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Tax administration in Nigeria
Question 1
For the purpose of National Tax policy “Tax” is any compulsory payment to a
government imposed by law without direct benefit or return of value or a service
whether it is called a tax or not. The policy is now applicable to all the tiers of
government in Nigeria. It establishes the fundamental principles to guide an
orderly development of the Nigeria tax system and reinforces the need for tax
laws and administrative practices to promote economic development.
Required:
a) State the objective of National Tax policy
b) Discus the guiding principles of Nigeria tax system.
Solution.
a) The policy is expected to achieved the following specific objective, among
others’
i. Provides the basis for future tax legislation and administration
ii. Serve as a point of reference for all stakeholders on taxation
iii. Guide the operation and review of tax system
iv. Provide benchmark on which stakeholder shall be held accountable
v. Provide clarity on the role and responsibilities of stakeholders in the
tax system.
b) According to the new National tax policy, all existing and future taxes are
expected to align with the following fundamental feature.
i. Equity and fairness: Nigeria Tax system should be fair and equitable
devoid of discrimination.
ii. Simplicity, certainty and clarity. Tax laws and administrative
processes should be simple, clear and easy to understand.
iii. Convenience: the time and manner for the fulfilment of tax
obligations shall take into account the convenience of taxpayers and
avoid undue difficulties
iv. Low compliance cost: the financial and economics cost of
compliance to the taxpayers should be kept to the barest minimum
v. Low cost of administration: tax administration in Nigeria should be
efficient and cost-effective in line with international best practices
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vi.
vii.
Flexibility: taxation should be flexible and dynamic to respond to
changing circumstances in the economy in a manner that does not
retard economic activities and,
Sustainability: the tax system should promote sustainable revenue.
Economic growth and development. There should be a synergy
between tax policies and other economic of government.
Question 2
The Nigeria tax policy (NTP) establishes fundamental principles to guide an
orderly development of the Nigeria tax system and reinforces the need for tax laws
and administrative practices to promote economic development. When the Nigeria
Tax policy is fully implemented, it will address key challenges confronting the
Nigeria tax system.
Required
i.
ii.
State the challenges confronting the Nigeria Tax system
The key recommendation by National tax policy to address the
challenges
Solution.
i.
a.
b.
c.
d.
e.
f.
g.
Some of key challenges confronting the Nigeria tax system including the
following
Low tax to GOP ratio
Fragmented database of taxpayers and weak structure for exchange of
information,
Multiplicity of taxes and revenue agencies,
Poor accountability for tax revenue
Use of aggressive and unorthodox methods for tax collection
Failure by tax authorities to honour refund obligations to taxpayers, and
The non-regular review of tax legislation which has led to obsolete laws, that
do not reflect current economic realities
ii.
Some of the key recommendations that have been included to address the
challenges are as follows.
a. Ensuring that there is only one revenue agency per level of government,
b. Establishment of a tax court as an independent body to adjudicate in tax
matters
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c. Lower tax rate and VAT compliance threshold for SMEs
d. Establishment of an office of tax simplification for continuous improvement
to tax legislations and administration and develop key performance indices
for Nigeria to attain a top 50 position on the global index of ease of paying
taxes by 2020 and consistently improve on the ranking
e. Administrative framework for amnesty and whistle blowing as part of the
strategies for curbing evasion and widening the tax net and
f. INEC to mandate political parties to articulate, prepare, provide and make
public their tax agenda before and during election campaigns
Question 3
Mr. White a Non residence individual operate a business activity in Ondo state,
Nigeria. On more than one occasion he had been approach by various tax official
for collection of tax within the state. He understand that for tax purpose and in
accordance with it constitutional provision, Nigeria is divided into three
constituencies – Federal, state and Local governments.
Mr. White has contacted you in other to have in-depth knowledge of Nigeria Tax
structures and administration.
Required:
i. Discuss the structure of the tax administration system in Nigeria and the
various organ of tax administration
ii. Taxing right of different level of Government.
Solution.
i. The structure of tax administration in Nigeria is divided to three namely;
a. Federal Government,
b. State Government and
c. Local Government.
Federal Government is responsible for the assessment and collection of taxes
due from all taxable corporate bodies, personnel of the Nigeria armed forces
and those employed in Nigeria’s foreign missions.
The organ of tax administration that has the authority to collect tax for Federal
Government in Nigeria is Federal Inland Revenue Services.
3
State Government is responsible for the assessment and collection of the taxes
due from all taxable persons resident in the state with the exception of the
Nigeria armed forces and those employed in Nigeria’s foreign missions. The
State Board of internal revenue service act as an organ of tax administration to
collect revenue for each state government.
Local Government is responsible for the assessment and collection of their
taxing right. And it’s collected by Local government revenue committe
ii) The taxing right for each of the three tiers of government is as contained in
taxes and levies (approved list for collection Act Cap T2 LFN 2004) as follows
a. Federal government.
i. Companies income tax
ii. Petroleum profit tax
iii. Value added tax
iv. Withholding tax on companies
v. Education tax
vi. Capital Gain tax of corporate bodies
vii. Stamp duties of corporate bodies
viii.Personal income tax of member of armed forces and police forces.
b. State government
i. Personal income tax (PAYE and Business enterprise)
ii. Capital gain tax on individual
iii. Withholding tax on individual
iv. Road taxes
v. Pools betting and lotteries, gaming and casino
vi. Development levy
vii. Business premises registration fees
viii. Market taxes and levies where the state finance in involved
c. Local government.
i.
Shop and kiosk rate
ii.
Tenement rate
iii. On and off liquor license fees
iv.
Slaughter slab fees
v.
Marriage, birth and death registration fees.
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Question 4
Each tiers of government has its own tax authority, created by federal laws. The
authorities includes Federal inland Revenue services Board, State Board of Internal
Revenue and Local Government revenue committee.
Required:
i. State the composition and function of each of the above named tax
authority.
ii. Section 86 of personal income tax act as amended established the joint tax
board. What are the composition and the function of JTB and what
constitute a quorum of JTB.
Solution.
i. Composition and function of tax authority.
Composition Federal Inland Revenue Services.
a. Executive chairman- who shall be a person within the service to be
appointed by the president
b. Six members representing each geopolitical zones, with relevant
qualifications and expertise, to be appointed by President
c. A representative of the minister of finance not below the rank of a director
d. A representative of attorney- general of the federation
e. The governor of CBN or his representative
f. The Chairman of Revenue Mobilisation Allocation and fiscal commission or
his representative, representing the 36 state of the federation.
g. NNPC group managing director or his representative
h. Nigeria custom service comptroller general or his representative
i. The Registrar-General of Corporate affairs commission or his
representatives
j. The chief executive officer of the National Planning Commission or his
representative.
Function of FIRSB
i. Provide the general policy guideline relating to the function of the service
ii. Manage and superintended over the policies of the services on matter
relating to the administration of the revenue assessment, collections and
accounting system.
iii. Review and approve the strategic plans of the service
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iv. Recruitment of the employees of the services
v. Determine the remuneration, allowance benefit and pension of the staff and
employees.
vi. determine the term of service, including disciplinary measures of the
employees of the services
Composition of the state board of internal revenue service board.
i.
ii.
iii.
iv.
v.
vi.
The executive chairman of the state service appointed by state governor
The director and head of department within the state service
A director from the state ministry of finance
Three person nominated by the commissioner of finance in the state.
A legal adviser to the state service
The secretary of the state service.
Function of State Board of Internal Revenue service board.
i.
ii.
iii.
iv.
v.
vi.
Recruiting, promoting, transferring and imposing discipline on employees
of the state service
The assessment and collection of Pay as you earn (PAYE) and other
personal income tax.
Ensuring the effectiveness and optimum collection of all taxes and penalties
due to government
Controlling the management of the state service on matter of policies.
Doing all such things as may be deemed necessary and expedient for the
assessment and collection of tax and account for all amount so collected to
the commissioner
Making recommendation to JTB of tax matter, policy, reform, Legislation
Treaties and Tax exemptions.
Composition of Local Government revenue committee
i. The supervisor for finance as chairman
ii. Three local government councilor as member
iii. Two nominees from local government chairman who has the tax and
revenue experience
Function
i. The day to day administration of the department.
ii. The assessment and collection of all taxes, fines and rates under its
jurisdiction and shall account for the amount so collected.
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Joint tax Board
Composition
i.
ii.
iii.
iv.
The chairman of federal inland revenue service
One member from each state of the federation
The secretary
The legal adviser of FIRS
Function
i.
ii.
iii.
iv.
Exercise the powers or duties conferred on it by PITA and other act.
Advice federal government on request in respect of double taxation
arrangement with any other country.
Advice federal government on request in respect of rate of Capital
allowance and any other tax matter.
Promote uniformity, both in application of PITA and in the incidence of
tax on individuals throughout Nigeria.
Quorum; seven member or their representatives shall constitute a quorum
(section 86 (6))
Question 5
The Nigeria Tax Administration in Nigeria is collective effort of Federal, state
and Local Government. With all the conservatives’ effort by the government for
effective administration tax in Nigeria, some constraint still posed itself to the
government.
Required.
State the limitation of the tax administration of tax in Nigeria
Solution
The following are some of the constraints to the effective tax administration in
Nigeria
i.
ii.
iii.
iv.
v.
Inadequate funding of tax authority
Poor public enlightenment
Inexperience of tax officials at all level of government
Tax evasion
Improper use of tax consultant
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vi.
vii.
Poor governance
Tax avoidance; loops hole in the relevant laws
8
Objection and appeal procedure in Nigeria
Question 1.
You are John Felix a potential Qualified accountant who is the final stage of ICAN
examination with just one paper to go, you work has Audit Training in PWC
professional firm.
One of the major client of the firm, had sent a mail received from FIRS in respect
of additional notice of assessment for 2019 year of assessment. You client is
aggrieved about the additional assessment raise by the FIRS. Your Supervisor
partner forward the mail for your review, in the process, you observed the
followings:
i.
ii.
iii.
The additional assessment raised on the company is N6, 340,670 and the
mail was sent on 5th December, 2020 and today date is 28th December, 2020.
The FIRS claimed that the Company understate her turnover by N8, 340,500
The FIRS disallowed an expenses that worth N2, 560,450 during the year
under review.
You further investigate the claim of the FIRS in respect of the additional
assessment, and you are able to discover the following;
1. The amount claim in respect of understated revenue is amount realized on
disposal of equity share investment of the company and the money was paid
directly into the company account.
2. Part of the disallowed expenses was amount equal to N1, 570,000 in relation
to repair and renewal of major plant of the company but was disallowed by
FIRS.
You are require:
In respect of the above case scenario, discuss the process involve in Notice of
objection and identify steps to be taken to seek redress in respect of the additional
assessment raised by FIRS.
Solution.
I relation to company income tax act as amended the process of issue a notice of
Objection are as follow:
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Where a taxpayer receives a notice of assessment, he either agrees with it or he is
aggrieved. Where he agree with the assessment, the position of the law is that the
tax must be remitted within the statutory time limit of sixty days from the date of
receipt of the assessment.
Where the taxpayer is aggrieved however, he is expected to raise a Notice of
Objection. The notice of objection must be valid for it to have any effect.
For notice of objection to be valid, such a notice;
i.
ii.
iii.
Must have been made in writing
Must have been made within 30 days of receipt of the notice of assessment;
and
Must contained the ground of objection.
Upon the receipt of the valid notice of objection, the relevant tax authority will
examine the ground of objection to determine its validity. Where the ground are
found to be valid, the tax computation would be reviewed and a revised or
amended assessment raised. Payment would be based on the revised amendment.
Finally, were the tax relevant tax authority believed that there is no merit in the
notice of objection, then a notice of refusal to amend would be sent to the
taxpayer
Steps to resolve the above additional assessment.
The following step should be taken to redress the additional assessment raised by
FIRS;
i.
ii.
iii.
iv.
Write a notice of objection to the additional assessment raises by FIRS in a
prescribe manner.
Ensure that the your objection letter focus on the ground of Objection: i.e
that the additional assessment is ambiguous and should be review, that the
amount claimed to be taxable income is income in relation to disposal of
equity investment which is exempted from CITA, and that the amount
disallows as an expenses is an allowable expenses as it relate to Repair and
renewal expenses.
Schedule a reconciliation meeting with the tax inspector
Ensure you receive a response from the inspector in writing, communicating
their position based on the reconciliation meeting you had with them
10
v.
vi.
vii.
viii.
After meeting, if they refuse to discharge the additional assessment notice,
advice the client tp proceed to the tax appeal tribunal.
File a notice of appeal with the tax appeal tribunal ad serve the tax office a
copy of the notice of appeal.
Attend the appeal tribunal with relevant document to prove your ground of
your appeal.
If the decision of the tax appeal tribunal is not favorable, advice the client to
arrange for a legal adviser in order to commence court proceedings up to
high court and to the level of Supreme Court.
11
Company income tax Liability
Ascertainment of Adjusted profit and Total profit.
Question 1
For tax purposes, it will be extremely difficult, if not impossible, to prepare new
sets of accounts. Besides the difficulties anticipated, there appears to be no
justification for the unnecessary duplication of the efforts that would be required in
the production of such accounts. It has been established in some decided cases that
in ascertaining the true profits of a trade for tax purposes regard should be paid to
the correct principles of accountancy. Thus in practice, adjustments that are
considered necessary in view of the provisions of the Tax Acts, are made to
accounting profits to arrive at the profits for tax purposes. Such adjustments are
usually in respect of
ο‚· Expenditure charged but not allowable - disallowable expenditure
ο‚· Items chargeable to tax but not credited in the statement of profit or loss
(SPL).
ο‚· Items credited in the SPL but not taxable; and
ο‚· Expenditure not charged but allowable
There are adequate provisions in the Act which when considered in the light of
normal taxation practice, can be applied to determine which items of a company s
trading transactions will fall into any of the four categories listed and for which
adjustments will be necessary. The main guiding principle is that of allowable and
disallowable expenditure
Required:
In relation to company income discus allowable expenses and list eight of
allowable expenses. And six example of Disallowable expenses.
Solution.
Allowable expenses
All expenses of a company that are wholly, exclusively necessarily and reasonably
incurred in the production of the profits, are allowable deductions. Thus, any
expense that can be proved to meet these conditions will be an allowable deduction
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in arriving at a company chargeable profit unless such expenses is specifically
prohibited under any other provision of the Act
In addition, the following items are stated in Section 20 of the Act, as allowable
deductions provided they are incurred for the purpose of acquiring the profits being
subjected to tax
i.
ii.
iii.
iv.
v.
vi.
Interest on money borrowed and employed as capital
Rent and premiums in respect of land or buildings occupied for the purpose
of acquiring the profits:
Repairs and renewal cost relating to the promises, plant, and fixtures. etc.,
used in the business.
Bad and doubtful debts to the extent that they are respectively estimated to
the satisfaction of the Revenue Service to have become bad or doubtful of
collection
Contribution to approved person, provident or other retirement benefits fund,
society or scheme.
Any outlay or expenses incurred during the year in respect of Salaries,
wages or other remuneration paid to employees,
Disallowable expenditure
Certain expenditure are disallowed for tax purposes. These are specifically listed in
Section 23 of the Act and they should be added back to accounting profit even if
their charge in the statement of profit or loss could be justified under ordinary rules
of commercial accountancy. These are
i.
ii.
iii.
iv.
v.
vi.
Capital repaid or withdrawn and any expenditure of a capital nature:
Any sum recoverable under an insurance or contract of indemnity:
Taxes on income or profits levied in Nigeria or elsewhere. In case of tax
levied outside Nigeria on profits which are also chargeable to tax in Nigeria
and double taxation relief is not available, such tax will be an allowable
deduction:
Payments to unapproved pension, provident, savings or widows and orphans
society, fund or schemes:
Depreciation of any asset (capital allowances are granted instead):
All appropriations for profit: namely, dividends: general provision for bad
and doubtful debts, write off of preliminary and formation expenses and
13
expenses on issue or redemption of shares and other securities, etc. Preproduction expenses to the extent to which they are not of capital nature will
be allowable deduction as such have been incurred for the purpose of
producing the company's profit:
Question 2
AKC. Kosky consult carry on cold-room business for many years. The follow relate
to the company statement of profit or loss for the year ended 30th November, 2019.
N
Gross profit
profit on sales of Non-Current Assets
Dividend received (gross)
Rent received (Gross from Rayzen LTD)
Betting winning
interest received
Rent paid
Business name sign
wages and salaries
Lighting
Traveling
Rates
Repairs to premises
Depreciations
Bad debt
Income Tax provisions
Stationery
Posting and Telephone
Legal expenses
General expenses
Cost of patent
Cold-room expansion
Net profit
N
2,172,000
72,000
168,000
144,000
57,600
14,400
2,628,000
216,000
7,200
480,000
36,000
24,000
57,600
144,000
120,000
48,000
168,000
33,600
28,800
96,000
192,000
24,000
48,000 1,723,200
904,800
The following information in available for your reference in the computation of
adjusted profit.
a. Bad debts includes N21,600 written off on sales of stock
14
b. Cost of goods taken by Managing Director for personal use has been deducted
from the purchases in the trading Account. The selling price of the Good was
N4,800. The business prices it goods at cost plus 25%.
c. Legal expenses include N24,000 for acquisition of new lease, N12,000 for
renewal of old lease and N12,000 for debt recovery.
d. Kola, the managing director resides in the business premises.
e. General expenses includes:
Repairs to cold-room
Kola's private use vehicles
Fine on kola's traffic offence
Fine on employees traffic offence
Trade magazines
Other magazines
wedding gift to staff
interest on bank loan for manufactured Export
Donation to Omupo Social Club
Christmas gift (drinks)
Director private holiday hotel Bills
N
8,400
2,400
1,200
720
480
360
1,200
1,200
7,200
2,280
9,600
f. Wages and salary include:
Remuneration for 2 directors
Contribution to Nation provident Fund
Salary for Director's House boy
N
38,400
48,000
7,200
g. Repairs to premises include:
Replacement of office stolen furniture
Provision of iron gate (office)
N
14,400
2,400
h. Omitted deductible expenses N19, 200
i. Interest received is from post office saving bank.
You are required:
Compute the adjusted profit for the relevant year of assessment
15
Solution to Question 2
Note:
i. Cost of gifts to a customers is generally allowed in computing adjusted profit
provided it incorporates element of advertisement and does not include food,
drink or cigarettes. This is not a specific provision of CITA rather it is a
convention evolved out of normal Inland Revenue practices.
ii. Betting winning are considered to be illegal earnings and therefore not liable
to tax. Likewise the losses incurred are also not allowable for tax.
iii. Any dividend received net of withholding tax shall be regarded as frank
investment income and shall not be charges to further tax.
iv. Any expenses incurred by the company in respect of benefit granted to Mr.
Kola the managing director are allowable expenses in computing the company
adjusted profit but are assessable as benefit in kind in the hand of MR. KOLA.
v. The profit on goods taken by managing director shall be subjected to tax since
the cost of the good has been subtracted from the purchase, then the profit
margin shall be computed as follow.
25
125
vi.
* N 4, 800. = N 960
The expenses to be allow for the purpose of computing adjusted profit must
be wholly, exclusively, necessarily and reasonably in arriving the company
profit.
AKC. Kosky
Computation of adjusted profit for the year 2020 year of assessment.
N
N
Net profit for the year
904,800
Add back: Non-allowable expenses
Depreciation
120,000
Income tax provision
168,000
Business name sign
7,200
Cold-room expansion
48,000
Cost of patent
24,000
Legal Expenses: acquisition of new lease
24,000
General expenses:
1,200
Fine on kola
720
Fine on employees
Other magazines
360
16
Christmas gift (drinks)
Donation to Omupo Social Club
Repairs to premises:
Replacement of office furniture
Provision of Iron Gate
Add back: Taxable profit;
Profit margin on Goods taken by Director
Deduct: Non Taxable income;
Profit on sales of Non-Current Assets
Dividend received (gross)
Betting winning
Interest received
Deduct: Allowable expenses omitted
Adjusted Profit.
2,280
7,200
14,400
2,400
419,760
960
960
72,000
168,000
57,600
14,400 (312,000)
19,200
(19,200)
994,320
Question 3
Joyous manufacture Nigeria limited carried out business of production and
distribution of plantain and Plantain ships, the company is highly experience in the
business and over the year the company are known for their major contribution to
the Nigeria economy as the company are the major exporter of plantain in Nigeria.
During the year 2020 and in the period of Pandemic (Covid 19), the company made
several effort to support both the state and federal government to combat the fight
against the Covid 19. Joyous limited spent several millions of naira on palliatives
donated to state and Federal government.
The abridged statement of profit or loss and other comprehensive income for the
year ended 301 December, 2020 are as follow.
Turnover
Cost of sales
Gross profit
Other income
N
102,500,000
78,250,000
24,250,000
1,750,000
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Deduct; distribution and administrative
expenses
Net profit
18,342,000
7,658,000
Additional information:
a. Other income include dividend received amounting to N1,500,000
b. Distribution and administrative expenses includes:
N
i. Depreciation
180,000
ii. Renewal of major equipment
1,985,000
iii. Interest of loan
1,345,000
iii. Donations
15,450,000
c. Includes in the donation is N11,400,000 donated to the state and federal
government during the COVID 19 pandemic while the other donation where
donated to the appropriate approved body by law.
Mr. shola who is the finance and account heads of Joyous limited is not sure the
position of the tax law in respect of the such donation to Government but he very
sure that the donation to the approved body is allow for tax computation.
The finance head has consult you as a tax consultant to advise him on the above
subject matter.
Require.
a. Explain the requirement of the tax law as in relation to Donation made by the
company in any particular year of assessment.
b. Ascertained the assessable profit of the company for 2021 year of assessment
Solution
a). In respect of the provision of Section 25 as amended Deductible donations
must satisfies the following condition among other things:
(a) For the purpose of ascertaining the profits or loss of any company for any
period from any source chargeable with tax under this Act, there shall be
deducted the amount of any donation made for that period by that company
to any fund, body or institution in Nigeria provided is donated to approve
body under the tax law.
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(b) Donation is allow only if, the donations are made out of the profits of the
company,
(c) Donation should not be expenditure of a capital nature.
(d) For any year of assessment amount donated shall not exceed an amount
which is equal to 10% of the total profit of company before deducting the
donation.
f. Donation made by companies in cash or kind to federal Government or State
governments is respect of any pandemic, natural disaster or other exigency
shall be allowed.
g. Donation in respect of any pandemic, natural disaster or other exigency so
contributed in any year of assessment shall be limited to 10% of assessable
profit after deduction of other allowable donations made by the company."
b).
Joyous manufacturing Nigeria limited
Computation of adjusted profit for year 2021 year of assessment
N
7,658,000
Net profit
Add: Non allowable expense
Depreciation
Renewal of major equipment
Donation to Government
Deduct: Non Taxable income
Dividend
Assessable profit.
180,000
1,985,000
10,567,700
12,732,700
(1,500,000)
18,890,700
Workings:
Donation disallowed:
Donation so contributed in any year of assessment for the purpose of pandemic shall
be:
Lower of:
Amount donated N11, 400,000
19
And 10% of assessable profit after all other allowable donation 10% * 8,323,000
= 832,300
Therefore; donation to be disallowed is N10,567,700 i.e. (11,400,000- 832,300)
Assessable profit after other allowable donations
N
Net profit
Add: Non allowable expense
Depreciation
Renewal of major equipment
deduct: non-taxable income
Dividend income
Assessable profit before donation for pandemic
N
7,658,000
180,000
1,985,000
2,165,000
(1,500,000)
8,323,000
Question 4
Desire trading company make up her account to 30 th September, annually. The
statement of profit or loss for the year ended 30th September, 2019 are shown below:
N
Gross profit
Miscellaneous Income
Legal and professional Charges
Audit Fees
Repairs and Renewal
Donation and subscriptions
Salaries and Wages
Directors emoluments
Defalcation and embezzlements
Interest and bank Charges
Bad and Doubtful debts
Depreciation
Motor Vehicles Expenses
Electricity and generator running Expenses
Rents and Rate
Miscellaneous expenses
Net profit
20
N
1,641,248
41,920
1,683,168
68,267
45,867
54,560
49,600
334,987
48,000
41,200
36,160
54,053
228,400
173,520
25,680
193,440
110,773 1,464,507
218,661
You are given the following additional information.
A. salaries and wages includes the following:
i. N10, 450 paid to the company’s former sales manager who was dismissed
for non-performance and malpractices. His contract was to expire the
following year.
ii. N250,450 represent the total basis salaries and wages for the year
B. Pension scheme contributions by employer and employees was 20% and 10%
respectively.
C. Miscellaneous income includes
N
Dividends received net
30,333
Profit or loss on disposal
11,587
41,920
D. Defalcation and embezzlement:
A director defrauded the company to the tune of N23, 000. The other
embezzlements were committed by junior staff.
E. Legal and professional Charges include
N
Debt collections
8,000
Renewal of Short term leases
3,200
Defence of traffic Offences
20,000
Land Acquisitions
20,000
Retainer fee
8,000
59,200
F. Miscellaneous expenses includes the following:
N
3,200
Court fine
Exchanges loss on transaction of intercompany balances
Exchanges loss on remittance
Office expenses
G. Donations and subscriptions include:
33,520
8,667
14,400
N
4,000
Lagos Chamber of Commerce
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Motor Boat Club
Polo Club
Political Parties
National Relief fund
F. Bad and doubtful debts figure consist of:
1,600
1,333
40,000
2,667
N
16,000
36,133
24,667
(6,747)
54,053
General provision
Specific provision
Bad debts written off
Bad debt recovered
You are require:
i.
ii.
Compute the adjusted Profit for the relevant year of assessment.
If the Capital allowance for the relevant year of assessment amount to N268,
695, compute the TOTAL PROFIT and Company income Tax base on the
profit for the 30th September, 2019.
Solution to Question 4
Notes;
I. Exchange loss on transaction of inter-company balances represents loss
on exchange resulting from conversion of foreign liability at rates
existing as at the statement of financial position date, whist exchange
loss on remittance is the difference between the book value of a foreign
liability on the date of settlement and actual amount at which the
foreign liability is eventually settled. The deference between the two is
that the formal loss is unrealized while the later id realized. The two
forms of exchange loss are allowed in the computation of adjusted
profit.
II. Defalcation and embezzlement are disallowed expenses if they are
cover under insurance policy. But if they are not cover under any
insurance policy it is only the Defalcation and embezzlement
committed by junior staff that will be allowed.
III.
The maximum allowable pension contribution for the computation of
adjusted profit is 25% of basic salary. Any excess contribution will be
disallowed.
Total contribution
30% * N250, 450 = 75,135
22
Maximum Contribution 25% * N250, 450 = 62,613
The excess contribution
12, 523
a).
Desire trading company
Computation of adjusted profit for the year 2020 year of assessment.
N
Net profit as per account
Add non- allowable expenses:
Depreciation
General provision for doubtful debt
Legal expenses:
Defense of traffic Offences
Land Acquisitions
Miscellaneous Expenses: court fine
Donation and subscriptions:
Motor Boat Club
Polo Club
Political Parties
N
218,661
228,400
16,000
20,000
20,000
3,200
1,600
1,333
40,000
Defalcation and embezzlement
Excess pension scheme contribution
23,000
12, 523
Deduct: Non Taxable income;
Profit on sales of asset
Frank Investment Income (Dividends net)
Adjusted profit
11,587
30, 333
366,056
(41,920)
542,797
b. Computation of Total Profit
N
Adjusted profit/Assessable profit
Capital allowance
Restricted to lower of:
i). 66 2/3 % of assessable profit (542,797 *0.6667)
ii). Total Capital Allowance for the year
Lower is Capital Allowance
23
N
542,797
268,695
361,883
268,695
(268,695) (268,695)
Capital allowance c/d
Total profit
Nil
274,102
Tax Liability (30% of TOTAL PROFIT)
82,231
Question. 5
Kosky North limited is a Nigeria company engaged in the manufacture of syntetic
materials for the year ended 31 December, 2018. The company’s accounts
disclosed a Net profit of N10 million after charging the following.
(i)
Staff/personnel cost
Rent paid on Managing Director
residential accommodation
Depreciation
Penalties & fine
N
2,000,000
3,000,000
1,000,000
200,000
(ii) Included in other income were Loan payable (both interest and Principal)
which was waived to the company.
N
Loan principal
850.000
Accumulated interest on loan
180,000
Total
1,030,000
Additional information
1. An amount equal to N450,000 which was previously expensed on repair and
maintenance on one of the company major equipment, was refunded to the
company during the year as it cover by the warranty policy of the company
that sold it.
2. Agreed capital allowance is amounted to N 1,250,000
3. Unrelieved losses brought forward is N 550,000
You’re required:
i.
ii.
Compute the adjusted profit for the relevant year of assessment
Compute the Total profit for the relevant years of assessment.
24
Solution
i.
Computation of adjusted profit and total profit.
N
ii.
Net profit f
Add Non allowable expenses
Depreciation
Penalties & fine
Less: Non Taxable income:
Loan principal waived
Add taxable income omitted
Adjusted profit
Computation of Total profit.
Unrelieved losses b/f
1,000
200
N
10,000
1,200
(850)
450
10,800
(550)
10,250
(1,250)
9,000
Capital allowance
Total profit
Question 6
Raysen consult limited has been in production and distribution business for many
years. The company make up her account to 30th April, each. The following is the
company statement of profit or loss account for the year ended 30th April, 2019.
Gross profit
Sundry income
Rent and rate
Repairs and maintenance
Legal and professional fees
Donations and subscriptions
Advertising and sales promotion
Bad and doubtful debt provision
Directors fees and expenses
provision for stock obsolescence
loan interest
Traveling expenses
Sundry expenses (all allowable)
Depreciation
Salaries and wages
Net profit before tax
12,600,000
126,000
12,726,000
1,512,000
210,000
350,000
182,000
700,000
980,000
406,000
2,100,000
532,000
448,000
98,000
1,834,000
2,122,400 11,474,400
1, 251,600
25
You are given the following additional information.
1. Sundry income includes N 70,000 being dividend from pioneer company and
N42,000 being profit on sale of a building
2. The figures for repairs and maintenance include normal repairs of fencing gate
for office at N56,000
3. Legal and professional fees include:
Debt collection
28,000
Renewal of Short lease
14,000
Successful defense for traffic offence
Charge
5,600
Retainer fee
42,000
Acquisition of building
16,800
4. Donations and subscriptions include:
Manufacturing Association of Nigeria 14,000
Lagos Chamber of commerce
28,000
Uroma Social Club
5,600
Talakawa Political Party
2,800
Institute of Chartered Accountants of
Nigeria
2,800
5. Bad and doubtful provision is stated net of recoveries and includes a general
provision of N420,000
6. The tax written down value of the company’s asset as at 30 th April, 2018, are
as follows.
Furniture
560,000
3years
Office building
980,000
6year
Motor Vehicles
420,000
2years
th
During the year ended 30 April 2019 the following asset were purchased.
Office building
Motor Vehicles
1,400,000
140,000
7. Unrelieved capital allowance brought forward from the preceding year
amount to N4,200,000
You are required to compute the Adjusted Profit, Capital allowances and Tax
payable by Raysen consult limited stating clearly the year of assessment.
26
Solution to question 6
Raysen consult limited
Computation of adjusted profit for 2020 year of assessment.
Net profit before tax
Add: non-allowable expenses;
depreciation
Bad and doubtful debt; General
Legal and professional fee;
Traffic offence Charges
Acquisition of building
Donation and subscriptions;
Manufacturing Association of Nigeria
Uroma Social Club
Talakawa Political Party
Repairs and maintenance; Fencing of gate
Provision for stock Obsolesces
1,251,600
1,834,000
420,000
5,600
16,800
14,000
5,600
2,800
56,000
2,100,000
Deduct: Non- Taxable income;
Dividend from pioneer company
Profit on sales of building
Adjusted profit.
70,000
42,000
4,454,800
(112,000)
5,594,400
Computation of total profit for 2020 year of assessment.
Adjusted profit/assessable profit
Capital allowance:
C.A b/f
C.A for the year;
Initial Allowance
Annual Allowance
Total Capital allowance
Relief for the year
Unrelieved C/F
Total Profit
5,594,400
4,200,000
280,000
696,500
4,896,500
(4,896,500) (4,896,500)
nil
697,900
27
Company Income Tax
Education tax
Total Tax payable
30%*697,900
2%*5,594,400
209,370
111,888
321,258
Computation of capital allowance for 2020 year of assessment.
Initial Allowance
25%
15%
50%
annual allowance
20%
10%
25%
Furniture
Office
building
Motor Vehicles
Capital
allowance
N
N
N
N
560,000
980,000
420,000
Additional Cost
Initial Allowance
-
1,400,000
(210,000)
140,000
(70,000)
280,000
Annual allowance
(186,667)
(282,333)
(227,500)
696,500
373,333
1,887,667
262,500
TWDV b/f
TWDV c/d
Computation of A.A
Furniture
Annual allowance
Office building
N
Motor Vehicles
N
N
old asset
π‘‡π‘Šπ·π‘‰
remaining years
560,000
3
186,667
-
-
π‘π‘œπ‘ π‘‘−𝐼.𝐴
New asset no.of years
Annual Allowance
980,000
6
1,400,000 − 210,000
10
186,667
163,333
119,000
420,000
2
140,000 − 70,000
4
282,333
Question 7
Pappy Nigeria Limited is a company engage in construction business for many years
and the company incorporated in Nigeria. The detailed of the statement of profit or
loss account for the year ended 31st December, 2019 is as follows:
N'000
Value of work done
Miscellaneous income
28
N'000
6,111,852
1,077,394
7,189,246
210,000
17,500
227,500
Salaries and wages
410,140
Transport and freight
86,460
Repairs and Maintenance
5,908
Hire Equipment
30,294
Rent of warehouse
78,006
Insurance and license
175,646
Traveling expenses
56,904
Stationery and services
20,818
Canteen expenses
24,820
Postages and telephone
15,130
Medical expenses
13,786
Professional Charges
27,042
Directors' fees
37,500
Accountancy fees
15,000
Bank Charges and interest
1,082,596
Depreciation of non- current asset
148,716
Tender expense
32,072
loss on foreign exchange
367,286
Direct materials
37,972
Fuel and oils
86,866
Test and technical radiograph
496
Decrease (increase ) in W.I.P
4,153,120 (6,906,578)
Net profit
282, 668
The following information is also relevant.
a. Tax deducted at source from rental income which forms part of the
miscellaneous income amounted to N71,947,500
b. Tax written down value of asset disposed of was N176,677,500 and sale
proceeds amounted to N380,628,000
c. Only of the amount charge as professional charges has been agreed to be
admissible for tax purposes N15,942,000
d. Total Capital allowance for the year amounted to N204,900,000
e. Unutilized capital allowance brought forward from the immediate preceding
years amounted to N536,226,000
Required:
a) Compute the Adjusted Profit, Total profit and tax liability of Pappy Nigeria
Limited for the relevant year of assessment.
b) Explain the concept of “Wholly, Reasonably, Exclusively and Necessarily”
29
Solution to question 7 (a)
N'000
Net profit
Add back: Non allowable expenses;
Depreciation
Professional Charges (27,042,000-N15,942,000)
Adjusted profit/Assessable profit
Add: Balance Charges
Less: Capital Allowance
C.A b/f
C.A for the year
Total capital Allowance
Relieved for the year
Unrelieved C/F
Total Profit
C.A. Restricted to Lower of:
i. 66 2/3 of Assessable profit (0.6667*442,484)
ii. Total Capital allowance for the year
148,716
11,100
295,004
741,126
105,429.3
(71,948)
33,481.3
8,849.68
42,330.98
380,628
176,678
203,951
30
159,816
442,484
203,951
646, 435
536,226
204,900
741,126
(295,004) (295,004)
1,036,130
351,431
Company Income Tax (30% * 351,431)
Withholding Tax on Rent
Company Income Tax Payables
Education Tax (2% of 442,484)
Total Tax Payable
Workings.
1). Balancing Adjustment
Sales processed
TWDV
Balance Charges
N'000
282,668
7(b)
I. Wholly: this means that the expenditure was incurred only for the purpose of
the business
II. Reasonably: the expenditure must be moderate, right and acceptable and not
excessive, having regard to the particular circumstance.
III. Exclusively: the purpose for which the expenditure is made must be directly
in pursuance of the income or profit, where there is more than one purpose
apportionment must be made
IV. Necessarily: the expenditure must be mandatory or critical for the purpose
of producing the income.
31
TAXATION OF BUSINES AND INVESTMENT INCOME.
(COMPANY INCOME TAX. Basis of assessment)
Summarized note:
Bases of assessing company to tax.
In assessing company to tax, the tax authority must refers to the basis period.
Basis period: means a period of time in the life of a company. It is an accounting
period which is related to any particular years of assessment. All taxable
profit/income fallen within this period shall be assessed to tax as may be appropriate.
Ascertainment of assessable profit.
Basis for computing assessable profit (sect. 29 as amended)
1. The assessable profit of any company for each year of assessment from such
source of its profits shall be the profit of the accounting period immediately
preceding the year of assessment from each source.
2. When the board is satisfied that a company has made or intends to make up
accounts of its trade or business to someday other than the 31st December, it
may direct that the assessable profits of that company shall be computed on
the amount of the profits of the year ending on that day in the year preceding
the year of assessment.
New Trade or Business (old rules)
3. The assessable profit of any company for the first year of assessment and the
two following year of assessment (that its: “the first year”, “the second year”
and “the third year”) shall be ascertained in accordance with the following
provision:
a) For the first year, the assessable profit shall be the profits from the date
in which it commenced to carry on such trade or business in Nigeria to
the end of its first accounting period.
b) For the second year, the assessable profit shall be the profits from the
first day after it first accounting period to the end of its second
accounting period.
c) For the Third year and each subsequent year, the assessable profit shall
be the profit from the day after the accounting period just ended.
32
Cessation of business (old rules)
4. Where a company permanently cease to carry on a trade or business in an
accounting period, its assessable profit therefrom shall be the amount of the
profits from the beginning of the accounting period to the date of cessation
and the tax thereof shall be payable within six months from the date of
cessation.
Let quickly take a look at the interpretation of the above income tax law in relation
to the basis of assessment with some practical illustrations.
Old Business: (section 29(1)
Illustration 2.5
Mr. Omi Ekoro Limited has being in business for many year and the company make
up account to 31st December each years. The following relate to the company
adjusted profit for the recent years.
N’000
25,000
45,000
50,500
st
31 December, 2017
31st December, 2018
31st December, 2019
You are required:
Compute the Assessable profit for the relevant years of assessment.
Solution to Illustration 2.5
I think it will be very wise for me to analyses the accounting period first;
Analysis of accounting Date:
Account year Account periods
No of month Adjusted profits
N’000
2017
1/1/2017 – 31/12/2017
12
25,000
2018
1/1/2018 – 31/12/2018
12
45,000
2019
1/1/2019 – 31/12/2019
12
50,500
Let us now determine the basis period for which this company will be assessed to
tax in each year of assessment.
33
Basis Period shall be
assessment
Year of assessment
2018
2019
2020
the accounting period immediately preceding the year of
Basis period
1/1/2017 – 31/12/2017
1/1/2018 – 31/12/2018
1/1/2019 – 31/12/2019
Computation of assessable profit.
Remember, the assessable profit of any year of assessment shall be the profit of the
accounting period immediately preceding the year of assessment from each source.
Okay?
Therefore, the assessable profit shall be computed as follow:
Year of assessment
2018
2019
2020
Basis period
Assessable Profit
N’000
1/1/2017 – 31/12/2017 25,000
1/1/2018 – 31/12/2018 45,000
1/1/2019 – 31/12/2019 50,500
Old Business: section 29(2)
Illustration 2.6
A.K.C kosky consult LTD has been in business for many years. The company
make up its accounts to August each year.
The following are the adjusted profits for tax purposes.
N’000
16,000
20,000
28,000
st
31 August, 2017
31st August, 2018
31st August, 2019
Required;
Compute the assessable profit for the relevant years of assessment.
Solution to Illustration 2.6
Tutorial note:
Section 29 (2) state that, when the board (FIRS) is satisfied that a company has made
or intends to make up accounts of its trade or business to someday other than the 31st
December, the assessable profits of that company shall be computed on the amount
of the profits of the year ending on that day in the year preceding the year of
assessment.
34
What this law simply mean is that when the company accounting year end is not 31 st
of December, company cannot be assessed to tax in that particular year in which the
accounting year end occur.
So let proceed to solve the above question;
Analysis of accounting date
Account year Account periods
2017
2018
2019
No of month Adjusted profits
N’000
12
16,000
12
20,000
12
28,000
1/9/2016 – 31/8/2017
1/9/2017 – 31/8/2018
1/9/2019 – 31/8/2019
The relevant years of assessment and their basis period are:
Years of assessment Basis periods
2018
1/9/2016 – 31/8/2017
2019
1/9/2017 – 31/8/2018
2020
1/9/2019 – 31/8/2019
Computation of assessable profit.
Year of assessment
Basis period
2018
2019
2020
1/9/2016 – 31/8/2017
1/9/2017 – 31/8/2018
1/9/2019 – 31/8/2019
Assessable Profit
N’000
16,000
20,000
28,000
Basis of assessment for new trade or business section 29(3)
Once upon a time, new companies in Nigeria paid taxes twice on the same profits.
This unique tax provision, known as the commencement rule, applied to only new
businesses in the first three years of operation. The three years of assessment will
have two overlapping basis periods as below.
1st year – Date of commencement of business to 31 December of the same year
2nd year – First twelve months from the date of commencement of business
3rd year – Twelve-month accounting period ended in the preceding year of
assessment
35
However, the rule missed the mark in simplifying the procedures for tax compliance.
Taxpayers in Nigeria can now bid farewell to the era of commencement rule with
the introduction of the Finance Act 2019.
Effective from 13th January 2020, commencement rule will no longer apply to new
companies in Nigeria. This is in line with the Finance Act 2019.
Introduction
This Information Circular provides clarification on the administration of the various
amendments to relevant tax laws with respect to commencement & cessation.
(Sections 29 (3) & (4) of Companies Income Tax Act (CITA)
Commencement of Trade or Business
Section 29(3) of CITA is amended to eliminate the occurrence of overlap of basis
period upon commencement of trade thereby ensuring that the profits of a particular
year are only assessed to tax once.
Basis of Assessment for Commencement of Trade or Business
Section 29 of CITA, as amended, clearly provides that the basis of taxation is the
preceding year basis (PYB). As such, the income of a given year is assessed to tax
in the immediate following year of assessment.
INFORMATION CIRCULARNO: 2020/06 Publication Date: 29th April 2020
First Year of Assessment
Section 29(3)(a) of CITA provides thus: “for the first year, the assessable profits
shall be the profits from the date in which it commenced to carry on such trade or
business in Nigeria to the end of its first accounting period”.
This provision indicates that a company shall not be assessed to tax (on the basis of
the actual profit) in the year in which it commenced business. The profits of the first
accounting period is assessed to tax in the year of assessment immediately following
the year in which it commenced business. (PYB)
Illustration 3.7
A company commenced business on 1st July 2020 and makes up its accounts to 31st
October.
Solution to illustration 3.7
The first Assessment Year is 2021 and profits to be assessed are;
YOA: Basis Period
2021
1st July, 2019 – 31st October 2020
36
Illustration 3.7
A company commenced business on 1st January 2019 and makes up its account to
31st December.
Solution to illustration 3.7
The first Assessment Year is 2020 and profits to be assessed are;
YOA: Basis Period
2020
1st January 2019 – 31st December, 2019
Illustration 3.8
A company commenced business on 1st April 2019 and company makes up its
account to 31st March.
Solution illustration 3.8
The first Assessment Year is 2021 and profits to be assessed are;
YOA: Basis Period
2021
1st April 2019 – 30st March 2020
Second Year of Assessment
The Act stipulates that “for the second year, the assessable profits shall be the
profits from the first day after its first accounting period to the end of its second
accounting period”.
Consequently, the profits assessable to tax in the second year of assessment shall be
the profits arising in the second accounting period only, that is, the accounting period
immediately following that of the year of commencement.
Illustration 4.9
A company commenced business on 1st July 2020 and makes up its account to
31st October.
Solution to illustration 4.9
The first Assessment Year is 2021 and the second Assessment Year is 2022 and
profits to be assessed are;
YOA: Basis Period
2021
1st July 2020 – 31st October 2020
2022
1st November 2020 to 31st October 2021.
Third Year of assessment
The Act provides that “for the third year and for each subsequent year, the
assessable profits shall be the profits from the day after the accounting period just
ended.”
37
That is, the profits of the accounting year immediately preceding the year of
assessment.
Illustration 5.10
A company commenced business on 1st July 2020 and makes up its account to
31st October.
Solution to illustration 5.10
The first Assessment Year is 2021, the second Assessment Year is 2022 and the third
Assessment Year is 2023 and profits to be assessed are;
YOA: Basis Period
2021
1st July 2020 – 31st October 2020
2022
1st November 2020 to 31st October 2021.
2023
1st November 2021 to 31st October 2022.
Transitional provision:
Some major issue to be considered is a company that did not commenced in 2020,
but which has commenced since 2018 or 2019.
First categories of companies;
A company that Commenced business between January 2019 and January 2020 and
yet to file any tax return. The new basis periods for the first year of assessment
(YOA) will be as follows.
Illustration 5.11
Pualo LTD commenced business on 1st June 2019. Accounting year-end is 30th
November.
Solution to illustration 5.11
YOA: Basis Period
2020
1st June, 2019 – 30th November 2019
Illustration 5.12
Iya Eji Limited supplier and distributor of PUKURU, the company commenced
business in 1st October 2019. The accounting year-end is June.
Solution to illustration 5.13
YOA: Basis Period
2021
October 2019 – June 2020
38
Illustration 5.14
Wonubabie ltd commenced business in January 2020 while the financial statements
cover the period ended July.
YOA: Basis Period
2021
1st January,2020 – 31st July 2020
Second categories of companies
Company that commenced in 2019 and prepared the first set of financial statements
for more than 12 months and has not filed any tax return.
Determination of the End of First Accounting Period
The determination of the first year of assessment and the relevant basis period shall
be based on the company's accounting year-end. Therefore, the first accounting
period of a company is the date of commencement to the end of its first accounting
year-end.
Where a company submits financial statement for a period shorter or longer than the
first accounting period, the assessable profits for the first accounting period shall be
ascertained (on pro-rata basis) up to the indicated accounting year-end.
NOTE:
There will not be gap of basis period where the profits of all the relevant years are
computed in line with the new provisions.
There may be a gap (of YOA) between the first and second years of assessment due
to transitional issues.
Illustration 5.15
AANU my friend Limited was incorporated in July 2019 and commenced business
on 1st September 2019. The Company prepared its first set of financial statements
covering 16 months ending 31st December 2020.
Solution to Illustration 5.15
The company’s first accounting year end is December 2019 and not December
2020.
Therefore its first Year of Assessment is 2019 which falls under the old provision.
The second Assessment Year is 2021 which falls under the new provision.
39
The third Assessment Year is 2022 and profits to be assessed are;
YOA: Basis Period
2019
1st September 2019 to 31st December 2019
2021
1st January 2020 to 31st December 2021.
2022
1st January 2021 to 31st December 2022.
There was a gap between 2019 (1st YOA) and 2021 (2nd YOA). The gap was not a
gap of “basis period” but a gap of YOA. This means the company has no CIT returns
for 2020 YOA.
Illustration 5.16
Upcoming Chartered Accountant Plc. started operations on 1st June 2019. The
Company prepared its first set of financial statements for 18 months. Therefore, the
accounting year-end will be 30th November, 2020.
Solution to illustration 5.17
It should be noted that the first account year end is not 30th November, 2020 but
30th November, 2019. Therefore, First YOA will is 2019 while the Second YOA
will be 2021 and the third YOA will be 2022
YOA:
2019
2021
2022
Basis Period
1st June 2019 to 31st November 2019
1st December 2019 to 31st November 2020
1st December 2020 to 31st November 2021
Upcoming Chartered Accountants plc will have a gap in one YOA (between 2019
and 2021), and there will be no CIT returns for 2020 YOA.
Third categories of companies:
The company which has commenced business since 2018 must have applied the old
commencement rule for the first and second year (i.e. 2018 and 2019).
Then how will the company transit to the new rule in 2020 year of assessment?
NOTE:
There will not be any overlap of basis period where the profits of all the relevant
years on commencement are computed in line with the new provision.
However, there may be an overlap of basis period in the third year of assessment due
to transitional issues. As such, overlap of basis period may only occur in the third
year of assessment for a company that commenced business in 2018.
40
Illustration 5.18
A company commenced business on 1st July 2018 and makes up its account to
31st October.
Solution to illustration 5.18
The company’s first and second Assessment Year will falls under the old provision
While the third Assessment will be subjected to new provision and profits to be
assessed shall be as follows:
YOA
Basis Period
Rule
st
First YOA (2018):
1 July, 2018 to 31st December 2018
Old
Second YOA (2019):
1st July 2018 to 30th June, 2019
Old
Third YOA (2020) PYB:
1st November 2018 to 31st October 2019 New
An overlap occurs in 1st Nov 2018 – 30th Jun 2019 due to transition.
Illustration 5.19
Adu My Man Plc started operations in March 2018. The accounting year-end is
December.
Solution to illustration 5.19
YOA
First YOA (2018):
Second YOA (2019):
Third YOA (2020) PYB:
Basis Period
March 2018 – December 2018
March 2018 – February 2019
January 2019 – December 2019
Rule
Old
Old
New
Overlapping basis period from March to December 2018 in the first and second
YOA. The third YOA is already on a PYB. Which also result to overlapping period
in January 2019 to February 2019.
Illustration 5.20
GPA Company Limited commenced in June 2018. Accounting year-end is
November.
Solution to illustration to 5.20
YOA
First (2018):
Second (2019):
Basis Period
June 2018 – December 2018
June 2018 – May 2019
41
Rule
Old
Old
Third (2020 – PYB): December 2018 – November 2019
New
Overlapping basis period from June to December 2018 in the first and second YOA.
The third YOA is already on a PYB. Which also result to overlapping period in
December 2018 to May 2019.
Cessation of Business
Section 29(4) of CITA provides that:
“Where a company permanently ceases to carry on a trade or business (or in the case
of a company other than a Nigerian company, permanently ceases to carry on a trade
or business in Nigeria) in an accounting period, its assessable profits therefrom shall
be the amount of the profits from the beginning of the accounting period to the date
of cessation and the tax thereof shall be payable within six months from the date of
cessation.”
Basis of Assessment
Based on the above provision, a company that permanently ceases operation must
file tax returns for the year of cessation within six months. The due date of filing
may fall in the year of cessation or in the year following the year of cessation
depending on the date on which the company ceased operation in the year. If the
Company ceased operations between January and June, returns would be filed and
payment made in that year of cessation. However, if it ceased operations between
July and December, filing of tax returns and payment of tax due would fall into the
following year.
There is the possibility of filing tax returns of two years of assessment in the year of
cessation. Where this occurs, the company must file the outstanding tax returns in
addition to those arising upon cessation of business.
Illustration 5.20
XYZ Nigeria makes up its account to 31st December and permanently ceased
operation on 30th April 2020.
Solution to illustration 5.20
The relevant years of assessment and the due
follows:
YOA
Basis Period Due
2020
1/1/2019-31/12/2019
2020
1/1/2020-31/04/2020
42
date for payment of tax due are as
Date of Payment
30th June 2020 (PYB)
31st October 2020 (cessation)
In the above scenario, the company would file tax returns twice in the same year –
one based on the normal preceding year basis (PYB) and the other being cessation
returns.
Illustration 5.21
XYZ Ltd makes up its account to 31st December and permanently ceased operation
on 31st July 2020.
Solution to illustration 5.21
The relevant years of assessment and the due date for payment of tax due are as
follows:
YOA Basis Period
Due Date of Payment
2020
1/1/2019 – 31/12/2019 30th June, 2020 (PYB)
2021
1/1/2020-31/07/2020
31st January 2021 (cessation assessment)
In the above scenario, the cessation returns fall into the year following the year of
cessation.
I hope we have clear your concerned about the application of new tax provision in
relation to company income tax as amended by Finance bill 2019 and I believed your
confidence level have increased. So, let take a look at some comprehensive
questions. Are you ready?
Question 6.22
Akc Kosky consult limited incorporated on 31st September, 2018 but did not start
operation until 1st March, 2019. The company engaged in merchandizing of building
materials. The accounting report for the first 18th month of operation are as follows;
Statement of profit or loss account for the year ended 31 August, 2020.
N 000
Net profit per account
17,860
After charging
Depreciation
1,798
Loss on sales of Non- current assets
705
Loan interest
5,640
And crediting
Franked investment income
1,410
Bank Deposit interest (gross)
10,575
Note: capital allowance Claimed by the company N2,350,000.
43
The managing Director of Akc kosky consult is aware that the tax provision in
relation to determination of basis of assessments have been change by the reason of
2019 financial bill act. But he does not have deeper knowledge of the extant tax law.
The managing director has approach you as a tax consultant to advise him on how
the profit from the first set of account will assessed to tax for the relevant year of
assessment.
You are required
a. Compute the adjusted profit.
b. Advice the company on the relevant year of assessment and the tax
implication for prepared the first set of financial statements for more than 12
months in relation to the company that just commenced business.
c. Determine the Total profit and tax liability for relevant years of assessment
Solution to question 6.22
a. Computation of adjusted profit.
N’000
Net profit per account
Add non-allowable Expenses
Depreciation
Loss on sales of Non- current assets
Less Non-taxable income
Franked investment income (Divided)
Adjusted profit.
N’000
17,860
1,798
705 (2,503)
1,410
1,410
16, 767
b. Section 29 (3) as amended,
when company commence a business and decided to prepare its first set of financial
statement for a periods more than 12 months, the basis period for the first year of
assessment for tax purpose, shall be ascertained (on pro-rata basis) up to the
indicated accounting year-end.
Therefore its first Year of Assessment is 2019 which falls under the old provision.
The second Assessment Year is 2021 which falls under the new provision.
Year
of
assessment Basis period
2019
1/3/2019 – 31/8/2019
2021
1/9/2019 – 31/8/2020
44
The tax implication is that, there will be a gap in year of assessment and the
company will not fill for tax return in 2020 year of assessment.
c. Computation of tax liability.
Note: in determine the tax liability let first determine the assessable profit for each
year of assessment
Analysis of accounting period
Accounting
Year
Accounting period
2019
No. of
month
1/3/2019 – 31/8/2020
Adjusted
profit
N’000
16,767
18
Computation of Assessable profit (Commencement rule)
YOA Basis period
2019
1/3/2019 – 31/8/2019
2021
1/9/2019 – 31/8/2020
Working
6
18
12
18
* 16,767,000
Assessable profit
N
5,589,000
* 16,767,000
11,178,000
Computation of total profit and Tax Liability for the relevant year of assessment
2019 year of assessment;
Assessable profit
Capital allowance
Relief for the year
Total profit
Assessable Tax (30% * 3,239,000)
Education tax (2% * 5,589,000)
N
5,589,000
2,350,000
(2,350,000) (2,350,000)
nil
3,239,000
971,700
111,780
2021 year of assessment;
Assessable profit
Capital allowance
Relief for the year
N
11,178,000
nil
nil
45
-
Total profit
Assessable Tax (30% * 11,178,000)
Education tax (2% * 11,178,000)
11,178,000
3,353,400
223,560
Question 6.23
Success is sure after COVID 19 ltd has been in business for many years making up
its accounts to 31th December each year, due to outbreak of Covid 19 in the year
2020, the business activity were severely affected, the company decided to close
down. The company is contemplating which date between 30th June, 2020 and 3st1
august 2020 should be adopted as the cessation date.
Adjusted profits were as follows:
N
Year ended 31th December, 2018
1,250,000
Year ended 31th December, 2019
1,850,000
8 months ended 31th August 2020
450,000
Note; the profit accrued evenly throughout the year.
You are required to compute:
a. The chargeable profit and tax liability for each relevant year of assessment
bases on the proposed two date.
b. Advise the company the tax implication of the proposed two date.
Solution to question 6.23
Analysis of Accounting period
Accounting year
Accounting periods
2018
1/1/2018 – 31/12/2018
2019
1/1/2019 – 31/12/2019
2020
1/1/2020 – 30/8/2020
No of month
12
12
8
N
1,250,000
1,850,000
450,000
Computation of assessable profit for relevant year of assessment.
YOA
Basis period
Workings
2019
2020
1/1/2018 – 31/12/2018
1/1/2019 – 31/12/2019
Cessation (30th June, 2020)
2020
1/1/2020 – 30/6/2020
6
8
* 450,000
46
Assessable
profit
1,250,000
1,850,000
Tax payable
30%
375,000
555,000
337,500
101,250
Cessation (3st1 august 2020)
2021
1/1/2020 – 31/8/2020
8
8
* 450,000
450,000
135,000
The tax implication:
Section 29(4) of CITA provides that:
“Where a company permanently ceases to carry on a trade or business (or in the case
of a company other than a Nigerian company, permanently ceases to carry on a trade
or business in Nigeria) in an accounting period, its assessable profits therefrom shall
be the amount of the profits from the beginning of the accounting period to the date
of cessation and the tax thereof shall be payable within six months from the date of
cessation.”
Therefore, if 30 June is selected as the cessation date, the company must pay on or
before 31st December 2020, that mean the company will fill in two tax return in the
2020 year of assessment, one for PYB and other for cessation.
On the other way round if the company select 31 August, 2020 the tax is payable on
or before 28 February, 2021. That the company can fill one return for 2019 the
normal assessment and other in 2021 for cessation.
Question 6.25
Israel Limited has been in operation for many years, making up its accounts to 31st
December each year. Due to outbreak of Covid 19 during the year 2020, it decided
to cease operations on 31st may, 2020. The unutilized capital allowance which is
within 5 years was N1,143,750. The company has made claim for the capital
allowance to be carried back
Below are some adjusted are some information extracted from his record:
31st September, 2018
31st, September, 2019
31st May, 2020
Adjusted profit
N
686,250
533,750
381,250
A debt which was previously considered bad amounting to N 91,500 was recovered
by the liquidator of the company from a debtor on 30 November, 2020.
47
Required
a. Compute the assessable profit for all the relevant tax years
b. Show the agreed capital allowance rolled back
c. Show the total profit of the relevant years of assessment
Solution to question 6.25
a. Computation of assessable profit.
Assessable
YOA
Basis period
profit
2019
1/10/2017- 31/9/2018
686,250 Old rule
2020
1/10/2018- 31/9/2019
533,750 New rule
2020
1/10/2019- 31/5/2020
472,750 Cessation (new rule)
Note: any money received or pay after the company have ceases shall deemed to
be pay or received as the date of cessation and will be charge to tax accordingly
Assessable profit for the year of cessation
N
Adjusted profit
381,250
Bad debt recovery
91,500
Total assessable profit
472,750
b. Capital allowance to be rolled back.
Any unutilized capital allowance in the year of permanent cessation of
business is available for relief against the remainder of its profit on 5 years
before the cessation.
Capital allowance to be rolled back
2020 YOA
Assessable profit
Capital allowance
Unutilized capital allowance
48
N
472,750
(1,143,750)
(671,000)
c. Total profit for the relevant year of assessment
N
472,750
2020 YOA (cessation)
Assessable profits
Capital allowance
Relieve
Unrelieved capital allowance
Total Profit
1,143,750
(472,750)
671,000
(472,750)
Nil
2020 YOA (PYB)
Assessable profits
Capital allowance Rolled back
Relief
Unrelieved capital allowance
Total Profit
533,750
671,000
(533,750)
137,250
(533,750)
Nil
2019 YOA
Assessable profits
Capital Allowance Rolled Back
Relief
Unrelieved capital allowance
Total profit
686,250
137,250
(137,250)
Nil
(137,250)
549,000
49
Loss relief.
Question
In arriving at the chargeable profits of a company, if any, brought forward from the
preceding years of assessment are to be deducted. However, some certain provision
of the law is apply to the corporate taxpayers in relation to loss relief procedures.
Required:
i)
Discuss the types of loss reliefs and the feature of each types of loss
relief.
ii)
Discus the rules applicable to losses incurred with reference to the
companies income tax.
Solution
Current year loss relief
This is one of the methods of relieving losses. In this case, losses incurred from a
particular source of income can be relieved against t other sources It is applicable
to only individuals. The following features are common to it;
a) In order to enjoy this relief, a written claim must be made within 12 months
after the end of the year of assessment in which the loss arises.
b) It is important to note that the current year loss relief is applicable to a loss
incurred only in the first year.
c) Any unrelieved loss can only be set off against profit from the source from
which the loss was incurred.
Carry forward loss relief
This is available to all taxpayers (individuals and companies). The features of this
type of relief are as stated below
a) There is no need for a written application by the taxpayer as it is
automatically granted to them;
b) The relief is granted on preceding year basis;
c) The loss of a source of income is relievable against future income earned
from the same source of income, and
d) The loss of a source of income shall be available for relief against future
profit from the same source of income until it is fully relieved.
B. Rules applicable to losses incurred by companies. Essentially, includes the
followings:
50
a) In no circumstance shall the amount to be relieved exceed the total amount
of the loss incurred;
b) losses can be carried forward indefinitely and relieved against future profits;
c) Relief can only be against profits from the same trade or business in which
the loss was incurred;
d) The loss available for relief should be computed on the same basis as that of
assessable profit, for a year of assessment; and
e) The amount of the loss to be allowed should be that which the Revenue
Service is satisfied as having been incurred by the company in a trade or
business during a preceding year of assessment (Section 27(2) (a)). The
reference to preceding year in the wordings of that Section of CITA means
logically current year losses cannot be relieved since the company must
make profits in order to do so
51
Comprehensive questions on the computation of
companies’ income Tax.
All the question in these section are detailed question on any aspect of computation
of company income tax. It should be noted that question on company income tax
cover a wide range of the syllabus i.e. Basis of assessment, Loss relief, capital
allowance, Tax audit and investigation, Adjusted profit/assessable profit, Total
profit, Objection and appeal procedure and Method of assessment such as selfassessment, Minimum Tax, Divided method and turnover basis method.
The bellow questions should be study carefully,
Question 1
The following information relates to Easy life LTD for year ended 31 December,
2019
N
N
Revenues
406,500,000
Cost of sales
(201,780,000)
Gross profit for the year
204,720,000
profit on sale of fixed assets 37,500,000
Dividend received
1,912,500
39,412,500
244,132,500
Depreciation
16,162,500
Legal Expenses
14,052,000
Provision for doubtful debts 2,272,500
Audit fees
5,400,000
Salaries and wages
2,130,750
Administration Expenses
29,265,000
Plant maintenance expenses 6,120,000
Utilities
10,674,000
Stationary
1,800,000
Subscription and donations 17,185,500
Repairs of vehicles, offices 19,476,000
Rent and Rates
13,125,000
Fuel and lubricants
7,875,000 (145,538,250)
Net profit
98,594,250
The note to the accounts of the company showed the following details and
breakdowns:
52
a. The sales proceed of the Fixed asset that was disposed during the year is
N42,580,000. The original cost of the asset is N52,850,000 with Tax written
down Value of N28,670,000
b. The following Qualifying capital expenditure was acquired during the year.
N
Non industrial building
38,540,000
Plant and machinery
25,750,000
c. The tax written down value of asset brought forward are
N
Non industrial building
12,850,000 4years
Plant and equipment (Hire Purchase) 16,450,000 3 years
Plant and Machinery
8,465,000 2 years
Furniture and fittings
4,540,000 3years
d. The company pay two equal annual instalment of N 4,250,000 per instalment
and the hire purchase interest per instalment is estimated to be N 1,640,000,
on the Hire purchase contract.
e. The original cost of construction of the building acquire during the year is
estimated by the seller to be. N 32,250,000. And the building was acquired
second hand.
f. The company incurred a loss of N 21,130,000 in the preceding years.
g. Legal expenses include the following:
N
Debt collection
2,520,000
Renewal of Long term lease
4,000,000
Successful defense for traffic offence Charge 1,600,000
h. Donation and subscription are made of the following:
N
Educational Cooperative society
4,000,000.00
National Sports commission and it state Associations 7,520,000.00
Southern Africa relief Fund
5,350,500.00
Afprint foundation limited
315,000.00
You are required:
Compute the tax liability of the company for 2020 year of assessment.
53
Solution to question 1
Easy life LTD
Computation of adjusted profit and Total profit for the 2020 year of
assessment
N
Net profit
add non allowable expenses
Depreciation
Provision for doubtful debts
Renewal of Long term lease
Successful defense for traffic offence
Charge
Deduct: Non Taxable Income
Dividend (Franked Investment Income)
Profit on sale of fixed assets
Adjusted profit/assessable profit
Add: Balance Charge
Deduct: Loss relief
Investment allowance
Deduct: Capital allowance
Capital allowance b/f
Initial Allowance
Annual allowance
Total Capital Allowance
Relief
Unrelieved Capital Allowance
Total Profit
N
98,594,250
16,162,500
2,272,500
4,000,000
1,600,000
24,035,000
1,912,500
37,500,000 (39,412,500)
83,216,750
13,910,000
(21,130,000)
(2,575,000)
73,421,750
15,485,000
21,755,417
37,240,417
(37,240,417) (37,240,417)
Nil
36,181,333
CITA (30% * 3,6181,333)
EDT (2% * 83,216,750 )
Chargeable Tax
10,854,400
1,664,335
12,518,735
54
Workings
1. Balance charges/allowance
Sales Process
TWDV
Balance Charge
42,580,000
(28,670,000)
13,910,000
2. Cost element of Hire purchase asset
Installment Payment
8,500,000
Interest
(3,280,000)
Hire purchase Cash Price
5, 220,000
3. Computation of Capital allowance
I.A
A.A
Invet.A
15%
10%
Nonindustrial
building
N
12,850,000
TWDV
Cost
32,250,000
I.A
A.A
(6,437,500)
Invt. All
TWDV 38,662,500
50%
25%
50%
25%
10%
25%
20%
Plant and
equipment
(Hire
Purchase)
N
16,450,000
Plant and
Machinery
N
8,465,000
Furniture
and fittings
N
4,540,000
5,220,000
(2,610,000)
(6,353,333)
12,706,667
25,750,000
(12,875,000)
(7,451,250)
13,888,750
(1,513,333)
3,026,667
A.A
OLD
3,212,500
5,483,333.33
NEW
3,225,000
870,000.00
3218750
6,437,500
6,353,333
7,451,250
55
4,232,500 1,513,333.33
1,513,333
Capital
Allowance
N
15,485,000
21,755,417
2,575,000
Note: Acquisition of Building; when building is acquire second hand the actual cost
price for capital allowance purpose is Lower of the construction cost to the seller
and purchase price to the buyer, most importantly when building is acquired second
hand, company acquire the asset cannot claim initial allowance on the building but
is entitle to annual allowance.
Question 2
Shollay Construction Company incorporated with CAC on 1st September, 2018.
The company did not commenced business until 1st May, 2019. Shollay
construction had approach your firm as tax consultant and the following
information were made available to your company.
i) The assessable profit for the year ended 31 October, 2020 is N37,500,000
ii) The company had neither obtain TIN nor file any Tax return with relevant tax
authority since incorporation
iii) The following qualifying capital expenditure were acquired:
Date of acquisition Type of asset
Amount.
N
5/8/2018
Land and building
17,000,000
1/12/2018
Motor van
6,000,000
15/10/2019
Plant and machinery
14,000,000
28/2/2020
Furniture
3,750,000
1/5/2020
Delivery van
5,000,000
iv) The land element of the property acquire was 5,550,000
v) Part of qualifying plant and machinery capital expenditure which was acquired
during 2019 was disposed of during the year 2020. The sale proceed amounted
to N2, 800,000 and the cost element of part disposed is N4, 000,000.
Required;
i) Discus the procedure of obtaining TIN and it relevant in relation the
Company income Tax act.
ii) Compute the tax liability of Shollay Construction Company for relevant
years of assessment and discussed all underline tax issue arising from
Shollay Construction Company.
Solution. (i)
In accordance with the section 8 of CITA, Tax identification Number is generated
by FIRS, and shall serve as the identification number of the company and shall
display by the company on all business transactions with other companies and
individuals and on every document, statement, returns audited accounts and
56
correspondence with revenue authorities, including the Nigeria custom services,
ministries and all government agencies.
The following procedure must be follow in other to obtain TIN
i) Tax payer must visits the Tax office on or before six month after the date
of incorporation to register for TIN failure to do so attract a penalty.
ii) The following document in copies must be made available to tax
authorities
a. Certificate of incorporation
b. Memorandum and article of associations.
c. The original copy of the certificate of incorporation for verification by
tax official
d. Letter of application for TIN on company letter head
iii) Completed form containing the following information:
a. Name and address of the company
b. Nature of the business activities
c. Date of incorporation of the company
d. Date of commencement of the business
e. Names and address of the company’s directors
f. Numbers of share hold by each director
g. Name of the company auditor and tax consultant
h. Name of the company banks
i. The accounting years end of the company.
iv) Once the above information is provided the TIN should be available
within two weeks without delay.
i)
Computation of company income tax liability.
N’000
2019 year of Assessment
Assessable profit
Less: investment allowance
Capital allowance
Initial allowance
Annual allowance
Total Capital Allowance
Restricted to 66 2/3%
Unrelieved Capital c/f
Total Profit
Company Income tax
11,717.5
1,736.625
13,454.125
(8,333.75)
5,120.375
N’000
12,500
(1,400)
11,100
(8,333.75)
2,766.25
829.875
57
250.00
Education Tax
2021 year of assessment
Assessable profit
Investment allowance withdrawn
Restated Assessable profit
Balance Charge
25,000
400
25,400
1,050
26,450
Capital Allowance
Capital allowance b/f
Initial allowance
Annual allowance
Total Capital allowance
Relieved
Unrelieved capital allowance c/f
Total profit
Companies income tax
Education tax
5,120.375
3,437.5
4,160.75
12,718.625
(12,718.625) (12,718.625)
nil
13,731.375
4,119.4125
508.00
Underline tax issue arising from Sholay Construction Company.
i. shollay has incorporate since 1st September, 2018 and the company did
registered with tax office therefore, shollay limited will have to penalty on
late registration.
ii. when company commence a business and decided to prepare its first set of
financial statement for a periods more than 12 months, the basis period for
the first year of assessment for tax purpose, shall be ascertained (on pro-rata
basis) up to the indicated accounting year-end.
iii. Therefore its first Year of Assessment is 2019 which falls under the old
provision.
iv. The second Assessment Year is 2021 which falls under the new provision.
v. The tax implication is that, there will be a gap in year of assessment and the
company will not fill for tax return in 2020 year of assessment.
vi. Any investment allowance claimed on Plant and machinery will be withdraw
if the plant and machinery were disposed with five years.
Workings
The basis of assessment shall be subject to tax law as amended in relation to
commencement rules.
Analysis of date in relation to accounting periods
58
Accounting year
Accounting period
2020
1/5/2019 – 31/10/2020
No of
months
18
Basis period is ascertain as follows:
Year of
Basis period
assessment
2019
1/5/2019 – 31/8/2019
2021
1/9/2019 – 31/10/2020
Old rules
New rule
Assessable profit for relevant years
Year of
Basis period
assessment
2019
1/5/2019 – 31/10/2019
6
x N37,500,000
Assessable profit
Old rules
18
N 12,500,000
New rule
1/11/2019 – 31/10/2020
12
x N37,500,000
2021
Assessable
profit
N37,500,000
18
N 25,000,000
Computation of capital allowance.
Basis of assessment for capital allowance
YOA Basis period
2019 1/5/2019 – 31/10/2019
L&B, M/V, P&M
2021 1/11/2019 – 31/10/2020
Furniture, D/V
I.A
A.A
Invest All
Year of
assessment.
15%
10%
Building
N’000
2019
Cost
I.A
A.A
Invt. A
TWDV
2021
Cost
Disposal
I.A
50%
25%
50%
25%
10%
Motor van
Plant &
machinery
N’000
N’000
11,450
(1,717.5)
(486.625)
6,000
(3,000)
(375)
14,000
(7,000)
(875)
9,245.875
2,625
6,125
-
-
(1,750)
59
25%
20%
50%
25%
Furniture
Delivery
van
N’000
N’000
-
-
3,750
(937.5)
5,000
(2,500)
Total
Capital
allowance.
N’000
11,717.5
1,736.625
1,400
3,437.5
A.A
TWDV
(973.25)
8,272.625
(750)
1,875
(1,250)
3,125
(562.5)
2,250
(625)
1,875
4,160.75
Computation of annual allowance.
2019
2021
Building
Motor van
Plant &
machinery
Furniture
Delivery van
N’000
N’000
N’000
N’000
N’000
11,450 − 1,717.5
10
973.25 x 6/12
6000 − 3000
4
750 x 6/12
14000 − 7000
4
1750 x 6/12
= 486.625
=375
=875
486.625* 12/6
375 *12/6
(875-250) * 12/6
3750 − 937.5
5
5000 − 2500
4
973.25
750
1,250
562.5
625
Asset disposed (calculate the TWDV as at the disposal date)
N’000
Cost
4,000
I.A
(2,000)
A.A
(250)
TWDV
1,750
Investment Allowance is 400,000 i.e. (10% * 4,000)
Balance adjustment
N’000
Sales proceeds
TWDV
Balance Charge
2,800
(1,750)
1,050
Restricted to total capital allowance claimed which is 2,250
60
Taxation of specialized Business.
Taxation of sea/air and telecommunication companies
A Nigeria company engaged in the above named business is assessed to tax like any
other company under the companies income tax act as amended.
However, when a Non-Nigerian company is engaged in the same business, the profit
or loss of the company derived from Nigeria would be ascertained as follows.
Income of foreign company assessable to tax
The income of foreign company to be assessed to tax in Nigeria shall be restricted
to that income derived from Nigeria. This income does not include those derived
outside Nigeria.
Condition for assessment
For the foreign company to be assessed on this restricted income, the federal Inland
Revenue services must be satisfied that.
ο‚· The tax authority in the company’s country compute tax in a manner not
materially different from that in Nigeria, for the same business
ο‚· The tax authority in the company’s country certified the following ratios as
being correct.
Adjusted profit ratio
Depreciation ratio
Computation of tax liability
If the Service is satisfied with the two above condition, it will apply the two ratio to
the amount of income derived in Nigeria by the company, in other to compute the
company’s tax liability.
Assessable Income
Capital Allowance
(Adjusted profit ration x Income derived from Nigeria)
(Depreciation Ratio x Income derived from Nigeria)
Total profit
Tax payable (Tax Rate x Total profit)
XX
(XX)
XX
XX
Minimum Tax Payable is 2% is Income derived from Nigeria.
Note.
Where the two condition required above are not meet, the service has the discretion
to assess the company on a fair percentages of the income derived in Nigeria. This
assessment may however be reversed if at any time within six years the conditions
are satisfied by the company.
61
Simple steps to follow in computation of tax liability
1. Determine the Global/Total/worldwide income of the company
2. Determine the Total income derived in Nigeria
3. Compute Global adjusted profit
4. Compute the Global adjusted profit as follows
𝐴𝑑𝑗𝑒𝑠𝑑𝑒𝑑 π‘π‘Ÿπ‘œπ‘“π‘–π‘‘ π‘œπ‘“ π‘‘β„Žπ‘’ π‘π‘œπ‘šπ‘π‘Žπ‘›π‘¦
π‘₯ 100%
πΊπ‘™π‘œπ‘π‘Žπ‘™ π‘–π‘›π‘π‘œπ‘šπ‘’
5. Compute the Depreciation Ratio as follows:
π·π‘’π‘π‘Ÿπ‘’π‘π‘–π‘Žπ‘‘π‘–π‘œπ‘› πΆβ„Žπ‘Žπ‘Ÿπ‘”π‘’
π‘₯ 100%
πΊπ‘™π‘œπ‘π‘Žπ‘™ π‘–π‘›π‘π‘œπ‘šπ‘’
6. Apply the GAPR on the Total income derived from Nigeria to obtained
Assessable income in Nigeria
7. Apply the DR on the Total income derived from Nigeria to obtain Capital
allowance granted
8. Deduct capital allowance from the assessable income and apply tax rate.
Question 7.26
Eja-Lo-Ni-Bu Marine shipping Company is a foreign based company that engaged
in transportation business by sea. The profit or loss account of the company for the
years ended 30 June, 2019 is as follows:
Income from passenger freight
Carried solely on transit terms
Incomes from passengers freight into Nigeria
Incomes from passengers freight out of Nigeria
Incomes from passengers on other route
Total income
Administration expenses
Depreciation
Other disallowable expenses
Net profit
Required:
Compute the tax liability for Nigeria tax purpose.
Solution to question 7.26
62
N
N
86,250
258,750
86,250
2,242,500
2,673,750
1,725,000
129,375
42,263 (1,896,638)
777,113
Simple steps to follow in computation of tax liability are as follow
1. Determine the Global/Total/worldwide income of the company
Global Income = N 2, 673,750
2. Determine the Total income derived in Nigeria
Total Income Derived in Nigeria = N 86, 250
3. Compute Global adjusted profit
N
Net Profit
Add: Non allowable expenses
Depreciation
Other Disallowable expenses
Adjusted Profit.
129,375
42,263
N
777,113
(171,638)
605,475
4. Compute the Global adjusted profit as follows
605,475
π‘₯ 100%
2,673,750
= 22.65%
5. Compute the Depreciation Ratio as follows:
129,375
π‘₯ 100%
2,673,750
= 4.84%
6. Apply the GAPR on the Total income derived from Nigeria to obtained
Assessable income in Nigeria
Assessable income = N86, 250 x 22.65%
= N 19,535.63
7. Apply the DR on the Total income derived from Nigeria to obtain Capital
allowance granted
Capital allowance = N 86, 250 x 4.84%
63
= N 4,174.5
8. Deduct capital allowance from the assessable income and apply tax rate to
obtain tax liability.
N
19,535.63
4,174.50
15,361.13
Assessable profit
Capital allowance
Total profit
Company income (30% x 15,361.13)
Education Tax (2% x 19,535.63)
4,608.34
390.71
Question 7.27
I believed I Can Fly Plc. is a foreign based company which carry on business in
airline operation. The operation is between Nigeria and other West African
country. The operating result for the year ended 31st December, 2019 are as
follow.
N
N
Income from passenger freight Congo/Nigeria
960,135
Income from passenger freight Nigeria /Cameron
544,065
Income from Cargo loaded into aircraft on other routes
603,750
Income from passenger freight Nigeria/Ghana
733,125
Total income
2,841,075
Salaries and wages
433,500
Administrative Expenses
1,050,000
Depreciation
276,000
Other expenses - General provision
69,000 (1,828,500)
Net profit
1,012,575
The following informational are relevant:
a. Capital allowance were agreed with the relevant authority as 150% of
depreciation charged in the account.
b. Administrative expenses includes the following:
Purchase of twin engine
Use of airport facilities
Hotel bills for first class passengers
Gift to airport staff for gratifications
Accusation for airline crew
64
N
112,125
31,050
36,225
10,350
8,625
Require;
a. Compute the total profit of the company Total Profit for the purpose of
Nigeria income tax
b. The tax liability to income in respect of the total profit and state the relevant
year of assessment.
Solution to question 7.27
Simple steps to follow in computation of tax liability
1. Worldwide income of the company = N 2,841,075
2. Total income derived in Nigeria
N
544,065
733,125
1,277,190
Income from passenger freight Nigeria /Cameron
Income from passenger freight Nigeria/Ghana
3. Compute Global adjusted profit
N
Net profit
Add: non- allowable expenses
Depreciation
Other expenses - General provision
Purchase of twin engine
Gift to airport staff for gratifications
Adjusted profit
4. Compute the Global adjusted profit as follows
𝟏,πŸ’πŸ–πŸŽ,πŸŽπŸ“πŸŽ
2,841,075
π‘₯ 100%
= 52.09%
5. Compute the Depreciation Ratio as follows:
65
276,000
69,000
112,125
10,350
N
1,012,575
467,475
1,480,050
276,000
π‘₯ 100%
2,841,075
= 9.71%
6. Assessable income in Nigeria
1,277,190 x 52.09% = N 665,288.27
7. Capital allowance granted
276,000 x 150% = N 414,000
8. Computation of tax liability.
N
665,288.27
414,000.00
251.288.27
Assessable profit
Capital allowance
Total profit
Company income (30% x 251,288.27)
Education Tax (2% x 665,288.27)
75,386.48
13,305.77
Question 7.28
Raysen Connect ltd is a foreign company engaged in cable services between
Nigeria, United Kingdom and other part of the word. The following information is
provided by the accountant, as the company’s operating result for the year ended
31st December, 2019.
N
Income from Cable messages from Nigeria to London
1,468,510
Income from Cable messages from New York to London
1,978,800
Income from Cable messages termination in Nigeria
552,900
Income from Cable messages originating in Nigeria
334,650
In addition to the above income the follow transaction also took place
during the year
Number of minute of Telecommunication
Minutes
U.S to other part of the word
2,480,775
Nigeria to Canada
1,156,353
United Kingdom to Nigeria
545,625
U.S to Canada through Nigeria
1,418,261
66
The wordwide expenses incurred include the following
Rent
Depreciation
Salaries and wages
Administrative expenses
General provisions
Other expenses
N
10,403,250
37,817,730
5,914,850
21,564,200
13,459,850
3,654,960
The following information are relevant
Other expenses includes
Donation to Covid 19 as palliative through NSCDC
Licensee fees paid to NCC
N
363,750
218,250
N
3,695,700
6,387,616
1,964,570
Administrative expenses includes
Purchase of equipment
Loss on disposal of NCA
Other non-allowable expenses
The average price charges for calls that is applicable
during the year is $0.50 per 4 minute and the current
exchange rate is 198 to $1
Required: compute the tax liability for the relevant years
Solution to question 7.28
Raysen Connect ltd
Computation of tax liability for 2020 year of assessment
N
24,034,089
(8,046,856)
15,987,233
Assessable profit (wk.6)
Capital Allowance (wk.7)
Total profits
Tax payable
CITA 20% x 15,987,233
EDT 2% x 24,034,089
3,197,447
480,682
67
Workings:
1. Determine the worldwide income of the company
Global Income from Messages
Income from Cable messages from Nigeria to London
Income from Cable messages from New York to London
Income from Cable messages termination in Nigeria
Income from Cable messages originating in Nigeria
Global income from calls
Minutes
U.S to other part of the word
2,480,775
Nigeria to Canada
1,156,353
United Kingdom to Nigeria
545,625
U.S to Canada through Nigeria
1,418,261
Global Income
2. Determine the Total income derived in Nigeria
Total Income derive from Nigeria
Income from Cable messages from Nigeria to London
Income from Cable messages originating in Nigeria
Nigeria to Canada (Income From Calls)
N
1,468,510
1,978,800
552,900
334,650
61,399,181
28,619,737
13,504,219
35,101,960
142,959,957
N
1,468,510
334,650
28,619,737
30,422,897
3. Compute Global adjusted profit
Global Income of the company
Income from Cable messages from Nigeria to London
Income from Cable messages from New York to
London
Income from Cable messages termination in Nigeria
Income from Cable messages originating in Nigeria
Global income from calls
U.S to other part of the word
Nigeria to Canada
United Kingdom to Nigeria
U.S to Canada through Nigeria
Global Income
68
N
1,468,510
1,978,800
552,900
334,650
61,399,181
28,619,737
13,504,219
35,101,960
142,959,957
Less allowable expenses:
Rent
Salaries and wages
Administrative expenses
Purchase of equipment
Loss on disposal of NCA
Other non-allowable expenses
Other expenses
Adjusted Profit.
10,403,250
5,914,850
21,564,200
(3,695,700)
(6,387,616)
(1,964,570)
9,516,314
3,654,960 (29,489,374)
113,470,583
4. Compute the Global adjusted profit as follows
πŸπŸπŸ‘,πŸ’πŸ•πŸŽ,πŸ“πŸ–πŸ‘
π‘₯ 100% = 79%
πŸπŸ’πŸ,πŸ—πŸ“πŸ—,πŸ—πŸ“πŸ•
5. Compute the Depreciation Ratio as follows:
37,817,730
πŸπŸ’πŸ,πŸ—πŸ“πŸ—,πŸ—πŸ“πŸ•
π‘₯ 100% = 26.45%
6. Assessable income in Nigeria
N 30,422,897 x 79% = N 24,034,089
7. Capital allowance granted
N 30,422,897 x 26.45% = N 8,046,856
Question 7.29
Fly-over Airline was incorporated in United Kingdom to engage in air
transportation business. On its scheduled flight to Africa the plane land in
Portharcout State in Nigeria to pick passengers whose traveled to Manchester or
London.
Transaction are carried out in Nigeria by this company through an accredited agent
who sell total sum of N 10,350,000 ticket on behalf of the company in 2019 and
incurred the following local expenses in Nigeria.
Wages to Labourers and security men
Office Expenses
Electricity & rate
69
N
69,000
43,125
26,738
Trade Subscriptions
7,765
146,628
In order to obtain tax clearance certificate for the purpose of remitting proceeds
from air transport business to the home country, the agent consult you as a tax
consultant to prepare a tax payable to the service. He informed you that:
a. 20% of the total ticket sale proceeds is allowed annually by the service to
cover capital allowance
b. 30% of the total ticket sold is allowed annually to cover head office overhead
c. Local expenses in Nigeria are allowable expenses
Required:
a. Compute the tax liability payable in Nigeria.
b. State other options for the company in computing its tax payables
Solution to question 7.29
Note: This question a little bit tricky, because of the information provided. Follow
the information and compute the total profit as if the company is a Nigeria
company.
a).
Fly-over Airline
Computation of tax Liability in Nigeria for 2020 year of assessment
N
Sales process (Ticket sold by agent)
Less: Allowable Expenses
Head office Overhead (30% of Sales)
Local Expenses:
Wages to Labourers and security men
Office Expenses
Electricity & rate
Trade Subscriptions
Adjusted Profit/Assessable profit
Capital Allowance (20% of Sales)
Total Profit
N
10,350,000
3,105,000
69,000
43,125
26,738
7,765
CITA (30% x 5,028,372)
(3,251,628)
7,098,372
(2,070,000)
5,028,372
1,508,512
70
EDT (2% x 7,098,372)
141,967
b). the option opened to the company is to claim within six years after year 2020
assessment year that the basis of their assessment be recomputed on the basis of
the formula under section 14 (2).
For the foreign company to be assessed on this formula under section 14 (2), the
federal Inland Revenue services must be satisfied that.
ο‚· The tax authority in the company’s country compute tax in a manner not
materially different from that in Nigeria, for the same business
ο‚· The tax authority in the company’s country certified the following ratios as
being correct.
Question 7.30
Safe landing airways and logistics limited, a Ghanaian company. The company is
fully involved in the business of transporting passengers and goods to and from
Nigeria since 1990. The following were the accounting information for the year
ended 31st November, 2019
.
Operating Income from passenger tickets outside Nigeria
Income from goods loaded into aircraft from Lagos & PH
Income from goods loaded through Nigeria from out Nigeria
Operating Income from passenger tickets from Abuja airport
Operating Income from passenger tickets from PH airport
N
244,807,800
31,884,300
89,302,550
34,371,420
20,838,065
The following were expenses incurred during the year.
Operation staff salaries and wages
Administrative and distribution expenses
Fines paid to federal airport Authority
Provision for Bad debt (General)
provision for depreciation
149,323,600
55,671,000
1,807,500
8,431,385
27,702,950
Required:
a. Compute the adjusted profit of Safe landing airways and logistics limited for
the year ended 31st November, 2019
71
b. Compute the total profit assessable to tax in Nigeria and the tax payable
using current Nigeria tax rate for the relevant year of assessment.
Solution to question 7.30
a.
Safe landing airways and logistics limited
Computation of Adjusted profit for the year ended 31 November, 2019
N
N
Global Income:
Income from Other routes:
Operating Income from passenger tickets outside Nigeria
244,807,800
Income from goods loaded through Nigeria from out Nigeria
89,302,550 334,110,350
Income from Nigeria:
Operating Income from passenger tickets from Abuja airport
34,371,420
Operating Income from passenger tickets from PH airport
20,838,065
Income from goods loaded into aircraft from Lagos & PH
31,884,300
87,093,785
Global Income:
421,204,135
less allowable expenses
Operation staff salaries and wages
149,323,600
Administrative and distribution expenses
55,671,000 (204,994,600)
Adjusted profit
216,209,535
b. Computation of Total profit and Tax payable in Nigeria.
N
44,705,239.84
(5,730,771.05)
38,974,468.79
Assessable profit (wk.6)
Capital allowance (wk. 7)
Total profit
Company income (20% x 38,974,468.79)
Education Tax (2% x 44,705,239.84)
7,794,893.76
894,104.80
Workings:
Simple steps to follow in computation of tax liability
1. Determine the Global/Total/worldwide income of the company
= N 421,204,135
72
2. Determine the Total income derived in Nigeria
= N 87,093,785
3. Compute Global adjusted profit
= N 216,209,535 see solution (a) above
4. Compute the Global adjusted profit Ratios as follows
216,209,535
π‘₯ 100%
421,204,135
= 51.33%
5. Compute the Depreciation Ratio as follows:
27,702,950
π‘₯ 100%
πŸ’πŸπŸ, πŸπŸŽπŸ’, πŸπŸ‘πŸ“
= 6.58%
6. Assessable income in Nigeria
N 87,093,785 x 51.33% = N 44,705,239.84
7. Capital allowance granted
N 87,093,785 x 6.58% = N 5,730,771.05
Question: 7.31
Mr Olowolagba is the CEO of OWO’s group of company. The conglomerate
operate in several state of Nigeria. The group’s area of business interest span
across supply of building materials, transport and banking.
In 2018, at the instance of the CEO, the group decided to diversify its business into
some African countries by floating water flow limited as shipping company which
was incorporated in Cameron.
The CEO wanted to know how beneficial it would be to him should he decide to
invest in Cameron. His main concern are company income tax, education tax
payable and the mode of computation.
Meanwhile, the financial results of water flow limited for the year ended 31
December, 2019 are show below:
N
73
N
Income from goods loaded on other routes
Operating Income from passenger tickets from Nigeria
Operating Income from passenger earned on transit term
Operating Income from Cargo Loaded into ship in Nigeria
Depreciation
Staff salaries
General Provision
other expenses
Net Profit
257,470,850
65,553,530
241,000
60,175,507
383,440,887
2,378,821
17,320,631
259,135
698,783
(20,657,370)
362,783,517
Additional information included the following:
ο‚· Capital allowance were agreed with the relevant authority at 110% of
depreciation charges.
ο‚· Other expenses include disallowable expenses of N512,000
Required:
As a tax consultant prepare a report to address the concern of the CEO in respect of
1. Total profit of water ways limited for Nigerian tax purpose
2. Company income tax liability and education tax liability.
3. How the company would be assessed to tax where RIRS is not satisfied that
there is a reciprocal tax exemption granted to Nigerian companies in the
shipping company’s home country.
Solution to questions: 7.31
From: Tax consultant
To: CEO Owo’s group of Company
Attention: Olowolagba,
Tax assessment of Water way Limited for the 2020 year of assessment
In response to your mail requesting our firm to carry out the computation of tax
liability payable in Nigeria respect of water way limited.
The following were our response
74
1. Total profit from water ways limited to be subjected to Nigeria tax is
N117,203,069 (as computed in working 7)
2. Company income tax payable is N 35,160,921 while education tax is
N2,396,395
Basis of assessment.
A Nigeria company engaged in the above Transportation business is assessed to
tax like any other company under the companies income tax act as amended.
However, when a Non-Nigerian company is engaged in the same business, the
profit or loss of the company derived from Nigeria would be ascertained as
follows.
Income of foreign company assessable to tax
The income of foreign company to be assessed to tax in Nigeria shall be restricted
to that income derived from Nigeria. This income does not include those derived
outside Nigeria.
Condition for assessment
For the foreign company to be assessed on this restricted income, the federal
Inland Revenue services must be satisfied that.
ο‚· The tax authority in the company’s country compute tax in a manner not
materially different from that in Nigeria, for the same business
ο‚· The tax authority in the company’s country certified the following ratios as
being correct.
Adjusted profit ratio
Depreciation ratio
Looking forward for any request on any further clarification on the above subject
matter.
Yours faithfully,
Rayzen consult.
Managing Partner.
Working Notes
Simple steps to follow in computation of tax liability
1. Determine the Global/Total/worldwide income of the company
75
= N 383,440,887
2. Determine the Total income derived in Nigeria
= N 125,729,037
3. Compute Global adjusted profit
N
N
362,783,517
Net profit
Add: non allowable expenses
Depreciation
2,378,821
General provision
259,135
Other expenses
512,000
3,149,956
Less: Non-taxable income:
Operating Income from passenger earned on transit term
241,000
(241,000)
Adjusted profit
365,692,743
4. Compute the Global adjusted profit Ratios as follows
365,692,743
π‘₯ 100%
383,440,887
= 95.37%
5. Assessable income in Nigeria
N 125,729,037x 95.3% = N 119,819,772
6. Capital allowance granted
N 2,378,821 x 110% = 2,616,703
7. Computation of Tax liability
N
119,819,772
(2,616,703)
117,203,069
Assessable profit (wk.6)
Capital allowance (wk. 7)
Total profit
Company income (30% x 117,203,069)
Education Tax (2% x 119,819,772)
Taxation of specialized Business.
Insurance company.
76
35,160,921
2,396,395
Capital Gain Tax
36. Personal injury
(1) Subject to subsection (2) of this section, sums obtained by way of
compensation or damages for any wrong or injury suffered by an individual in his
person in his profession or vocation shall not be chargeable gains within the
meaning of this Act; and the foregoing provision of this subsection shall extend to
77
compensation or damages for personal or professional wrong or injury including
wrong or injury for
libel, slander or enticement.
(2) Sums obtained by way of compensation for loss of office shall not, however, be
chargeable gains, except where the amount of such compensation or damages
exceeds N10, 000,000.
CAPITAL GAIN TAX FORMAT
Consideration (Sales proceeds/market value)
Less incidental costs of disposal
Net sales proceeds
Less
Original cost of acquisitions
Incidental costs of acquisition
Cost of improvement
Capital Gain
Capital Gain Tax @ 10%
Xx
(X)
X
XX
Xx
Xx
(XX)
XX
xx
For the purpose of incidental cost of disposal the following are example of
allowable expenses
a. Any expenses wholly, exclusively and necessarily incurred in establishing,
preserving or defending the owner’s title to or a right over the asset.
b. Improvement cost wholly, exclusive and necessarily incurred
c. Any incidental cost of making the disposal such as:
i. Fees, commission or remuneration paid for professional services of
surveyor, auctioneer, accountant, agent and /or legal adviser.
ii. Cost of transfer on conveyance (including stamp duties)
iii. Advertisement cost to find a seller/buyer
iv. Cost reasonably incurred in making any valuation or apportionment
required for the purpose of computing the capital gains including
expenses in ascertaining market value where required.
The following expenses are not allowable
i. All expenditures allowed to be deducted in ascertaining the profit or loss of
the tax payer under the income tax act.
ii. Insurance premium on the asset
iii. Normal repairs and maintenance on the asset e.g painting except for the
purpose of disposal.
78
Question
Paulo Investment Limited sold his property in Benin for 3,500,000 on January 2,
2020. When the company bought the house in 2015, it incurred the following cost
N
Cost of Acquisition
850,000
Agency Commission
15,000
Legal fees
21,000
Reconstruction and Renovation
75,000
insurance premium against fire and burglary
18,000
When the building was disposed of in 2020, the following costs were also incurred
by the company.
N
Advertisement
25,000
Agency Commission
80,000
Mr. Tile who bought the property also suffered the following cost:
N
Cost of Acquisition
3,500,000
Agency Commission
75,000
Legal fees
35,000
Renovation and improvement
120,000
You are require to compute the capital gain tax payable by the company.
Solution to question
Paulo Investment Limited
Computation of Capital Gain Tax payable for year 2020 year of assessment
N
N
Sales proceeds
3,500,000
less:
Advertisement
25,000
Agency Commission
80,000 (105,000)
Net Sales Proceeds
3,395,000
Cost of the Asset:
Cost of Acquisition
850,000
Agency Commission
15,000
Legal fees
21,000
79
Reconstruction and
Renovation
Capital Gain
CGT (10% x 2,434,000)
75,000
(961,000)
2,434,000
243,400
Question
The following relate to capital expenditure transaction Kosky Training institute
During the year 2017 the company Acquire six flat for N750,000 and spent 18, 000
on construction of swimming pool and landscaping the garden in the premises.
The company also acquired a set of plant and machinery at a cost of N120,000 on
1st of April, 2018.
Two years later (year September 2019) kosky limited disposed off one of the flat to
his Brother-in-law for N150,000 after ascertaining from professional valuers that
he could sell the flat for N170,000.
Likewise, part of the plant and machinery was sold on 31st December, 2019 for
N75,000. The company incurred N15,000 as expenses- incidental to the sale.
The market value of the remaining plant and machinery was N125,000 on the 31st
December, 2019
You are required to compute:
i)
The chargeable gian if any, accruing on the asset sold and tax payable.
Solution to question
This question focus on part disposal aspect of CGT
The most important issue to address in the aspect is how to compute the cost of the
part disposed.
The basis formula to use is;
𝑨
𝑿π‘ͺ
𝑨+𝑩
A = the sales proceeds of part disposed
B = Market value of part no disposed
C = the total cost of the asset.
Computation of capital Gain tax liability of Kosky Training institute
Disposal of Flat;
N
Market Value of Flat
170,000
80
Cost of part disposed (wk. 2)
Capital Gain
CGT @ 10%
(128,000)
42,000
4,200
Disposal of Plan and Machinery
N
75,000
(15,000)
60,000
(45,000)
15,000
1,500
Sales proceeds on plant
less: expenses
net sales
Cost of part disposal (wk. 3)
Chargeable Gain
CGT @ 10%
Workings
1. Total cost of the Flat
N
750,000
18,000
768,000
purchase cost
Additional cost
2. Cost of part disposal of flat
πŸπŸ•πŸŽ,𝟎𝟎𝟎
πŸπŸ•πŸŽ,𝟎𝟎𝟎+(πŸπŸ•πŸŽ,πŸŽπŸŽπŸŽπ’™πŸ“)
𝑿 πŸ•πŸ”πŸ–, 𝟎𝟎𝟎 = 128,000
3. Cost of part disposal of plant and machinery
πŸ•πŸ“,𝟎𝟎𝟎
πŸ•πŸ“,𝟎𝟎𝟎+πŸπŸπŸ“,𝟎𝟎𝟎
𝑿 𝟏𝟐𝟎, 𝟎𝟎𝟎 = 45,000
Questions.1.608
Mr. Adu who resides in Oda Town in Ondo state has many building situated in the
state. He sonld one of the house to his Brother-in- law for N350,000 on June 23,
2018
81
The following additional information was supplied.
N
176,585
14,500
24,870
(a)Cost of construction of building sold
(b)
Cost of renovation prior to sale
(c)Professional charges in connection with the
sale of property
(d)
Insurance- fire, tornadoes on building sold
15,380
(e)Cost of land on which the building was
30,000
erected
(f)Market value of the building on June 23, 2019 478,670
Required;
Compute the total capital gain tax payable by Mr. Adu.
Solution;
Mr. Adu
Computation of Capital Gain Tax Payable
N
Market value
478,670
Deduct
Professional charges
(24,870)
Net sale proceeds
453,800
Deduct
Cost of costruction
176,585
Renovation prior to sales
14,500
(221,085)
Capital gains
232,715
Capital gain tax
(10% x 232,715)
23,271.5
Question 1.609
Raysen consult limited sold a property in Ondo state for 3,500,000 on January
2020. When the company bought the house in 2016, it incurred the following cost
Cost of acquisition
Agency commission
Legal fees
Reconstruction and renovation
Insurance premium against fire and burglary
82
N
850,000
15,000
21,000
75,000
18,000
When the building was disposed of in 2019, the following cost were also incurred
by the company.
N
Advertisement
25,000
Agency commission
80,000
Tibabe who bought the property also suffered the following cost.
N
Cost of acquisition
3,500,000
Angency xost
75,000
Legal fees
35,000
Renovation and improvement
120,000
Solution
N
Sales proceeds
Less expenses
Advertisement
Commission
Net sales
Cost of purchase
Agency commission
Reconstruction and renovation
Legal fee
Capital Gain
Capital gain tax @ 10%
25,000
80,000
850,000
15,000
75,000
21,000
N
3,500,000
(105,000)
3,359,000
(961,000)
2,434,000
243,400
Note: the cost incurred by the buyer are irrelevant and should be ignore completely
Capital Loss.
On the disposal of any asset, if any loss is incurred by a person, such loss cannot be
set off or relieved against gains accruing to the person on the disposal of other
assets. Such loss is deemed to be lost, in a disposal of non-current assets, excess of
the cost of the asset over the sales proceed of the asset result in capital loss.
83
Question 1.611
On January 1, 2020 #ENDSARS ltd bought a building at a cost of N 375,000 and
incurred professional charges 0f N 37,500. On 10 may, 2020, the company sold the
building for N 675,000, incurring cost relating to the disposal of N 67,500. The
company also acquired another building on 6 august 2019 at a cost of 600,000 plus
a professional charges of N 60,000. The building was disposed of on 3rd October,
2020 for N 492,750 and disposal expenses of N 49,275 were incurred.
Required; compute the capital gain tax arising on the disposal of the building.
Solution
Computation of capital gains tax payable
Building sold
On 10/05/2012
N
N
N
675,000
67,500
Sales proceeds
Less disposal
expenses
Net sales proceeds
Less:
Cost of Acquisition
Professional charges
Capital gain (loss)
Capital gains tax at
10%
Capital gains Tax at
10%
607,500
375,000
37,500
412,500
195,000
195,000
19,500
Building sold
on 31/11/2012
N
492,750
49,275
443,475
600,000
60,000
660,000
(216,525)
(216,525)
NIL
Note. The loss of N 216,525 incured on the sale of one building is not deducted
from the gain of N 195,000 made on the sales of other building. In other words, the
capital gain of N 195, 000 is tax payable, while there is no loss relief for N
216,525.
Installment payment of consideration
If, on disposal of non-current asset, consideration is paid instalment over a period
more than 18 month the accrued capital gain tax on disposal shall be a proportion
of the consideration received in relation to total consideration receivable in the
84
year of assessment in which the disposal is made and in subsequent year if
assessment until the payment of final instalment.
But if the installment payment period is 18 month or less the capital gain tax is
payable in the year of disposal.
In the computation of chargeable gains, the act provides that the full amount of
consideration for the disposal should be brought into account.
a. Without any discount for postponement of the right to receive any part of the
consideration.
b. Without regard to risk of any part of consideration being irrecoverable.
c. Without regard to right to receive any part of the consideration being
contingent.
Necessary adjustment will be made by way of discharge or repayment of tax or
otherwise if it later proved to satisfaction of the relevant tax authority that part of
the consideration taken into account in computing gain has subsequently become
bad debt.
Question1.618
Kenny ltd sold an asset on 30th June, 2019 for N2,000,000 which cost N1,600,000
to acquire on 1 January, 2018. Professional charges in connection with the sales
amounted to N140,000. The sales agreement provided for payment of five equal
instalments of N400,000. The first instalment being paid on the day of sales and
remaining instalments payable every six months.
Required.
Compute the capital gain arising from the disposal and indicate the dates the gains
accrued, the assessment years and tax payable.
Solution.
Kenney ltd
Computation of capital gain tax
N
2,000,000
(140,000)
1,860,000
(1,600,000)
260,000
Sales proceeds
Less: Professional charges
Net sales proceeds
Less: cost of acquisition
Capital Gain
85
Date of
instalment
Instalment Year of
Date
assessment chargeable
gain
deemed
accrued
30/6/2019 400,000
2019
31/12/2019
31/12/2019 400,000
2019
31/12/2019
30/6/2020 400,000
31/12/2020 400,000
2020
2020
31/12/2020
31/12/2020
30/6/2021
2021
31/12/2021
400,000
Chargeable gain
deemed accrued
800,000
2.000,000
CGT
payable
@ 10%
x 260,000 10,400
= 104,000
x260,000
800,000
10400
2,000,000
= 104,000
400,000
x 260,000 5,200
2,000,000
= 52,000
260,000
2,000,000
26,000
If Kenny ltd had left the consideration as a loan to the purchaser of the asset, or the
instalment payment period is 18 month or less, the full amount of the chargeable
gain would have been taxed at once in 2019 year of assessment.
Question 1.620
#ENDPOLICEBRUTALIY LTD sold an asset to SAS on 20 October, 2015 for
N5,000,000 which cost N3,125,000 to acquire on I February, 2014. The sales
agreement provide for payment of initial depaosit of N2,000,000 on the day of
sales and balance of 3,000,000 payable in three equal instalment on 31december
2021, 2022,and 2023 respectively
SAS actually made the payment as follows.
N
31st December, 2016 1,000,000
31st December, 2017 1,000,000
31st December, 2018 250,000
As a result of SAS death, the balance of N750,000 could not be recovered by the
company as at 31 December 2019. The amount has been written off as bad debt
with the consent of FIRS.
Solution.
#ENDPOLICEBRUTALIY LTD
Computation of capital gain and tax payable
N
86
Sales proceeds
Less cost of acquisition
Chargeable gain
5,000.000
(3,125,000)
1,875,000
The chargeable gain of N1,875,000 will be assessed as follows:
YOA
Chargeable gain CGT @10%
2,000,000
2015
75,000
x 1,875,000 750,000
5,000,000
2016
1,000,000
x 1,875,000
5,000,000
375,000
37,500
2017
1,000,000
x 1,875,000
375,000
37,500
x 1,875,000
5,000,000
375,000
37,500
1,875,000
187,500
5,000,000
2018
1,000,000
In the computation of chargeable gains and capital gain tax, the full amount of the
sales proceeds should be taken into account without regard to the risk that part of
the proceeds may end up being bad debts, this is the reason for taxing the full
amount of the chargeable gain of the N375,000 in the year 2018 year of assessment
although only N250,000 out of the N1,000,000 due was eventually paid.
Having convinced the FIRS that N750,000 of the sales proceeds has become bad
debts, the company will be given tax credit or tax refund of N28,125 being the
capital gain tax on the chargeable gain of N281,250 arising from the bad debt of
N750,000
750,000
5,000,000
x N1,875,000
= N281,250
Tax credit/ refund = N281,250 x 10% = N28,125
Question 1.621
Dr. Ramon purchase a Duplex in Parkview estate at a cost of N80 million on
January 2016. It was purchase for private residence. Another property was
87
purchased in Ijapo extension in the year 2018 and Dr. Ramon transferred the
Parkview estate property to his wife as a birthday gift on September 2018. The
market value of the property was N140 million. As a result of incessant flooding in
park view estate, the property was finally disposed off for 200 million on January,
2019 by the wife.
Mr. Kosky purchase an option to purchase a plot of land at Ijapo Estate at N120
million in July 2019. Mr. Kosky exercised the right to purchase the Land for N150
million in the same year and later sold the property for N400 million in year 2020.
Require.
1. Compute the chargeable gain and discussed your opinion on the above
transactions
Solution
Asset transferbr Mr. Ramon to his wife;
N
80,000,000
(80,000,000)
Nil
Deemed disposal proceeds
Cost of the asset
Chargeable gain
Opinion: since the asset was between spouses by way of gift, the consideration is
deemed to be the cost of the asset, neither gain nor loss would accrue to Dr. Ramon
Asset disposed by Dr. Ramon’s wife
N
200,000,000
(8,000,000)
120,000,000
Sales proceeds
Cost of the asset
Chargeable gain
Opinion: since the asset has now disposed by Mrs. Ramon to third party, there is
changeable gain for the period.
Sales of Option by Mr. Ramon to Mr. kosky
N
120,000,000
120,000,000
Sales of option
Chargeable gain
88
Asset disposed by Mr. Kosky
Sales proceeds
Cost of the asset
Cost of the option
Chargeable gain
N
400,000,000
150,000,000
120,000,000 270,000,000
130,000,000
Opinion; when an option is exercised, consideration given for it is incorporated
with the consideration for the asset itself so as to form part of single transaction for
both parties concerned.
Hire purchase Transactions
Question1.625
Kosky limited had cash flow problem during the year 2017 and decided to
approach a finance to acquire an asset on hire purchase.
The cash price of the asset if the company have enough cash to acquire the asset is
N395,000. The company pay a deposit of N125,000 and promised to pay the
balance in thirty-six monthly instalment.
You are require to calculate the capital gain tax due assuming the asset was sold as
follows;
a. For N650,000 after full payment of all the instalment
b. For N625,000 after payment of twenty-four instalments
Solution
Disposal after full instalment payments
N
650,000
(395,000)
255,000
25,500
Sales proceed
Cash price of the asset
Changeable Gain
CGT @ 10%
If the asset is disposed after all the installment has been paid the chargeable gain is
simply difference between the sales proceeds and cash price of the asset.
Disposal after 24 instalment
N
625,000
Sales proceed
Cost of the asset
89
Deposit
Total Instalment (24 x 12,500)
125,000
300,000
425,000
(120,000) (305,000)
320,000
32,000
Less Interest payment (24 x 5,000)
Chargeable Gain
CGT @ 10%
Interest element
N
Hire purchase price
Deposit
Total Installment (36 x 12,500)
Hire purchase price
Less: Cash price
Hire purchase interest
Interest per instalments (180,000/36)
125,000
450,000
575,000
395,000
180,000
5,000
Question 1.626
On 1 July, 2016, #SOROSOKE ltd purchase plant on hire purchase on the
following terms.
Deposit on 1 July, 2018
Monthly instalments commencing on 1 august, 2018
Interest element of each instalment
Period of repayment
N
750,000
125,000
12,500
2 years
On 1 january 2020, the company sold the plant for 4,000,000 incuring costs
relating to the disposal of 43,750.
Required;
Compute the capital gain tax by #SOROSOKE LTD
SOLUTION
Since the asset was disposed after the full installment payment has been made.
The cash price of the asset will use as the cost of the asset.
N
4,000,000
(43,750)
Sales proceed
Incidental cost
90
Net Sale proceeds
Less: Cash price
Chargeable gain
CGT @ 10%
3,956,250
(3,450,000)
506,250
50,625
Computation of cash price
N
750,000
3,000,000
3,750,000
300,000
3,450,000
Deposit
24 instalment (24 x 125,000)
Hire purchase price
Less hire purchase (24 x 12,500)
Cash price
Question 1.632
Double chief of ICAN had been in business for many years. In December 2018 he
sold the business to Kosky Limited in exchange for N7,500,000 consisting of
N3,300,000 cah and 840,000 N1 ordinary share, valued at N5 each. On the date of
transfer, the assets of the business were valued as follows;
Cost of
Market
acquisition value
N
N
Freehold premises
1,350,000
3,750,000
Plant and machinery
1,800,000
2,385,000
Goodwill
300,000
Furniture
450,000
510,000
Stock
900,000
825,000
Receivable
750,000
8,520,000
Less creditor
1,020,000
7,500,000
Required:
Compute the capital gains tax by double chief.
Double chief
Computation of capital gain tax payable
91
Freehold premises
Plant and machinery
Goodwill
Furniture
Gain
(3,750,000-1,350,000)
(2,385,000-1,800,000)
(510,000-450,000)
N
2,400,000
585,000
300,000
60,000
3,345,000
Chargeable gain
3,300,000
7,500,000
x N3,345,000 = N1,471, 180
Capital Gains Tax = 10% x N1,471,180 = N147,800
Note:
Any consideration by way of Share is not taxable under Capital gain tax act.
Goodwill is an incorporeal property, the amount realized on the disposal of an
incorporeal property is deemed to be the capital gain without taking cognizance of
the cost of acquisition.
Gain of Inventory is taxable under CITA.
Asset Loss or destruction
The loss or destruction of an asset may attract a compensation. If, within three
years of receipt of compensation, the compensation is used to acquire another asset
to replace the asset lost or destroyed, the owner is entitled to make a claim in
accordance with section 18(1) of CGTA.
Question 1.633
TeeBaby limited acquired an asset on January 1 2018 at a cost of N312,500. On
May 1st 2019 the asset was destroyed by fire and company received N350,000
from Kenny insurance ltd. The compensation was used to acquire similar asset on
2nd November. 2019.
The residual value of the old asset was N50,000. The new (replacement) asset was
sold by the company on 1 June, 2020 for N337,500
During the year, an asset which was acquired at a cost of N255,000 in the year
2016 was stolen. The company was paid 300,000 as compensation by an insurance
company. The compensation was acquire a new asset for N270,000 to replace the
one stolen.
92
Required:
Assuming TeeBAby ltd make a claim as provided in section 18(1), compute its
chargeable gain.
Solution.
i.)
Asset destroyed by Fire,
N
350,000
(350,000)
Nil
Compensation received
Deemed cost (old asset)
Capital gain
Note: in in line with section 18(1), the compensation for the destruction of the asset
is taken to be such an amount as would result in neither a loss nor gain on disposal.
The amount 350,000 received as compensation is deemed to be equivalent to the
original cost of asset, hence no profit or loss on disposal and no capital gin tax is
payable in year 2019.
ii.) Disposal of the new asset (year 2020)
Capital Gain tax payable
N
Sales proceeds
337,500
Deemed cost of new asset
(262,500)
Capital gain
75,000
CGT payables
7,500
Note: the deemed cost of the new asset when it was eventually disposed is
computed as follow.
N
N
Cost of acquisition of new asset.
375,000
Actual compensation received
350,000
Residual value
50,000
400,000
Original cost of Old asset
(312,500) (87,500)
Deemed cost of old asset
262,500
iii.)
Asset stolen the year (2020)
Note: where the whole compensation is not used to acquire the new asset, and the
part of the compensation not used is less than the amount of the gain on disposal of
93
the old asset, owner can make claim in accordance with section 18(2) of CGTA
that:
a. The amount of the gain be reduced to the amount of the compensation not
used to acquire new asset (and, if not all chargeable gain, with a
proportionate reduction in amount of the chargeable gain); and
b. The cost of acquisition of new asset is reduced by the amount by which the
gain is educed.
Capital gain
N
300,000
(255,000)
45,000
Compensation received
Original cost of old asset
Capital Gain
In line with the section 18(2), the gain of 45,000 is to be reduce to the amount of
compensation applied in the acquisition of the new asset.
N
Compensation received
300,000
Cost of new asset (compensation used)
(270,000)
Portion of Gain not used for new asset
30,000
This portion of Gain is subject to capital Gain tax, therefore CGT is;
10% x 30,000 = 3,000.
The deemed cost of the new asset is calculated as follow.
Cost of acquisition of new asset
Amount be the gain is reduces (45,000 – 30,000)
Deemed cost of the new asset
N
270,000
(15,000)
255,000
Roll- over relief
Step in computing roll- over relief.
i)
Compute the Capital gain
ii)
Compare:
a. the amount re-invested with
b. sale proceeds of the asset
iii) select the lower of (ii)
iv) less cost of old asset from (iii) to obtained amount roll over
v)
less (iv) from (i) to obtained chargeable capita gain
94
vi)
Apply 10% on (v) to obtained CGT payable.
The above computation can result to major three scenario
i)
Full Roll over: This is the situation where step (iv) is equal to step (i).
That is the amount roll over is equal to capital gain. Therefore, CGT
payable is Nil
ii)
Partial roll-over: this is the situation where step (iv) is lower than step
(i). That is the amount roll over is less than capital Gain. Therefore, CGT
is payable on the balance
iii) No Roll-over: this a situation where by in step two the amount reinvested
is lower than the sales proceeds and the cost of the old asset is higher
than amount reinvested. Therefore, CGT is payable in the capital Gain
computed in step (i)
Question 1.647
#NEWNIGERIA ltd decided to relocate away from Lekki Toll Gate, Lagos due to
20th October, 2020 toll gate massacre. And the following asset which was acquired
in 2016 as follows
N
Factory building
1,125,000
Warehouse
1,000,000
Plant and machinery
1,500,000
When the company moved, it made the following transactions.
Disposal of old assets at lekki toll gate.
N
Factory building
2,500,000
Warehouse
1,750,000
Plant and machinery
1,875,000
Expenses in connection with the disposal
N
250,000
125,000
Factory building
Warehouse
Acquisition of new assets in Ondo state to replace the one sold.
N
Factory building
3,500,000
Warehouse
1,375,000
95
Plant and machinery
1,062,500
Required;
a. Compute the capital gains tax payable assuming the tax rate is 10% and the
all possible claims which reduce or defer the tax liability are made.
b. Compute the carrying cost of the new asset.
c. Suppose the new factory building and the new warehouse were sold 31st
December, 2020 for 4,000,000 and 2,100,000 respectively without
replacement, compute the capital gain payable.
Solution.
a. Computation of capital gain tax payable
Factory
Building
N 000
Step (i)
Capital Gain
Sales proceeds
Expenses
Net sales proceeds
Cost of old asset
Capital gain
Step (ii)
Amount re-invest.
Net Sale proceeds
Step (iii)
Lower of (i) & (ii)
Step (iv) Less:
Cost of old asset
Amount Roll-over
Step (v):
Chargeable Gain
CGT @ 10%
Types of roll over
Ware
house
N 000
2,500
(250)
2,250
(1,250)
1,000
Plant and
Machinery
N 000
1,750
(125)
1,625
(1,000)
625
1,875
1,875
(1,500)
375
3,500
2,250
1,375
1,625
1,062
1,875
2,250
1,375
1,062
(1,250)
(1,000)
(1,500)
(1,000)
(375)
Nil
Nil
Nil
Full
250
25
Partial
375
37.5
No.
b. Carrying cost of the new asset for the purpose of future disposal
Factory Ware
Plant and
Building house
Machinery
N 000
N 000
N 000
96
Cost of the new asset
Less: amount roll over
Carrying cost of new asset
3,500
(1,000)
2,500
1,375
(375)
1,000
1,062
Nil
1,062
Note: capital allowance will be calculated based on the cost of the new asset not
the carrying computed as above.
c. Disposal of new asset.
Sales proceeds
Less: Carrying Cost
Capital gain
CGT 2 10%
Factory
building
N 000
4,000
(2,500)
1,500
150
Ware house
N 000
2,100
(1,000)
1,100
110
Question 1.655
Desire LTD purchased the plant and machinery on 1st July, 2017 at N1,200,000.
Part of the plant and machinery was sold on 31 December, 2019 for N1,850,000.
The company spent N250,000 as expenses incidental to the sale. The market value
of the remaining plant and machinery was N750,000 on December, 2019.
PAPA D one of the director of Desire ltd, resident in Ondo State, owed an estate
made up of ten identical house at Ijapo estate. He sold one of the houses for
N55,000 under arms- length agreement on 10th November, 2018. On the following
day PAPA D died in a motor accident and under his will Raysen property become
the executor. On 1st April 2020 when the market value of each building stood at
N65,000 Raysen property transferred one of the building to Mary the eldest
daughter of PAPA D. the daughter sold the building for N120,000. Allowable
expenses relating to the sale totaled N15,000. Assuming each building cost
N40,000 to build
Required:
Discus the tax effected of the above transaction and show all the calculations.
97
Double taxation arrangement
Each country has its own tax laws. Nigeria, for instance, adopts the residency
principle while some countries apply the source principle in deciding whether a
taxpayer will pay tax in that jurisdiction. Hence, if a business is tax resident in
Nigeria and generates income or profit in the United States, this could lead to
double taxation or double non-taxation. Double taxation arises when a specific
income or profits is taxed in two jurisdictions, that is, where the income is earned
(the source state) or in the state of residence. On the other hand, double nontaxation occurs when a taxpayer evades tax on the profits or income in the source
state and resident state. These issues may reduce the inflow of foreign direct
investment and international taxation has created tax treaty as a cure.
Tax treaty:
A tax treaty is a written agreement between two countries that helps to lessen the
risk of double taxation and double non-taxation. Furthermore, a tax treaty shows
the category of income, tax treatment, where this income would be taxable (at
residence, at source or both) and the timing for taxation.
It also provides the Mutual Agreement Procedure (MAP) for settling conflicts
arising from the execution of the agreement or in the allocation of taxing rights.
Objective of double tax agreement
Generally the main objectives of a double tax agreement are;
a)
b)
c)
d)
e)
to mitigate double taxation,
Prevent double non taxation,
Curb tax evasion,
clarify the taxing rights of parties involved,
Enhance exchange of information and mutual cooperation.
Nigeria has tax treaties with fourteen (14) countries. They are
Belgium,
Canada,
China,
Czech Republic,
98
France,
Italy,
The Netherlands,
Pakistan,
Philippines,
Romania,
Singapore,
Slovakia,
South Africa, and
The United Kingdom.
Key benefit of Tax treaty
Under a tax treaty, residents of a contracting state pay tax on certain income at a
lower rate. Foreign tax payable by taxpayers in these 14 countries is allowed as a
credit against tax payable in Nigeria.
If the scope of tax treaty does not cover a particular income, or if a country has no
tax treaty with Nigeria, then a taxable person must pay tax at the standard rates and
file a Nigerian tax return in line with the prescribed format.
The delays in ratification of the treaties
In Nigeria, when treaties are signed with other countries, they do not automatically
have the force of law. Section 12 of the 1999 Constitution of the Federal Republic
of Nigeria expressly provides that before a treaty between Nigeria and another
state shall have the force of law it must be enacted into law by the National
Assembly.
As at 22nd December 2019, The National Assembly is yet to ratify tax treaties with
Kenya, Mauritius, Poland, South Korea, Spain, united Arab Emirate and Sweden.
Permanent Establishment
For the purposes of this Agreement, the term "permanent establishment" means a
fixed place of business through which the business of an enterprise is wholly or
partly carried on.
The term "permanent establishment" includes especially:
a) a place of management;
b) a branch;
c) an office;
d) a factory;
e) a workshop;
99
f) a mine, an oil or gas well, a quarry or any other place of extraction of natural
resources;
g) a building site or construction or assembly project which exists for more
than three months;
h) the provision of supervisory activities for more than three months on a
building site or construction or assembly project;
i) the installation, or the provision of supervisory activities in connection with
such installation, incidental to the sale of machinery or equipment where the
charge payable for such installation exceeds 10% of the sale price of the
machinery or equipment free-on-board.
Notwithstanding the preceding provisions of this Article, the term "permanent
establishment" shall not be deemed to include:
ο‚· the use of facilities solely for the purpose of storage, display or delivery of
goods or merchandise belonging to the enterprise;
ο‚· the maintenance of a stock of goods or merchandise belonging to the
enterprise solely for the purpose of storage, display or delivery;
ο‚· the maintenance of a stock of goods or merchandise belonging to the
enterprise solely for the purpose of processing by another enterprise;
ο‚· the maintenance of a fixed place of business solely for the purpose of
purchasing goods or merchandise or of collecting information, for the
enterprise;
ο‚· the maintenance of a fixed place of business solely for the purpose of
carrying on, for the enterprise, any other activity of a preparatory or
auxiliary character.
The term "permanent establishment" shall include a fixed place of business used as
a sales outlet notwithstanding the fact that such fixed place of business is otherwise
maintained solely for any of the activities mentioned in paragraph 3 of this Article.
Question
Kenny Homemade LTD has investment in foreign country with double taxation
agreement with Nigeria. For the year ended 31st December, 2019, the following
figures are provided
Profits derived from Nigeria
Dividends received from the foreign country Gross
Foreign tax surfer attributable to profit paid as the dividend
100
N
262,500
45,000
1500
Capital allowances
Unrelieved loss brought forward
18,000
172,500
Required:
Compute the company’s income tax payable and amount of tax saved as a result of
double tax agreement
Solution
Kenny homemade LTD
Computation of tax payable in Nigeria
N
Profit from Nigeria
Foreign tax surfer
Adjusted profit/assessable profit
Loss relief b/f
Capital allowance
Relieves
18,000
(18,000)
-
N
262,500
1,500
264,000
(172,500)
91,500
(18,000)
Total profit
73,500
Income tax payable (30% x73,500)
Foreign tax surfer
Tax payable
22,050
(1,500)
20,550
Total tax saved as a result of the double tax agreement.
Dividend from foreign investment will be subject to withholding tax of N45,000 at
7.5% instead of regular 10% according to Articles 10, 11 and 12 of the double
taxation avoidance agreement between Nigeria and foreign country.
And such dividend received will be net of withholding tax, is a “franked
investment income” and shall be a final tax on the dividend. The dividend is
exempted from further tax in the hand of Kenny homemade LTD.
Therefore, there will be tax savings of 22.5% (that is 30% - 7.5%) on the gross
dividend.
N45, 000 x 22.5% = N10, 125
101
Question
Akkoly Kosky Consult (AKC) is an investment advisory holding company
registered in Mauritius whose currency is Rupees. The company has been
operating in Nigeria since 2004 through its subsidiary, Raysen consult Nigeria
Limited (RCNL). AKC owned 90 percent of RCNL and 10 percent by the local
directors of the company. AKC has operations in four other African countries
under various arrangements including affiliate entities, branch operations and local
agencies.
RCNL’s primary business is the marketing of AKC’s investment funds in Nigeria
including mutual funds in capital and money market securities. RCNL L
sometimes undertake proprietary investment for its own account majorly in equity,
government bonds and Real Estate Investment Trust (REIT) units.
RCNL
N’000
Dividends from listed equity (net of WHT)
1,314
Dividend from subsidiary
Interest from treasury bills and bonds
3,560
REIT distributions
780
Marketing fees
3,370
Capital gains from sale of securities
685
Mutual fund income
-
AKC
Rupees ‘000
4,500
2,250
8,450
Required:
By applying the provisions of the DTA treaty, compute the tax savings to RCNL
and AKC based on the information above for the year ended December 31, 2018.
REVIEW OF MAURITIUS-NIGERIA DOUBLE TAXATION TREATY
Background information
In August 2012, representatives of the governments of Mauritius and Nigeria
signed an income tax treaty.
Also signed was a Protocol for the treaty which agreements contain measures
providing beneficial tax rates for;
102
ο‚· Dividends, interest, and royalties.
ο‚· It also provides for resident-based taxation of capital gains arising on
sale of shares, and
ο‚· Rules with respect to the taxation of permanent establishments.
The treaty provisions which have been ratified by Mauritius government
still await ratification by Nigeria. Once ratified by both countries, the treaty
will enter into force.
Below are some of the key provisions of the tax treaty.
o
Taxes covered under the DTT are capital gains tax, personal and
corporate income taxes including Tertiary Education Tax in Nigeria.
o
According to Articles 10, 11 and 12 of the DTT, dividends, interests
and royalties derived by a Mauritian resident from a Nigerian company
or vice versa, would be subject to a maximum tax deduction of 7.5% of
the gross amount, provided the recipient is the beneficial owner.
o
Where dividend received by a Mauritian company from Nigeria is
liable to tax in Mauritius, the relief by way of credit covers any
withholding tax paid in Nigeria as well as the underlying taxes paid by
the Nigerian company on the profit distributed.
o
Royalty is defined to mean payment of any kind received as
consideration for the use of, or the right to use any copyright of
literary, artistic or scientific work including cinematograph film and
films or tapes used for radio and television broadcasting, any patent,
trade mark, design, model, computer program, plan, secret formula or
process or for the use of, or the right to use industrial, commercial or
scientific equipment or for information concerning industrial,
commercial or scientific experience.
o
Business profit is only taxable in the source country where a Permanent
Establishment (PE) has been created.
Article 5 limits a PE to :
(a) A building site or construction, installation or assembly project, or
supervisory activities in connection therewith only if the site, project or
activity lasts more than 6 months
103
(b) The furnishing of services including consultancy services by an
enterprise of a Contracting State through employees or other personnel
engaged in the other Contracting State, provided that such activities
continue for the same or a connected project for a period or periods
aggregating to more than 6 months within any 12-month period.
o
Profit attributable to a PE is largely determined based on the arm’s
length principle but also the force of attraction principle may be
applied.
o
In determining the profit attributable to a PE there shall be allowed as
deductions expenses which are incurred for the purposes of the
permanent establishment including executive and general
administrative expenses so incurred, whether in the State in which the
permanent establishment is situated or elsewhere.
o
In the case of dependent personal service – the conditions for tax
exemption are:
a)
b)
c)
the recipient is present in the other State for a period or periods not
exceeding in the aggregate 183 days in any 12-month period commencing
or ending in the fiscal year concerned; and
the remuneration is paid by, or on behalf of an employer who is not a
resident of the other State; and
the remuneration is not borne by a permanent establishment or a fixed
base which the employer has in the other State.
o
Under the Mutual Agreement Procedure (MAP), where an agreement
between the competent authorities result in agreed adjustments to be
made, such will be implemented regardless of any time limit contained
in the local legislation.
o
There is a provision for the exchange of information but it does not
allow the supply of any information which is not obtainable under the
laws or in the normal course of the administration of either country.
o
Article 23 contains a tax sparing provision under paragraph 3 which
states that “for the purposes of allowance as a credit the tax payable in
Mauritius or Nigeria as the context requires, shall be deemed to include
the tax which is otherwise payable in either of the two Contracting
104
States but has been reduced or waived by either State in order to
promote its economic development.”
Solution.
Computation of tax savings for 2019 year of assessment
i
ii
iii
iv
v
vi
vii
Dividend from listed equity (net of WHT)
Dividend from subsidiary
Interest from treasury bills and bonds
Real estate investment trust distributions
Marketing fees
Capital gains from sale of securities
Mutual fund income
Total tax savings
Note
a
b
c
d
e
f
g
RCNL
N '000
292.00
1,068.00
234.00
68.50
1,662.50
AKC
R'000
1,012.50
675.00
1,687.50
Tutorial note to tax savings computation
a) The dividend received by RCNL from listed equity net of withholding tax, is
a “franked investment income” and shall be a final tax on the dividend. The
dividend is exempted from further tax in the hand of RCNL. There will be
tax savings of 20% (that is 30% - 10%) on the gross dividend since the 10%
WHT already deducted is a final tax on the dividend, that is 20% X (100/90
x N1, 314,000) = N292, 000
b) Dividend from subsidiary RCNL to AKC will be subject to withholding tax
of R337, 500 at 7.5% instead of regular 10% according to Articles 10, 11
and 12 of the double taxation avoidance agreement between Mauritius and
Nigeria. The withholding tax credit note issued to AKC shall be utilized to
claim relief of the WHT when the dividend is received in Mauritius, also, in
line with the provision in Mauritius-Nigeria DTA treaty. Meanwhile, the net
dividend from subsidiary (RCNL) will constitute a franked investment
income to AKC and exempted from any further tax. Therefore, there will be
tax savings of 22.5% (that is 30% - 7.5%) on the gross dividend, that is
(30% of R4, 500,000) - (7.5% of R4, 500,000) = R1, 012,500
105
c) Interest from treasury bills and bonds are exempted from tax in Nigeria,
though Article 10, 11 and 12 of the Mauritius-Nigeria DTA treaty provides
for withholding tax at 7.5% on interest.
The tax savings from such investment incomes are as shown below:
RCNL (N3, 560,000 X 30%) = N 1, 068,000
AKC (R2, 250,000 X 30%) = R675, 000
d. REIT distribution is an income from unit trust. Dividends or distributions
received from unit trust are exempted from tax in Nigeria. Therefore, the tax
savings from the income is N234, 000 being 30% of the distribution received
(N 780, 000).
e. The marketing fee received by TPNL from TPI is a taxable income and shall
be fully subject to tax when received in Nigeria. This income is not covered
in the DTA agreement between Mauritius and Nigeria. There will be no tax
savings on the fee.
f. Capital gains from sale of securities are exempted from Capital Gains Tax
Act effective 1998 year of assessment. Therefore, the tax savings on the
capital gains on sale of securities shall be N68, 500 (10% X N 685, 000).
g. The mutual fund income is deemed derived in Nigeria and shall be liable to
tax in Nigeria. Mutual fund income is not covered in the DTA agreement
between Mauritius and Nigeria, hence there will be no tax savings on the
income.
Treatment of double taxation when there is no double
taxation agreement.
The basic rule under commonwealth agreement.
a. Commonwealth Relief for a Nigerian company
Where a Nigeria company has paid tax on profit, upon which commonwealth
income tax has been paid, such company will be entitled to relief as follow:
i)
If the commonwealth rate (CWR) is lower than one half of the Nigeria
tax rate (CITA), the rate of relief is to be given shall be the
Commonwealth Rate (CWR)
106
That is: if CWR < ½ CITA; relief is CWR.
ii)
If the commonwealth rate (CWR) is greater than one half of the Nigeria
tax rate (CITA), the rate of relief is to be given shall be the
Commonwealth Rate (CWR)
That is: CWR > ½ CITA, the relief is ½ CITA
b. Commonwealth Relief for a Non-Nigerian company
In the case of were a Non-Nigerian company has paid tax on profit, upon
which commonwealth income tax has been pain, such company will be
entitled to relief as follow:
i)
If the commonwealth rate (CWR) is lower than Nigeria tax rate (CITA),
the rate of relief to be given shall be the ½ Commonwealth Rate (CWR)
That is: CWR > CITA, the relief is ½ CWR
ii)
If the commonwealth rate (CWR) is greater than Nigeria tax rate (CITA),
the rate of relief to be given shall be the Nigeria Rate (CITA) minus ½
Commonwealth Rate (CWR)
That is: CWR > CITA, the relief is (CITA - ½ CWR)
Question.
#ENDSAS world-wide run Protest Company across the world. The company’s
operating result for 31st October, 2020 are as follows:
N
Income from Nigeria
60,000,000
Income from UK
26,400,000
Total income
86,400,000
Les overhead expenses
(48,000,000)
Net profit
38,400,000
Including in overhead were:
a.
b.
c.
d.
N
5,400,0000
900,000
300,000
5,040,000
Depreciation Nigeria Business
Depreciation – UK business
Donation to clubs in Nigeria
Foreign tax suffered
107
e. Profit attributable to UK business
6,180,000
Capital allowances agreed with tax officials for Nigeria and UK business were
4,248,000 and 1,740,000 respectively. Assume the company is wholly owned
Nigeria Company.
Required:
Compute the tax liability on the total income, stating clearly the double taxation
relief applicable to the company.
SOLUTION.
#ENDSAS world-wide
Computation tax payable for 2021 year of assessment.
N
N
Net profit
38,400,000
Add: non- allowable expenses
Depreciation
6,300,000
Donation
300,000
Foreign tax suffered
5,040,000 11,640,000
Adjusted/assessable profit
50,040,000
Capital allowance
5,948,000
Relieved
(5,949,000) (5,949,000)
Unrelieved
nil
Total profit
44,052,000
Income tax
Double taxation relief (15% x 10,380,000)
Tax payable
13,215,600
(1,557,000)
11,658,600
Working for double taxation relief
Net profit in UK
Add back
Depreciation
Foreign tax
Assessable/adjusted profit
Capital allowance
Total profit
6,180,000
900,000
5,040,000
108
5,940,000
12,120,000
(1,740,000)
10,380,000
Commonwealth rate:
π‘“π‘œπ‘Ÿπ‘’π‘–π‘”π‘› π‘‘π‘Žπ‘₯ π‘ π‘’π‘Ÿπ‘“π‘“π‘’π‘Ÿπ‘’π‘‘
πΉπ‘œπ‘Ÿπ‘’π‘–π‘”π‘› π‘‡π‘œπ‘‘π‘Žπ‘™ π‘π‘Ÿπ‘œπ‘“π‘–π‘‘
5,040,000
10,380,00
x 10%
x 100% = 48.55%
Since:
CWR > ½ CITA, the relief is ½ CITA
Therefore the double taxation relief rate is 15% (i.e ½ of 30%)
Double taxation relief if 15% x 10,380,000 = 1,557,000
Questions:
a. Explain the concept and objective of double taxation relief
b. Identifying six types of income exempted from double taxation relief.
Solution;
a. Double taxation is a bilateral agreement between two countries aimed at
exempting certain income already subjected to tax in another country from
further tax in the hand of the recipients.
b. Types of income exempted from double taxation relief:
i)
Payment to a student or apprentice during his full time education or
training in Nigeria are exempted.
ii)
Government pensions are exempted unless the recipients is ordinary
resident inn Nigeria
iii) Dividend paid by UK Company to a Nigeria resident who has no
permanent establishment in the UK ae exempt from double Taxation
relief.
iv) The income of resident in the UK is exempt provided
a. He is not in Nigeria for at least 183 days
b. The services are rendered for UK employer.
v)
Aircraft and shipping profits are exempt
vi) The Remuneration of a Professor or Teacher who is resident for not more
than two years in the country, for the purpose of teaching is exempt.
109
110
OIL AND GAS
An Act to impose a tax upon profits from the winning of Petroleum in Nigeria,
to provide for the assessment and collection thereof and for purpose
connected therewith.
Short title
This Act may be cited as the Petroleum Profits Tax Act.
Interpretation
In this Act, unless the context otherwise requires“petroleum operations” means the winning or obtaining and transportation of
petroleum or chargeable oil in Nigeria by or on behalf of a company for its own
account by any drilling, mining, extracting or other like operations or process, not
including refining at a refinery, in the course of a business carried on by the
company engaged in such operations, and all operations incidental thereto and any
sale of or any disposal of chargeable oil by or on behalf of the company;
“Accounting period” in relation to a company engaged in petroleum operations,
meansa) a period of one year commencing on 1 January and ending on 31 December
of the same year; or
b) any shorter period commencing on the day the company first makes a sale
or bulk disposal of chargeable oil under a programme of continuous
production and sales, domestic, export or both, and ending on 31 December
of the same year; or
c) any period of less than a year being a period commencing on 1 January of
any year and ending on the date in the same year when the company ceases
to be engaged in petroleum operations,
and in the event of any dispute with respect to the date of the first sale of
chargeable oil above or with respect to the date on which the company ceases to
be engaged in petroleum operations, the Minister of Petroleum Resources shall
determine the same and no appeal shall lie therefrom;
111
“Board” means the Federal Board of Inland Revenue established and constituted
in accordance with section 1 of the Companies Income Tax Act;
“Casing head petroleum spirit” means any liquid hydrocarbons obtained in
Nigeria from natural gas by separation or by any chemical or physical process but
before the same has been refined or otherwise treated;
“Chargeable natural gas” in relation to a company engaged in petroleum
operations means natural gas actually delivered by such company to the Nigerian
National Petroleum Corporation under a Gas Sales Contract but does not include
natural gas taken by or on behalf of the Government of the Federation in pursuance
of this Act;
“Company” means anybody corporate incorporated under any law in force in
Nigeria or elsewhere;
“Crude oil” means any oil (other than oil extracted by destructive distillation from
coal, bituminous shales or other stratified deposits) won in Nigeria either in its
natural state or after the extraction of water, sand or other foreign substance
therefrom but before any such oil has been refined or otherwise treated;
“Disposal” and “disposed of”, in relation to chargeable oil owned by a company
engaged in petroleum operations, mean or connote respectivelya) delivery, without sale, of chargeable oil to; and
b) chargeable oil delivered, without sale, to a refinery or to an adjacent storage
tank for refining by the company;
“G-Factor” means gas production cost adjustment factor;
“High Court” means a High Court in Nigeria within whose jurisdictiona) in relation to any offence under this Act, the place is situated where such
offence is, for the purposes of this Act, deemed to have occurred;
b) in relation to any suit for tax or appeal against an assessment of tax, the
place is situated where the return under section 33 of this Act was submitted
or where the assessment of the tax was made as the case may be;
c) in relation to any direction under section 32 (2) of this Act, the place is
situated from which the direction was issued; and
112
d) in relation to any claim or other matter which is subject to appeal in like
manner as an assessment, or to which the provisions of section 38 of this Act
apply with any modifications, the place is situated from which the claim or
other matter was refused by the Board;
“Intangible drilling costs” means all expenditure for labour, fuel, repairs,
maintenance, hauling, and supplies and materials (not being supplies and materials
for well cement. casing or other well fixtures) which are for or incidental to
drilling, cleaning, deepening or completing wells or the preparation thereof
incurred in respect of(a) determination of well locations geological studies and topographical and
geographical surveys preparatory to drilling;
(b) drilling, shooting, testing and cleaning wells;
(c) cleaning, draining and levelling land, road building and the laying of
foundations;
(d) erection of rigs and tankage assembly and installation of pipelines and other
plant and equipment required in the preparation or drilling of wells
producing petroleum;
“Liquefied natural gas” means natural gas in its liquid state at approximately
atmospheric pressure;
“Loss” means a loss ascertained in like manner as an adjusted profit;
“Minister” means the Minister charged with responsibility for matters relating to
taxes on incomes and profits;
“MMcf” means one million cubic feet;
“Natural gas” means gas obtained in Nigeria from boreholes and wells and
consisting primarily of hydrocarbons;
“Nigeria” includes the submarine areas beneath the territorial waters of Nigeria
and submarine areas beneath any other waters which are or at any time shall in
respect or mines and minerals become subject to the legislative competence of the
National
Assembly;
113
“non-productive rents” means and includes the amount of any rent as to which
there is provision for its deduction from the amount of any royalty under a
petroleum prospecting license or oil mining lease to the extent that such rent is not
so deducted;
“oil mining lease” means a lease granted to a company, under the Minerals and
Mining Act, for the purpose of winning petroleum or any assignment of such lease;
“Oil prospecting licence” means a licence granted to a company, under the
Minerals and Mining Act, for the purpose of winning petroleum, or any assignment
of such licence;
“Person” includes a company and any unincorporated body of persons;
“petroleum” means any mineral oil or relative hydrocarbon and natural gas
existing in its natural condition in Nigeria but does not include liquefied natural
gas, coal, bituminous shales or other stratified deposits from which oil can be
extracted by destructive distillation;
Ascertainment of profits, adjusted profit, assessable, profits and chargeable
profits
“Profits” means profits for the purpose of section 9 of this Act;
Subject to any express provisions of this Act, in relation to any accounting period,
the profits of that period of a company shall be taken to be the aggregate of(a) the proceeds of sale of all chargeable oil sold by the company in that period;
(b) the value of all chargeable oil disposed of by the company in that period;
and
(c) all income of the company of that period incidental to and arising from any
one or more of its petroleum operations.
For the purposes of (b) of this section, the value of any chargeable oil so disposed
of shall be taken to be the aggregate of(a) the value of that oil as determined, for the purpose of royalty, in accordance
with the provisions of any enactment applicable thereto and any financial
agreement or arrangement between the Federal Government of Nigeria and
the company;
114
(b) any cost of extraction of that oil deducted in determining its value as referred
to in paragraph (a) of this subsection; and
(c) any cost incurred by the company in transportation and storage of that oil
between the field of production and the place of its disposal.
“Adjusted profit” means adjusted profit for the purpose of section 9 of this Act;
The adjusted profit of an accounting period shall be the profits of that period after
the deductions allowed by subsection (1) of section 10 of this Act and any
adjustments to be made in accordance with the provisions of section 14 of this Act.
Exclusion of certain profits, etc. (section 14)
Where a company engaged in petroleum operations is engaged in the transportation
of chargeable oil by ocean going oil-tankers operated by or on behalf of the
company from Nigeria to another territory then such adjustments shall be made in
computing an adjusted profit or a loss as shall have the effect of excluding there
from any profit or loss attributable to such transportation.
Deductions allowed under subsection (1) of section 10 of the Act
In computing the adjusted profit of any company of any accounting period from its
petroleum operations, there shall be deducted all outgoings and expenses wholly,
exclusively and necessarily incurred, whether within or without Nigeria, during
that period by such company for the purpose of those operations, including but
without otherwise expanding or limiting the generality of the foregoing1. Rents incurred by the company for that period in respect of land or buildings
occupied under an oil prospecting license or an oil mining lease for
disturbance of surface rights or for any other like disturbance;
2. all non-productive rents, the liability for which was incurred by the company
during that period;
3. all royalties, the liability for which was incurred by the company during that
period in respect of natural gas sold and actually delivered to the Nigerian
National Petroleum Corporation, or sold to any other buyer or customer or
disposed of in any other commercial manner;
4. all royalties the liability for which was incurred by the company during that
period in respect of crude oil or of casing head petroleum spirit won in
Nigeria:
115
5. all sums the liability for which was incurred by the company to the Federal
Government of Nigeria during that period by way of customs or excise duty
or other like charges levied in respect of machineries, equipment and goods
used in the company's petroleum operation; and
6. sums incurred by way of interest upon any money borrowed by such
company, where the Board is satisfied that the interest was payable on
capital employed in carrying on its petroleum operations;
7. all sums incurred by way of interest on any inter-company loans obtained
under terms prevailing in the open market, that is the London Inter-Bank
Offer Rate, by companies that engage in crude oil production operations in
the Nigerian oil industry
8. any expense incurred for repair of premises, plant machinery, or fixtures
employed for the purpose of carrying on petroleum operations or for the
renewal, repair or alteration of any implement, utensils or articles so
employed;
9. debts directly incurred to the company and proved to the satisfaction of the
Board to have become bad or doubtful in the accounting period for which
the adjusted profits is being ascertained notwithstanding that such bad or
doubtful debts were due and payable prior to the commencement of that
period Provided thati. the deduction to be made in respect of a doubtful debt shall not
exceed that portion of the debt which is proved to have become
doubtful during that accounting period, nor in respect of any
particular debt shall it include any amount deducted under the
provisions of this paragraph in determining the adjusted profit of a
previous accounting period;
ii.
all sums recovered by the company during that accounting period
on account of amounts previously deducted in respect of bad or
doubtful debts shall. for the purposes of subsection (1) (c) of
section 9 of this Act, be treated as income of that company of that
period; and
116
iii.
it is proved to the satisfaction of the Board that the debts in respect
of which a deduction is claimed were either-
a) included as a profit from the carrying on of petroleum operations
in the accounting period in which they were incurred; or
b) advances made in the normal course of carrying on petroleum
operations not being advances on account of any item falling
within the provisions of section 13 of this Act;
10.any other expenditure, including tangible drilling costs directly incurred in
connection with drilling and appraisal of a development well but excluding
an expenditure which is qualifying expenditure for the purpose of the
Second Schedule to this Act (that is CAPITAL ALLWANCE), and any
expense or deduction in respect of a liability incurred which is deductible
under any other provision of this section
Deductions not allowed
A. Subject to the express provisions of this Act, for the purpose of ascertaining the
adjusted profit of any company of any accounting period from its petroleum
operations, no deduction shall be allowed in respect ofi. any disbursements or expenses not been money wholly and exclusively laid
out or expended, or any liability not being a liability wholly or exclusively
incurred, for the purpose of those operations;
ii. any capital withdrawn or any sum employed or intended to be employed as
capital;
iii. any capital employed in improvements as distinct from repairs;
iv. any sum recoverable under an insurance or contract of indemnity;
v.
rent of or cost of repairs to any premises or part of premises not incurred for
the purposes of those operations;
vi.
any amounts incurred in respect of any income tax, profits tax or other
similar tax whether charged within Nigeria or elsewhere;
vii. the depreciation of any premises, buildings, structures, works of a permanent
nature, plant, machinery or fixtures;
viii. any payment to any provident, savings widows' and orphans' or other
society, scheme or fund, except such payments as are allowed under
subsection (1) (g) of section 10 of this Act;
ix. any customs duty on goods (including articles or any other thing) imported
by the company- [1996 No. 31.J
a. for resale or for personal consumption of employees of the company; or
117
x.
b. where goods of the same quality to those so imported are produced in
Nigeria and are available, at the time the imported goods were ordered by
the company for sale to the public at the prices less or equivalent to the
cost to the company of the imported goods;
Any expenditure for the purchase of information relating to the existence
and extent of petroleum deposits.
2. Notwithstanding the provisions of subsection (1) (d) of section 10 of this Act, in
computing the adjusted profit of any company of any accounting period no
deduction shall be allowed in respect of sums incurred by way of interest during
that period upon any borrowed money where such money was borrowed from a
second company if during that perioda) either company has an interest in the other company; or
b) both have interests in another company either directly or through other
companies; or
c) Both are subsidiaries of another company.
3. For the purposes of subsection (2) of this sectiona) a company shall be deemed to be a subsidiary of another company if and so
long as an interest in it is held by that other company either directly or
through any other company or companies;
b) an interest means a beneficial interest in issued share capital (by whatever
name called); and
c) The Board shall disregard any such last-mentioned interest which in
their opinion is insignificant or remote, or where in their opinion that
interest arises from a normal market investment and the companies
concerned have no other dealings or connection between each other.
“Assessable profits” means assessable profits for the purpose of section 9 of this
Act. The assessable profit of an accounting period shall be the adjusted profit of
that period after any deduction allowed by section 20 of this Act.
Assessable profits and losses
Subject to the provisions of section (16), the assessable profits of any company for
any accounting period shall be the amount of the adjusted profit of that period after
the deduction ofa. the amount of any loss incurred by that company during any previous
accounting period;
118
“Chargeable profits” means chargeable profits for the purpose of section 9 of this
Act. The chargeable profits of an accounting period shall be the assessable profits
of that period after the deduction allowed that is CAPITAL ALLOWANCE by
section 20 of this Act.
“Assessable tax” means assessable tax ascertained under section 21 of this Act.
The assessable tax for any accounting period of a company shall be an amount
equal to 85% of its chargeable profits of that period.
“Chargeable tax” means chargeable tax ascertained under section 22 of this Act
and imposed under this Act;
Chargeable tax means
1) A crude oil producing company which executed a Production Sharing
Contract with the Nigerian National Petroleum Corporation in 1993 shall,
throughout the duration of the Production Sharing Contract, be entitled to
claim an investment tax credit allowance as an offset against tax in
accordance with the provision of the Production Sharing Contract.
2) The investment tax credit rate applicable to the contract area shall be 50%
flat rate of chargeable profit for the duration of the Production Sharing
Contract.
3) In computing the tax payable, the investment tax credit shall be applicable in
full to petroleum operations in the contract area such that the chargeable tax
is the amount of the assessable tax less the investment tax credit.
4) The chargeable tax computed under subsection (3) of this section shall be
split between the Nigerian National Petroleum Corporation and the crude oil
producing company in accordance with the proportion of the percentage of
profit of oil split.
In this section"Contract area" means the contract area as defined in the Production
Sharing Contract;
"Production Sharing Contract" has the meaning assigned to it in the Deep
Offshore and Inland Basin Production Sharing Contracts Act.
119
Capital Allowance
"Qualifying expenditure" means,
1. subject to the express provisions of this Schedule, expenditure incurred in an
accounting period which isa. capital expenditure (hereinafter called "qualifying plant expenditure")
incurred on plant, machinery or fixtures;
b. capital expenditure (hereinafter called "qualifying pipeline and storage
expenditure") incurred on pipelines and storage tanks;
c. capital expenditure (hereinafter called "qualifying building
expenditure"), other than expenditure which is included in paragraphs
(a), (b) or (cl) of this interpretation, incurred on the construction of
buildings, structures or works of a permanent nature; or
d. capital expenditure (hereinafter called "qualifying drilling
expenditure") other than expenditure which is included in paragraph
(a) or (b) of this interpretation, incurred in connection with, or with
petroleum operations in view ofi. the acquisition of, or of rights in or over, petroleum deposits;
ii. searching for or discovering and testing petroleum deposits, or
winning access thereto; or
iii. the construction of any works or buildings which are likely to
be of little or no value when the petroleum operations for which
they were constructed cease to be carried on:
Provided that, for the purposes of this definition qualifying expenditure shall not
include any sum which may be deducted under the provisions of section 10 of this
Act.
2. For the purposes of this interpretation of qualifying expenditure, where
expenditure is incurred by a company before its first accounting period and
such expenditure would have fallen to be treated as qualifying expenditure
(ascertained without the qualification contained in the foregoing proviso) if it
had been incurred by the company on the first day of its first accounting period,
anda) that expenditure is incurred in respect of an asset owned by the company
then such expenditure shall be deemed to be qualifying expenditure
incurred by it on that day; or
b) that expenditure is incurred in respect of an asset which has been disposed
of by the company before the beginning of its first accounting period, then
any loss suffered by the company on the disposal of such asset shall be
deemed to be qualifying petroleum expenditure incurred by the company on
120
that day and be deemed to have brought into existence an asset owned by
the company in use for the purposes of petroleum operations carried on by
the company, and any profit realised by the company on such disposal shall
be treated as income of the company of its first accounting period for the
purposes of subsection (1) (a) of section 9 of this Act.
Provisions relating to qualifying petroleum expenditure
1. For the purposes of this Schedule wherea. expenditure has been incurred before its first accounting period and such
expenditure would have been treated as such qualifying petroleum
expenditure (ascertained without the qualification contained in the
proviso in the interpretation of qualifying expenditure) if it had been
incurred in that first accounting period; and
b. such expenditure has not brought into existence an asset, then such
expenditure (ascertained in the case of sub-paragraph (1) (a) of this
paragraph with- out such qualification) shall be deemed to have brought
into existence an asset owned by the company incurring the expenditure
and in use for the purposes of such petroleum operations.
2. For the purposes of this Schedule, an asset in respect of which qualifying
drilling expenditure has been incurred by any company for the purposes of
petroleum operations carried on by it during any accounting period of the
company, and which has not been disposed of, shall be deemed not to cease
to be used for the purposes of such operations so long as such company
continues to carry on such operations.
3. So much of any qualifying petroleum expenditure incurred on the
acquisition of rights in or over petroleum deposits and on the purchase of
information relating to the existence and extent of such deposits as exceeds
the total of the original cost of acquisition of such rights and of the cost of
searching for, discovering and testing such deposits prior to the pur- chase of
such information shall be left out of account for the purposes of this
Schedule: Provided that where the company which originally incurred such
costs was a company which carried on a trade or business consisting, as to
the whole or part thereof, in the acquisition of such rights or information
with a view to the assignment or sale thereof, the price paid on such
assignment or sale shall be substituted for the aforementioned costs.
Petroleum investment allowance
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1. For the purposes of this Act and subject to the provisions of this Schedule,
where a company has incurred any qualifying capital expenditure wholly,
exclusively and necessarily for the purposes of petroleum operations carried
out by it, there shall be due to that company, for the accounting period in
which that asset was first used or for the purposes of such operations, an
allowance (in this Schedule called "Petroleum Investment Allowance") at
the appropriate rate per cent, set forth in Table I to this Schedule, of such
expenditure.
Qualifying expenditure in respect of Rate per centum
Rate per centum
On-shore operations.............................................................................................. 5
Operations in territorial waters and continental shelf areas up to and
including
100 metres of water depth
............................................................................... 10
Between 100 metres and 200 metres .....................................................................15
Beyond 200 metres of water depth ......................................................................20
2. For the purpose of this Act, the Petroleum Investment Allowance shall be
added to the annual allowance computed under paragraph 6 of this Schedule
and shall be subject to the same rules under this Act.
Annual allowance
1. Subject to the provisions of this Schedule, where in any accounting period, a
company owning any assets has incurred in respect thereof qualifying
expenditure wholly, necessarily and exclusively for the purposes of
petroleum operations carried on by it, there shall be due to that company as
from the accounting period in which such expenditure was incurred, an
allowance (in this Act referred to as "an annual allowance") at the
appropriate rate per centum specified in Table 11 of this Schedule.
Annual allowance
Rate per centum
First year.................................................................. 20
2nd year................................................................... 20
3rd year.................................................................... 20
4th year .................................................................. 20
5th year................................................................... 19
122
2. Notwithstanding the provisions of sub-paragraph (1) of this paragraph, there
shall be retained in the books, in respect of each asset 1 % of the initial cost
asset which may only be written off in accordance with sub-paragraph (3) of
this paragraph.
3. Any asset or part thereof in respect of which capital allowances have been
granted may only be disposed of on the authority of a Certificate of Disposal
issued by the Minister or any person authorized by him.
Balancing allowances
Subject to the provisions of this Schedule, where in any accounting period of a
company, the company owning any asset in respect of which it has incurred
qualifying expenditure wholly and exclusively for the purposes of petroleum
operations carried on by it, disposes of that asset an allowance (hereinafter called
"a balancing allowance") shall be due to that company for that accounting period
of the excess of the residue of that expenditure, at the date such asset is disposed
of, over the value of that asset at that date:
Provided that a balancing allowance shall only be due in respect of such asset if
immediately prior to its disposal it was in use by such company for the purposes of
the petroleum operations for which such qualifying expenditure was incurred.
Balancing charges
Subject to the provisions of this Schedule, where in any accounting period of a
company, the company owning any asset in respect of which it has incurred
qualifying expenditure wholly and exclusively for the purposes of petroleum
operations carried on by it, disposes of that asset, the excess (hereinafter called "a
balancing charge") of the value of that asset, at the date of its disposal, over the
residue of that expenditure at that date shall, for the purposes of subsection (1) (a)
of section 9 of this Act, be treated as income of the company of that accounting
period:
Provided that a balancing charge in respect of such asset shall only be so treated if
immediately prior to the disposal of that asset it was in use by such company for
the purposes of the petroleum operations for which such qualifying expenditure
was incurred and shall not exceed the total of any allowances due under the
provisions of this Schedule, in respect of such asset.
Meaning of "disposed of"
Subject to any express provision to the contrary, for the purposes of this Schedule123
a. a building, structure or works of a permanent nature is disposed of if any of
the following events occurb. the relevant interest is sold; or
c. that interest, being an interest depending on the duration of a concession,
comes to an end on the coming to an end of that concession; or
d. that interest, being a leasehold interest, comes to an end otherwise than on
the company entitled thereto acquiring the interest which is reversionary
thereon; or
e. the building, structure or works of a permanent nature are demolished or
destroyed or, without being demolished or destroyed, cease altogether to be
used for the purposes of petroleum operations carried on by the owner
thereof;
f. plant, machinery or fixtures are disposed of if they are sold, discarded or
cease altogether to be used for the purposes of petroleum operations carried
on by the owner thereof;
g. Assets in respect of which qualifying drilling expenditure is incurred are disposed of if they are sold or if they cease to be used for the purposes of the
petroleum operations of the company incurring the expenditure either on
such company ceasing to carry on all such operations or on such company
receiving insurance or compensation monies therefor.
Interpretation of' Fourth Schedule:
(Natural Gas Sold)
For the purposes of this Schedule, unless the context otherwise requires"contract capacity" means the maximum quantity of natural gas
expressed in MMcf to which a customer of a company is entitled in the
accounting period under an individual gas sales contract between the
company and such customer;
"gas take" means the actual quantity of natural gas expressed in MMet'
actually taken or paid for by a customer in the accounting period under
an individual gas sales contract between the company and a customer of
the company.
2. Ascertainment of G-Factor
(1) The value of all chargeable natural gas in the accounting period shall
be the sum of gross proceeds under individual gas sales contracts in the
124
accounting period less the G-Factor allowance as applicable to any such
individual gas sales contracts at the appropriate rate per cent of such
proceeds under any such individual gas sales contracts as specified in the
Table to this Schedule.
(2) G-Factor per centum in respect of factors in between the figures
mentioned in the Table to this Schedule shall be calculated on pro-rata
basis
Load factor
50
60
70
80
G-Factor per centum
16.9
15.5
14.3
13.6
11. Incentives for utilization of associated gas
(1) The following incentives shall apply to a company engaged in the utilization of
associated gas, that is(a) Investment required to separate crude oil and gas from the reservoir into usable
products shall be considered as part of the oil field development;
(b) Capital investment on facilities equipment to deliver associated gas in usable
form at utilization or designated custody transfer points shall be treated for tax
purposes, as part of the capital investment for oil development;
(c) Capital allowances, operating expenses and basis of tax assessment shall be
subject to the provisions of this Act and the tax incentives under the revised
memorandum of understanding.
(2) The incentives specified under subsection (1) of this section shall be subject to
the following conditions, that is(a) Condensates extracted and re-injected into the crude oil stream shall be treated
as oil but those not re-injected shall be treated under existing tax arrangement;
(b) The company shall pay the minimum amount charged by the Minister of
Petroleum Resources for any gas flared by the company;
(c) the company shall, where practicable, keep the expenses incurred in the
utilization of associated gas separate from those incurred on crude oil operation
and only expenses not able to be separated shall be allowable against the crude oil
income of the company under this Act;
125
(d) Expenses identified as incurred exclusively in the utilization of associated gas
shall be regarded as gas expenses and be allowable against the gas income and
profit to be taxed under the Companies Income Tax Act; [Cap. C2!]
(e) only companies which invest in natural gas liquid extraction facilities to supply
gas in usable form to downstream projects, including aluminum smelter and
methanol, Methyl Tertiary Butyl Ether and other associated gas utilization projects
shall benefit from the incentives;
(f) All capital investments relating to the gas-to-liquids facilities shall be treated as
chargeable capital allowance and recovered against the crude oil income;
(g) Gas transferred from the natural gas liquid facility to the gas-to-liquid facilities
shall be at zero per cent tax and zero per cent royalty.
12. Application of incentives to utilisation of non-associated gas
All incentives granted in respect of investments in associated gas shall be
applicable to investments in non-associated gas.
Question on Oil and Gas
Question.
In the Petroleum Downstream Sector of the economy, the term “Deregulation” has
been frequently expressed.
i) Briefly explain this term
ii) Mention Six (6) objectives of the term
iii) Mention Five (5) perceived needs for deregulation.
Solution.
a.
(i)
(ii)
Deregulation
This is the process by which the Government decides to divest itself
from the Management of the oil sector, but allow it to liberalise, open
to the competitive pressure and contestable market for more entrants.
Objective of Deregulation
(i)
To promote easy competitive solution especially where there is
considerable danger of abuse of monopoly power
(ii) To promote internal and allocative efficiency within the sector
(iii) Ensure pricing rule which minimizes the deviation of price from
the marginal cost
126
(iv)
To remove entry deterrence and government erecting barriers
and transform downstream sector into a contestable market
(v) To enable private enterprise to perform functions previously
done by Government which could be out sourcing of services
(vi) To eliminate monopoly, but to encourage competition and
overcome poor public sector management
(vii) To bring the price down on a long run
(viii) The competition arising from the deregulation will remove unfit
producers and thus protect customers from exploitation
(ix) To maximise benefits of the efficiency, equity and innovation,
seek fair profit for utility and reasonable price for customers
(iii)
Need for Deregulation
(a) There is need for deregulation due to poor performance of the
sector, high cost of production and unreliable supply of white
product especially petrol (PMS).
(b) Desire to remove or re-allocate subsidies especially from
Government agencies as the Government is loosing too much to
subsidy
(c) The need to dispense ownership in downstream sector
(d) The need to solve technological and managerial problems
(e) To create opportunity for buyers/consumers to choose among
multiple sellers/suppliers.
Question.
As an expert in oil business, one of your clients approached you to explain in
brief the issue of “Local Content” in the Upstream Sector.
You are required to;
i) Define the term “Local Content”.
ii) Mention Three (3) parameters for measuring local content.
SOLUTION
(i) Definition of Local Content
This is the quantum of composite value added to or created in the
Nigerian economy through the deliberate utilisation of Nigerian human
and material resources and services in the exploration, development,
127
exploitation, transportation and sale of Nigerian crude oil and gas
resources without compromising quality, health, safety and
environment.
(ii)
Parameters for Measuring Local Content
(a) Percentage element of Nigerian ownership of the economy.
(b) Percentage of Nigerian management and established managerial
control of the economy.
(c) Percentage element of direct Nigerian employment (Skilled and
unskilled).
(d) Percentage cost of services provided by Nigerians.
(e) Percentage cost of Nigerian raw materials utilised.
(f)
Percentage cost of Nigerian finished goods utilised.
(g) Percentage of Nigerian participation in the procurement of
imported goods.
(h) Degree of effective technology acquisition and adaption capacity
building, equipment upgrades and formal training programmes.
(i)
New employment opportunity created for Nigerians.
(j)
Amount of taxes, fees, duties and payment to the Government.
Question.
There are some tax incentives available to companies engaged in the downstream
sector of the Petroleum Industry in Nigeria.
Enumerate Two (2) of such incentives in each of the following cases:
i) Gas utilization
ii) Gas Exploitation
iii) Gas Development Sector
SOLUTION
a.
Incentives available to companies engaged
(i)
Gas utilisation
(1) The initial tax holiday for three (3) years, renewable for an
additional two (2) years. This relief will commence from the
“Production Day” of the company
(2) Companies will be entitled to accelerated capital allowances after
tax holidays as follows:
128
(3)
- Investment in plant and machinery: 90% annual allowance
with 10% retention.
- Additional investment allowance of 15% which will not
reduce the value of the asset.
The dividend distributed during the tax free period to investor in
respect of investment in foreign currency or introduction of Plant
and Machinery of not less than 30% of the equity of the company
shall be tax free.
(ii)
Gas Exploitation
(a) Any capital investment on facilities and equipment to deliver
associated gas in useable form at utilisation or designated
custody transfer points shall be treated for tax purposes as part of
the capital investment for oil development.
(b) Any investment that is required to separate crude oil and gas
from reservoir into useable products shall be considered as part
of the oil field development. Such investments would be
classified as a qualifying capital expenditure which capital
allowance may be claimed.
(c) All capital allowances operating expenses and basis of the tax
assessment shall be subjected to the provisions of the PPTA (and
the tax incentives under the revised Memorandum of
understanding while it lasted).
(iii)
Gas Development
(a) All expenditure pertaining to the integrated oil and gas project
would be chargeable under the Petroleum Profit Tax Act
(b) Gas will be transferred at 0% Petroleum Profit Tax and the
Royalty also at 0%
(c) The investment allowance is increased from 5% to 15%
(d) Interest on loan for Gas Project is to be deducted provided that
prior approval has been obtained from the Federal Ministry of
Finance before obtaining the loan.
Questions.
Identify and describe Four (4) ways of gas utilization under the downstream
activities.
b.
Ways of Gas Utilisation under Downstream
1)
Power Generation - Gas is used to generate electricity e.g. Egbin,
Electric generation in Lagos. Other Gas fired
129
2)
3)
4)
5)
6)
plants include Ughelli, Sapele, Afam, Omotosho,
Geregu, etc.
Household Cooking Bottled liquidified natural gas are used in
everyday cooking in homes.
Lighting Gas is used as an alternative to Kerosene lamps
where there is no electric power supply.
Heating In temperate and cold regions of the world, gas is
used to heat rooms to desired temperature
Automobile fuel - Some motor vehicles have been developed and
adjusted to use gas in replacement of petrol. This
is called compressed natural gas
Industrial Use Many industries make use of gas as fuel
instead of petrol or diesel for aluminium and iron
smelting e.g. Ajaokuta steel and some other
companies especially in the Lagos area.
Questions.
In the Upstream sector of the oil & gas industry, there are various possible offences.
Enumerate Eight (8) of them.
SOLUTION
a.
Offences in the Petroleum Oil Business
1)
Failure to submit return of estimated tax
2)
Failure to deliver statement of accounts
3)
Failure to furnish additional information requested by the Board of
Federal Inland Revenue Service
4)
Failure to keep proper books and accounts as directed by the Board of
FIRS
5)
Failure to comply with the requirement of notice under the provision of
the ACT
6)
Failure to answer to a notice, summons or questions
7)
Making incorrect returns
8)
Aiding, abetting, assisting or advises false returns
9)
Collection of tax by unauthorised persons
10) Embezzlement of fund committed by Board members
11) Failure to deduct withholding taxes
12) Delay in filing Petroleum Profit Tax Returns
Questions.
130
A firm of tax advisers has submitted computations leading to Petroleum Profit
tax payable of N6,545,350 in respect of Daranijo Petroleum Company Limited
for 2013 year of assessment. In arriving at this amount you were informed that
the following deductions have been made.
N
Agreed loss brought forward
25,500,000
Unexpensed royalties paid
6,500,000
Customs duty
550,000
Capital allowance brought forward
30,705,000
Capital allowances for the current year
25,350,000
The rate of tax is 85%
You are required to agree the computation by computing;
i)
Adjusted Profit
ii)
Chargeable Profit
iii) Assessable Tax
Solution.
DARANIJO PETROLEUM COMPANY LIMITED
COMPUTATION OF ASSESSABLE TAX FOR 2013 ACCOUNTING
PERIOD
(i)
Computation of Adjusted Profit
N
Profit Tax payable reported
Chargeable profit (N6, 545,350/85%)
Add: Capital Allowance B/f
Capital Allowance for the year
Assessable Profit
Add: Loss B/f
Loss relieved
Adjusted Profit
N
6,545,350
7,700,412
30,705,000
25,350,000 56,055,000
63,755,412
25,500,000
(25,500,000) 25,500,000
89,255,412
(ii) Computation of Chargeable Profit and Assessable
Tax
N
Adjusted Profit
Less: Loss B/f
Loss Relieved
N
89,255,412
25,500,000
(25,500,000) 25,500,000
131
Loss C/f
Assessable Profit
Less: Capital Allowance B/f
Capital Allowance the year
Restriction: (85% of Assessable Profit)
Capital Allowance C/f
ο‚· Chargeable Profit
ο‚· Assessable Tax @ 85%
Nil
-63,755,412
30,705,000
25,350,000
56,055,000
54,192,100 54,192,100
1,862,900
9,563,312
8,128,815
The computation of Petroleum Profits Tax
(i)
This question tests the knowledge of candidates on the relationship
between the major components of Petroleum Profits Tax Computation.
(ii) The adjusted profits figure has taken care of all section to deductions
including Education Tax.
(iii) Assessable profit is arrived at by deducting loss brought forward (if
any) from adjusted profit.
(iv) Restriction of capital allowance is necessary in order to comply with
the provision of S20 of PPTA Cap P13 LFN 2004.
Question.
In the Upstream Sector of the oil industry, there are some operating arrangements or
agreements because of the desire of the Government to share in the ownership and
control of the operations. One of such agreements is the “Joint Venture
Agreements”. Briefly explain this form of agreement.
SOLUTION TO QUESTION 4
(a)
Joint Venture Arrangement/Agreement
This is an arrangement between NNPC on behalf of the Government and a
counterpart International Oil Company (IOC) whereby the parties hold the
OPL or OML jointly fund the exploration, development and production of
petroleum. This arrangement is typically governed by a joint operating
agreement with the following features:
- The arrangement is on equity basis
- The International oil company is the operator
132
- Both parties contribute funds proportionally to the costs of operations and
lift equity share of the crude oil won
- The funding of the joint venture is through cash call obligations
- Each party markets its equity crude
- Where the Government has problem in meeting cash call obligations, the
parties usually resort to alternative funding methods.
Question.
Oluchi Oil and Gas Exploration Company Limited in Joint Venture (JV) with NNPC
presents the following information with respect to its operations for the year ended
31st December, 2015.
(i) Costs
$’000
Intangible drilling and development
30,500
costs
Expenditure on 1st two appraisal wells
60,350
Exploration and drilling costs
40,500
Education tax
20,500
Admin and production expenses
100,400
(ii)
Production and Lifting Data
Oil produced
Oil exported
(iii) Capital Allowances
Qualifying expenditure 2015
Existing tax written down value (3years
old)
Recoupable PIA up to 2014
Bbls’000
7,500
7,000
$’000
80,500
20,500
NIL
The following information were also made available;
ο‚· Realizable price advised by NNPC for the period is $102.5
ο‚· The company has paid twelve monthly instalments totaling
$165,500,000.
ο‚· The company operates at 98 metre water depth.
You are required to;
(i)
Determine royalties payable
(ii) Compute Petroleum Investment Allowance
(iii) Compute the Capital Allowances
133
(iv)
(v)
Determine the Petroleum Profit Tax
Compute the final (13th) instalment payable by the company
Solution.
Oluchi Oil and Gas Exploration Company Limited
(i)
Determination of Royalties payable
$’000
ROY = Roy. Rate x RP x V
ROY = 18.5% x 102.5 x 7,500
$’000
142,219
Note: Royalty Rates for JV Operations:
1. Onshore production 20%
2. Offshore production up to 100metre of water depth 18.5%
3. Offshore Production above 100metre of water depth 16.67% or
162/3%
(ii)
Computation Of Petroleum Investment Allowance For 2015
Accounting Period
Qualifying Capital Expenditure
At 98 Metre Water Depth
PIA rates = 10% of $80,500
$’000
80,500
8,050
Note: P.I.A Rates for JV Operations:
1. Onshore production
2. Offshore production up to 100metre of water depth
3. Offshore Production above 100metre of water depth
4. Offshore Production above 200metre of water depth
(iii)
$’000
5%
10%
15%
20%
Computation of Capital Allowances for 2015 Accounting Period
$’000
Qualifying Capital Expenditure
Capital Allowance ($80,500/5) or (80,500
x 20%)
Capital Allowance on old asset:
Tax written down value (after 3 years)
134
$’000
80,500
16,100
20,500
Capital Allowance =($20,500/2)
Capital allowance for 2015 year of
assessment
10,250
26,350
(iv) Computation of Petroleum Profit Tax for 2015 Accounting Period
$’000
Fiscal value of chargeable oil ($102.5 x 7000)
Less: Royalty
Intangible drilling & Development cost
Expenditure on 1st two appraisal wells
Exploration and Drilling cost
Admin and production expenses
Education Tax
Adjusted/Assessable Profit
Less: Capital Allowances
Petroleum Investment Allowances
Chargeable Profit
Petroleum Profit Tax at 85% = 288,631 x 85%
(vi)
142,219
30,500
60,350
40,500
100,400
20,500
26,350
8,050
$’000
717,500
394,469
323,031
34,400
288,631
245,336.35
Computation 13th Instalment Payable
$’000
Petroleum Profit Tax at 85% = 288,631 x 85%
Less Instalment already paid
13th Instalment PPT due
Question.
135
$’000
245,336.35
165,500.00
79,836.35
Based on the following figures which relate to Bonny Light Co. Ltd a company
engaged in petroleum operations, for the accounting period ended 31 st December,
2014, compute the amount of capital allowances to be carried forward to 2015 year
of assessment.
Adjusted profit
Losses brought forward
Petroleum investment allowance
Capital allowances brought forward
Annual allowance
Balancing allowance
$
90,000,000
4,000,000
8,000,000
60,000,000
20,000,000
1,000,000
SOLUTION
Bonny Light & Co. Ltd
Computation of Capital Allowances to be carried forward to 2015 Year of
Assessment
$’000
$’000
90,000,000
4,000.000
86,000,000
Adjusted profit
Less losses brought forward
Assessable Profit
Capital Allowance
Brought forward
60,000,000
Annual Allowance
20,000,000
Balancing Allowance
1,000,000
Petroleum Investment Allowance
8,000,000
Total Capital Allowances
89,000.000
Capital Allowances restricted to:
85% of assessable profit (i.e. 85% x 86,000,000)
73,100,000
Less 170% of Petroleum Investment Allowance (i.e. 170% 13,600,000
x 8,000.000)
Capital Allowance relieved
59,500,000
Unrelieved capital allowances carried forward to 2015
29,500,000
Questions.
136
ABC Petroleum Ltd first made a sale of chargeable oil on 1 January, 2008 under
programme of continuous production and sales. As at 31 December, 2007 the value
of qualifying plant expenditure carried forward was $50,000,000. Between 1
January, 2008 and 31 December, 2008 additional qualifying expenditure incurred on
plant, machinery and fixtures amounted to $60,000,000. The qualifying expenditure
was in respect of:
$
On-shore operations
Offshore (up to and including 100 metres of water depth)
Offshore (between 100 and 200 metres of water depth)
30,000,000
46,000,000
34,000,000
Determine the residue of qualifying expenditure of the company after 2012
accounting period.
Solution.
Residue of Qualifying Expenditure
ABC Petroleum Ltd
Computation of Residue of Qualifying Expenditure
$’000
2008
$’000
Qualifying expenditure
110,000,000
Annual Allowance
22,000.000
Residue carried forward
88,000,000
2009
Annual Allowance
22,000,000
Residue carried forward
66,000,000
2010
Annual Allowance
22,000,000
Residue carried forward
44,000.000
2011
Annual Allowance
22,000,000
Residue carried forward
22,000,000
2012
Annual Allowance
20,900,000
Residue (1% retention until disposal ) c/f
1,100,000
Question
137
State the special provisions of the Second Schedule to the Petroleum Profits Tax Act,
Cap. P13, LFN 2004 on the following;
(i) Qualifying expenditure incurred before first accounting period;
(ii) Qualifying expenditure incurred on assets disposed of before first accounting
period;
(iii) Qualifying expenditure incurred on an asset used for petroleum operations
and for other purposes.
Solution.
(i)
Qualifying Expenditure before First Accounting Period
Where qualifying expenditure is incurred before the first accounting
period of a company, it is deemed to have been incurred by the
company on the first day of its accounting period.
Where qualifying expenditure has been incurred before the first
accounting period and such expenditure would have been treated as
qualifying drilling expenditure if it had been incurred in that first
accounting period and such expenditure has not brought into existence
any asset, then, such expenditure shall be deemed to have brought into
existence an asset owned by the company incurring the expenditure and
in use for the purpose of such petroleum operations.
(ii)
Assets Disposed of before First Accounting Period
Where the qualifying expenditure is in respect of an asset which has
been disposed of before the beginning of the company’s first
accounting period.
1.
Any loss on the disposal of such asset is deemed to be qualifying
drilling expenditure incurred on the first day of the company’s
first accounting period
2.
Any profit on the disposal of such asset is deemed to be income
of the company’s first accounting period
(iii)
Assets used partly for Petroleum Operations
Where a company which is the owner of an asset has incurred
qualifying expenditure in respect of the asset partly for petroleum
operations and partly for other purposes and/or the asset is used partly
for petroleum operation carried on by such owner and partly for other
purposes, allowances due and balancing charges would be computed as
if the asset had been used wholly and exclusively for petroleum
operations. The allowances and charges to be made in connection with
138
petroleum operations would be restricted to what the FIRS considers to
be just reasonable having regards to all the circumstances.
1. Desire Oil & Gas Ltd is engaged in petroleum operations. The following information
were extracted from the books of accounts of the company for the year ended
December, 31st 2019
N’000
Sale of Crude oil
Export
sales of Natural Gas
Other Incidental Incomes
The Expenses incurred during the period are as follows:
Production
Custom Duties On Plant & Machinery
Administration
Provision for restoration of well
Non-productive rents
Royalties on Export
Royalties on Local sales
Intangible Drilling Cost
750,000.00
37,500.00
3,750.00
187,500.00
22,500.00
240,000.00
120,000.00
18,750.00
3,750.00
2,250.00
45,000.00
The following additional information is provided:
1. Memorandum of Understanding (MOU) credit N22,500,000
2. Depreciation included in the production expenses amounted to N 62,500,000
3. Capital allowance agreed with the federal Inland Revenue Service is N
60,000,000
4. Investment tax credit has been agreed at N 11,250,000
You are require:
a. Compute the chargeable tax for the relevant accounting period.
b. Describe briefly, what you understand by the term Memorandum of
Understanding as it applies in petroleum profit tax computation.
139
2. The following were the Statement of profit or Loss account for the year ended 31st
December, 2019 of TIWA Oil and Gas Nigeria Limited, which has been in
Petroleum Producing Business continually for many years
N
Opening Stock: (Jan. 1 2019)
Crude Oil Sale: Export
Local
Less: Closing Stock (31st Dec. 2019)
Ancillary Income
Less:
Production Cost
Transportation
Less:
Intangible drilling Expenses
Repairs and Maintenance
Loss on Exchange
Travelling
Bank Interest
Custom Duties
Loan interest
Exploration Incentives
Royalties
Salaries
Consumables
Harbour Dues
Depreciation
Stamp duties on Increase Share capital
General Overheads
Net Profit
N
93,750,000.00
742,500,000.00
468,750,000.00
1,305,000,000.00
(165,000,000.00)
1,140,000,000.00
150,000,000.00
1,290,000,000.00
165,000,000.00
82,500,000.00 (247,500,000.00)
1,042,500,000.00
16,500,000.00
26,250,000.00
3,000,000.00
3,750,000.00
5,250,000.00
18,750,000.00
18,000,000.00
9,000,000.00
24,000,000.00
48,750,000.00
15,000,000.00
6,750,000.00
22,500,000.00
2,250,000.00
22,500,000.00 (242,250,000.00)
800,250,000.00
The Following additional Information is relevant
i. Petroleum investment allowance is N 165,000,000 and non-productive rent
is N 18,750,000
ii. Non- essential items worth N 8,250,000 are included in custom duties
140
iii.
iv.
v.
vi.
vii.
Intangible drilling expenses N 8,000,000 were capitalized
General overheads include N 3,750,000 Debenture issue Expenses and
N1,500,000 for staff canteen subsidy
N 6,000,000 of royalties represent royalties on domestic crude oil sales
Capital Allowance granted amounted to N 26,250,000
Loan interest includes N9,000,000 interest on foreign loan
You are require to compute the chargeable profit for the accounting period ended
31st December, 2019.
3. The Account of COVID 19 Oil and Gas limited a petroleum exploration
company , for the year ended 31st December, 2019 revealed that:
i
Crude oil Exported
1,750,000 barrels
ii
iii
Crude Oil Dispose in Local market of at N35 per barrel 937,500.00 barrels
Crude Oil dispose off into company refinery
450,200 barrels
N
iv
Exploration Cost
20,000,000.00
v
Incidental Income from Petroleum Operations
1,562,500.00
vi
Management and Administrative Expenses
17,500,000.00
vii Depreciation
937,500.00
Provision for bad Debts (Specific bad debts allowed
viii therein 12,500,000
3,062,500.00
Ix
Non-productive rents
1,445,000.00
xi.
The Schedule of Qualifying Capital Expenditure:
Type of
Acquisition
Plant &
Machinery
Date of
Acquisition
July, 2016 Territorial of 82 metres water dept.
6,000,000.00
Fixture & fitting
pipeline &
storage tanks
Building
July, 2016 Onshore
Continental shelf of 175 metres water
Feb, 2019 depth
Feb. 2018 Onshore
2,000,000.00
Location
141
Amount N
4,000,000.00
4,000,000.00
You are require:
To compute tax liability of the company for the year assuming:
i. That the international market price of crude oil during the year was $12.5
per barrel at the exchange rate of $1 = N 99
ii. The cost extraction of value of oil disposed of represent one-fifth of total
Exploration Cost, whilst the transportation cost per barrel is N 5.20
iii. The plant and Machinery acquired in July 2016 at a cost of N 4,000,000 was
dispose during the year with a sale value of N 2,800,000
4. Stay at Home integrated oil limited is an indigenous oil company incorporated in
2016.the following result was presented for the year ended 31st December, 2019.
N 000
Income
Value of Crude Oil
Exported
Value of Crude Oil sold
Locally
Other Income
Expenses
Royalty on Export
Interest paid
Transportation Cost
Intangible Drilling Cost
Non-productive Rent
Bad Debts Written Off
Operating Cost
Administrative Expenses
128,125.00
84,375.00
5,625.00
43,750.00
18,750.00
12,500.00
25,000.00
18,750.00
3,750.00
6,250.00
18,750.00
15,937.50
Other information:
i. The cost of drilling the first 3 appraisal wells totaling 45,000,000 was not
included in the figures above.
ii. The API gravity of exported crude was 250 although the standard API
gravity was agreed at 350. All crude oil that meet the standard specification
was sold at N 40.50 per barrel. There is an allowance of N 0.10 for every
degree rise or fall in API gravity. Six million barrels of crude oil were
exported in 2019
142
iii.
iv.
v.
vi.
vii.
Contract under natural gas sale with the NNPC were carried out. The
proceeds for gas with a load factor of 67% was N 45,000,000
Depreciation of 6,000,000 is included in administrative expenses
Capital allowances was agreed at 10,500,000
A sum of 20,000,000 was paid to acquire new assets used during the year
and the company operates at 350 meters above continental shelf areas.
Custom duty on plats and storage tanks of 1,500,000 was included in the
operate cost.
5. Tiwa Petroleum Plc. Commenced operations over few years ago and makes up
account to December, 31st annually.
The following details have been extracted from the accounting records for te year
ended 31st December, 2019.
i.
ii
iii
iv
V
vi
Crude Oil exported
Crude Oil used Locally (@ N100 per
barrel)
Incidental income from petroleum
Operational
Exploration and Drilling Cost
Management and administration
expenses
Non-productive Rents
vii
xii.
Allowance for bad debts- General
Specific
viii Depreciation
ix Losses brought forward
Qualified Capital Expenditure are as follows:
2,450,000 barrels
840,000 barrels
N
18,725,000.00
21,000,000.00
168,350,000.00
5,810,000.00
5,250,000.00
7,840,000.00
5,075,000.00
9,240,000.00
N
A Pipeline and Storage tanks acquired in
March 2019, Located in the continental
shelf of 185 metres water depth
B Plant & Machinery acquired in June
2016, located in territorial waters of 90
meters water depth
143
33,600,000.00
44,660,000.00
C Furniture & fittings acquires in May
2015, Located in territorial waters of 95
meters water depth
D building erected in April 2018, Located
onshore
14,700,000.00
49,700,000.00
You were able to confirm that Management and administrative expenses
comprised the following:
N
i
5,950,000.00
iv
Donations to DPP Political Party
Expenditure relating to the acquisition
of information relating to the existence
and extent of petroleum deposit
company income tax of an associated
company
interest on inter-company loans
obtained under terms prevailing in the
open market
v
staff salaries
122,500,000.00
ii
iii
3,290,000.00
3,500,000.00
1,820,000.00
vi
Royalties on Export Sales
4,340,000.00
Repairs and renewals expenses incurred
on PPE for the purpose of carrying on
vii petroleum operation
2,030,000.00
Rents paid in respect of land and
Building occupied under Oil
viii prospecting License
2,520,000.00
ix
Other administrative expenses
22,400,000.00
168,350,000.00
The international market price of crude Oil in 2019 was USD $75 per barrel and
the exchange rate was USD $1 = N 280
You are required to compute the:
a) Assessable Profit
144
b)
c)
d)
e)
Chargeable Profit
Assessable Tax
Chargeable Tax
Tertiary Education Tax
6. Free Moment Petroleum company ltd has been operating offshore at a water
depth of 186 metres. The operating activities of Free Moment for the year
ended 31st December, 2019 is as follow:
Value of crude oil exported
Domestic sale of crude oil
Sales of Chargeable natural gas
Other income
Total Income
Less Expenses:
Rent Paid
Royalty on oil exported
Royalty on Local Sales
Interest Paid
Repairs
Bad Debts written off
Intangible drilling Cost
Pension fund contribution
Non-productive rents
Stamp duty
Transportation
Operating Cost
Administrative expenses
Miscellaneous expenses
114,000.00
30,000.00
18,000.00
8,400.00
170,400.00
12,000.00
9,600.00
2,400.00
9,000.00
4,200.00
1,800.00
21,000.00
1,440.00
3,000.00
600.00
12,900.00
24,000.00
18,600.00
2,460.00
(123,000.00)
47,400.00
The following additional information is also given:
a. Capital allowance were agreed at 6,600,000
b. New asset acquired and used during the year amounted to 14,400,000
c. Interest paid included 3,000,000 which was paid to an associated company
d. Depreciation of 3,600,000
e. A sum of 1,800,000 paid to another company to retrieve information relating to
existence of petroleum was included in operating expenses.
145
f.
Custom duty on plant and storage tanks of 900,000 was included in operating
costs.
You are required to compute:
a) Assessable Profit
b) Chargeable Profit
c) Assessable Tax
d) Chargeable Tax
7. COVID holyday LTD is an oil producing company, you have been given the
following information in respect of the company for the year ended 31st December,
2019
a crude oil in barrels
b Sundry Income
c Applicable posted price
Recurrent Administrative and Production
d Expenses
e Intangible development expenditure
f Exploration and appraisal wells expenditure
g Royalty on Oil Sold
h Qualifying Capital Expenditure
at 1/4/2015
during 2016
‘’
2017
‘’
2018
‘’
2019
Export
335.823
N
154,105.00
48.49
Local
529.205
N
104,549.00
0.23
1,824,206.00
143,806.00
1,217,213.00
3,971,040.00
381,216.00
103,402.00
221,109.00
32,547.00
1,076,856.00
40,928.00
38,664.00
193,716.00
346,842.00
The additional asset acquired in 2019 are classified as:
N
A.
B.
Operations in territorial waters and continental shelf
area up to and including 100 meter of water depth
Operations in territorial waters and continental shelf
area beyond 200 meters of water depth
Offsetable custom duties for the year ended
31/12/2018
N 1,500
146
6,842.00
340,000.00
31/12/2019
N 1,700
The following additional information was also made available to you:
i. Sundry Income included profit of N 4,185 on disposal of assets, for which
appropriate approval has been obtained
ii. Recurrent administrative and production expenses include donations of
N 5,860 to Oil research.
You are required to:
a. State the year of assessment
b. For the year of assessment, calculate:
i. Total Income
ii. Assessable profit
iii. Net fiscal value of chargeable oil
iv. Capital allowance
v. Chargeable profit
vi. Assessable Tax
vii. Investment tax credit
viii. Chargeable Tax.
8. COVID Break Nigeria limited is an Oil producing company, COVID ltd makes up
its account to 31st December of every year. The following has been provided for the
accounting year ended 31st December, 2019.
Sales of Crude Oil
Export
Domestic
Income from supplies
income from interest on current account
administrative and operating expenses
Royalty on Oil exported
Customs and other duties
royalty on local Oil sales
intangible drilling costs
qualifying assets purchased in 2019
62,500 barrels
25,000 barrels
N
440,000.00
150,000.00
9,375,000.00
7,925,000.00
256,250.00
935,000.00
170,000.00
22,500,000.00
The following additional information were provided:
a. Posted price for crude oil exported was $19.0 per barrel and exchange rate
was N 80
147
b. Posted price for domestic crude oil was N 1,250 per barrel
c. The capitalized expenditure for 2019 were as follow:
i.
ii.
onshore
offshore (beyond 200 metres)
N
12,500,000.00
10,000,000.00
d. Administrative and operating expenses included:
i. Donation to Christian Association of Nigeria N50,000
ii. Depreciation of N 250,000
iii. Donation to social club and political parties amounted to N10,000 and
N30,000 respectively
e. Included in the figure for export was 5,000 barrels of crude oil sold locally.
You are require to compute:
i. Fiscal value of chargeable oil
ii. Total Income
iii. Assessable profit
iv. Capital Allowance
v. Chargeable Profit
vi. Assessable tax
vii. Petroleum Investment Allowance
viii. Chargeable Tax.
9. COVID 419 oil and gas limited has been operating petroleum business for
many years. The following is the profit or loss account of the company for
the year ended 31st December, 2019.
Sales of crude oil
Export
Non-export
Less:
Production cost
Transportation cost
Salaries
General overheads
Bank interest
Interest on bills payable
21,875,000.00
3,125,000.00
156,250.00
218,750.00
93,750.00
31,250.00
31,250.00
78,125.00
148
Loss on asset disposal
Depreciation
Royalties and Rentals
Non-productive rentals
Harbours dues or levies
Customs duties
9,375.00
828,125.00
2,500,000.00
31,250.00
28,125.00
34,375.00
You are given the following additional information:
1. Export sales;
Types of Crude Oil
Bonny light
Bonny medium
Forcados medium
Quantity
5,950 brl
5,950 brl
1,976 brl
API
40
24
26
The price of Nigeria Crude oil as advised by NNPC for 2019 were as
follows:
Types of Crude Oil
API
US$
Bonny light
38
19.65
Bonny medium
26
18.25
Forcados medium
26
9.38
For every degree increase in API gravity, the posted price is increased by
$0.03. The reverse is the case for a decrease in API gravity. N150 is
equivalent to $1.50.
The actual selling price for crude oil exported are:
Types of Crude Oil
Bonny light
Bonny medium
Forcados medium
N
2,187
1,313
938
2. Intangible drilling costs amounting to 1,406,250 has been capitalized.
3. Royalties and productive rentals in respect of the non-export sale for crude
oil amount to 1,718,750
4. Capital allowance for the year are as follows:
Annual allowance
Balancing allowance
1,562,500
6,250
149
Balancing charges
Capital allowance b/f
29,688
3,750,000
You are require to compute the 2019 petroleum tax.
150
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