ½ Explanation of the rules of residence ½ An executor ½ Explanation of the rules of residence ½ Partners in partnership ½ Explanation of the rules of residence ½ An itinerant worker 1 Explanation of the rules of residence 1 5 Total 15 181

a. i. Global Lgends Logistics Limited Computation of VAT Payable For the year ended December 31, 2024

ii. Computation of withholding tax remittable N Payments to suppliers (N506,250,000 x 2%) 10,125,000 Management fees paid to Kosemani Konsults (N45,000,000 x 5%) 2,250,000 Audit fees (N10,000,000 x 5%) 500,000 Legal and professional fees (N7,500,000 x 5%) 375,000 VAT remittable 13,250,000

Notes: Withholding tax credit notes are not available to offset withholding tax liabilities as it would only be utilised by the company. Withholding tax is remitted in the name and taxpayer identification number (TIN) of the beneficiary. Administrative expenses may not be subject to withholding tax depending on the specific services involved. Given the fact that the nature of the services involved are not specified, therefore, administrative expenses were not treated as subject to withholding tax.

bi. The relevant section of CITA (as amended) that FIRS will rely on is section 19 (1).

ii. The company will be assessed to tax on the dividend declared as this is higher than the total profit declar N Output VAT: Contract supplies (N668,250,000 x 7.5%) 50,118,750 Less input VAT: Payments to suppliers (N506,250,000 x 7.5%) (37,968,750) 12,150,000 Recruitment fees (N318,750,000 x 7.5%) 23,906,250 VAT payable 36,056,250 182

Examiner’s report Part (a) of the question tests the candidates’ knowledge of the computations of VAT and deduction of withholding tax at source whilst part (b) requires them to explain the tax implications of the dividend paid by the company on its tax liabilities. About 55% of the candidates attempted the question but performance was poor. The commonest pitfall of some of the candidates was their inability to apply the correct withholding tax rates based on the Deduction of Tax at Source (Withholding) Regulations, 2024, to the transactions, such as payments to suppliers. Candidates are advised to be conversant with the provisions of the Deduction of Tax at Source (Withholding) Regulations, 2024, read ICAN Study Texts, and Pathfinders.

Marking guide Marks Marks VAT payable Heading - Name of company ½ - Computation of VAT payable ½ - For the year ended December 31, 2024 ½ Contract supplier ½ N50,118,750 ½ Payments to suppliers ½ N37,968,4750 ½ Recruitment fees ½ N23,956,750 ½ VAT payable ½ 5 Computation of withholding tax remittable ½ Payments to suppliers 1 Management fees paid 1 Audit fees 1 Legal and professional fees 1 VAT remittable 1 Explanation on withholding tax credit notes ¼ Explanation on administrative expenses ¼ 6 Relevant section of CITA (as amended) Section 19 (1) of the CITA (as amended) 1 183 Implication of the company’s dividend decision Dividend declared as this is higher than the total project declared 1 The tax liability shall be based on the dividend 1 Tax liability is N10,500,000 1 3 Total 15

The following taxes relate to real property transactions in Nigeria as follows:

(a) i. Withholding Tax Where the recipients of incomes are companies and individuals, the payer of any income is expected to withhold 10% and 5% respectively. The amount deducted by the payer should be remitted to the relevant tax authority within the period specified by law. Withholding tax deducted on a dividend is regarded as final tax in the hand of the recipient.

ii. Tertiary education tax Like other taxpayers, companies which are into real estate business sare expected to pay tertiary education tax in addition to companies’ income tax. The tertiary education tax is 3% of the assessable profit of a company, and a small company with a gross turnover of N25million and below is exempted from paying this tax.

iii. Value added tax Real estate companies are required to register for VAT on commencement of business with the relevant tax authority. Like companies in other sectors, all goods and services utilised in the real estate industry are to be invoiced and 7.5% of the value of the goods and services representing the value added tax should be remitted to the relevant tax authority.

iv. Stamp duties It is expected that all written documents relating to any property or interest in property, which are transferred or leased to any person, must be stamped. The rate of stamp duties is 75 kobo for every ₦200 of the 184 consideration of certain real estate transactions like mortgages while for conveyances or the transfer or sale of real property is 75k for every ₦50.

b. The Federal Inland Revenue Service (FIRS) is given the discretionary power, by virtue of the provision of Section 30 of CITA, to assess and charge a company to tax on a fair and reasonable percentage of the turnover of the trade or business. The FIRS is entitled to exercise this power in any of the following circumstances where it appears to it that for any year of assessment, the company’s trade or business has either:

(i) no assessable profits; or (ii) assessable profits which in the opinion of the FIRS, are less than might be expected to arise from that trade or business; or (iii) the true amount of the assessable profit cannot be readily ascertained. The implication of the above provision is that whatever is obtained by applying a fair and reasonable percentage, as may be determined by the FIRS, to the company’s revenue, is deemed to be its assessable profit for the assessment year concerned.

Examiner’s report Part (a) of the question tests the candidates’ knowledge of taxes relating to Real Estate Investment Company (REIC) whilst part (b) requires them to explain the circumstances when FIRS can assess a company based on turnover. About 65% of the candidates attempted the question but the performance was average. Many of the candidates could not explain the taxes relating to Real Estate Investment Company (REIC). Candidates are advised to cover the syllabus adequately and should endeavour to be conversant with the taxation of specialised businesses.

Marking guide Marks Marks a. Explanations of the taxes in relation to Real Estate Investment Company (REIC) (2 marks for each of the four explanations) 8

b. Circumstances when FIRS can assess a company based on turnover The prerogative of the FIRS to exercise its power where: ½ i. no assessable profits 1½ 185

ii. assessable profits which in the opinion of the FIRS are less than might be expected 1½ iii. the true amount of the assessable profit cannot be readily ascertained 1½ Implication of the decision of the FIRS to exercise its power 2 7 Total 15 186 INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA