Page 1 of 24
THE CHARTERED INSTITUTE OF TAXATION OF NIGERIA (Chartered Institute by Act No. 76 of 1992)
STUDENTS’ COMPANION
OCTOBER 2011 PROFESSIONAL EXAMINATION
PROFESSIONAL 1 OUESTION AND SUGGESTED SOLUTIONS
Page 2 of 24
THE CHARTERED INSTITUTE OF TAXATION OF NIGERIA OCTOBER 2011 PROFESSIONAL EXAMINATION
PROFESSIONAL EXAMINATION 1: REVENUE LAW
INSTRUCTION: ATTEMPT ALL QUESTIONS TIME: 3 HOURS
1 In the course of a forensic audit exercise at Ewejoko Ltd by Kelechi Sofala & Co, a firm of Chartered
Accountants and Tax Practitioners, receipts and legal documents on the lease of the premises presently
occupied by the company and land purchased along Lekki/Epe Road, Lagos were presented to the
Auditors.
You are in the team of Auditors sent to carry out the audit, especially the tax aspects.
a What element of tax will you look for on the receipts and documents? 10 marks
b In the event the appropriate tax had not been paid, what are the legal implications and steps to take
to rectify the omission? 10 marks
(Total: 20 marks)
2 a “I can’t define an elephant, but I know one when I see it.” How helpful is this
aphorism in the definition of tax? 10 marks
b Discuss the canons of interpretation of tax statutes by the courts in Nigeria.
10 marks
(Total: 20 marks)
3 Femabay Oil & Gas Overseas Ltd, a company incorporated in Germany, is engaged in oil exploration in
the riverine area of Ondo State. The company seeks your assistance in preparing its returns for 2011 to the
Federal Inland Revenue Service. What items of chargeable profits and adjustable profits recognised under
the Petroleum Profit Tax Act will you consider germane?
20 marks
4 a What do you understand by the term “Capital Gains Tax”? 5 marks
b What are the challenges of capital gains tax administration in Nigeria. 15 marks
(Total: 20 marks)
5 a There is a clear-cut division of legislative and judicial powers among the tiers of
government in Nigeria. Discuss with reference to tax matters. 15 marks
b What are the functions of a tax system? 5 marks
(Total: 20 marks)
Page 3 of 24
PROFESSIONAL EXAMINATION 1: PERSONAL TAXATION
ATTEMPT ALL QUESTIONS. SHOW ALL WORKINGS TIME: 3 HOURS
1 a In Nigeria, many unregistered businesses (artisans and sole traders) are thriving
But not within the tax net of the Government. This phenomenon should be
checked as a means of boosting revenue and ensuring justice and equity.
Advise the relevant tax authorities on ways of ensuring that all potential tax payers are duly
assessed. 12 marks
b When does an assessment become final and conclusive? 12 marks
c The term “Place of residence” is very significant in personal income tax system.
Define the term “Place of residence”. 4 marks
(Total: 20 mark)
2 Chukwu Garba is married with five children.
Details about his children are as follows:
a Musa is 8 years old.
b Fatimah(unmarried) is in Federal Government College and is 17 years old.
c Funmi is in primary school and is aged 9 years.
d Thank God is a student in Idia Secondary School, Benin City and her age at the last birthday was
14 years.
e Nkechi(unmarried) is an undergraduate in Ambrose Alli University and is aged 18 years.
Other information are as follows:
(i) He took a life insurance policy for which he pays annual premium of N370,000
(ii) He provides for his old age by contributing N25,000 per annum to pension scheme approved by
the Joint Tax Board.
(iii) His aged parents live with him. They have no income of their own. He is an employee on a salary
of N5,700,000.
(iv) Capital sum of his life policy is N4,200,000.
Required:
a Compute his tax for 2009 year of assessment. 10 marks
b In what circumstances can claim for children and dependent relative allowances be approved?
5 marks
c In relation to taxation of a sole trader, what is the difference between adjusted profit for tax
purposes and net profit? 5 marks
(Total: 20 marks)
3 Mr. Cameron Wood is in the employment of God is good Institute of Nigeria. He got to Lagos on January
1, 2010 to assume duties on the following terms:
a Mr. Cameron Wood being a British citizen is to receive £2,500 which is part of his salary in
London less United Kingdom tax.
b The Institute would pay Mr. Wood in Nigeria another N900,000 and this should be subject to
Nigerian income tax.
In view of the double taxation agreement between Nigeria and the United Kingdom, Mr Wood will
be entitled to the double taxation relief on any part of income assessed in Nigeria. The United
Kingdom tax paid on £2,500 is £250. The rate of exchange is N250 to £1.
Mr Wood is entitled to personal allowance, earned income allowance, three children’s allowances
and life assurance premium of N 60,000.
You are required to compute:
(i) Mr. Wood’s chargeable income. 10 marks
Page 4 of 24
(ii) The credit to be given (if any) to Mr. Wood on tax paid on his United Kingdom’s income.
7 marks
(iii) Comment on your computation above. 3 marks
(Total: 20 marks)
4 a Olu, Ade and Oye have been in partnership business for many years. The
Partnership profit and loss account for the year ended 31st December 2009 were given as follows:
N N
Gross profit 7,404,600
Salaries and wages 1,446,000
Partners’ salaries 744,000
Staff loans written off 54,000
Partners’ loans interest 186,000
Interest on capital 37,200
Repairs and maintenance 262,200
Office rent 144,000
Depreciation (fixed appropriation) 52,500
General office expenses 307,200
General provision for doubtful debts 75,000 (3,308,100)
Net profit 4,096,500
Additional information:
Olu Ade Oye Total
N N N N
Salary 312,000 276,000 156,000 744,000
Loan interest 54,000 53,400 78,600 186,000
Interest on capital 7,200 10,500 19,500 37,200
The partners share profit and losses in the ratio of 3:2:1 while capital allowance is
N86,100.
You are required to:
Compute the chargeable income of the partners from partnership business for the purpose of
income tax.
Show all workings.
15 marks
b List any five incomes which are exempted from tax under the tax laws in Nigeria.
5 marks
(Total: 20 marks)
5 On April 12, 2007, Mr. Toulassi Dankwa acquired a house erected on an acre of land at a cost of
N15,000,000. Other expenses of acquisition were N25,000 for legal expenses and valuation fee of
N50,000.
On November 30, 2007, a bungalow was erected on the excess space at a cost of
N 3,000,000. On June 1, 2009, the bungalow was sold to a cousin for N4,000,000. The actual market
value was N5,000,000 and the market value of the rest of the property was N17,000,000.
On January 1, 2010, Mr. Toulassi Dankwa sold the rest of the property for N18,000,000 after incurring the
following expenses.
a Improvement before sale 250,000
Page 5 of 24
b Agency fees 100,000
c Advertising 60,000
d Legal expenses 30,000
You are required to calculate the Capital Gains Tax for all relevant years of assessment
20 marks
PROFESSIONAL EXAMINATION 1: BUSINESS TAXATION
INSTRUCTION: ATTEMPT ALL QUESTIONS. SHOW ALL WORKINGS TIME: 3 HOURS
1 Gateway Airline Limited is a foreign company registered in Canada. It is involved in the carriage of
Passengers, mails, livestock into and out of Nigeria. You are given the financial results for the year ended
31st December 2008 as follows:
N N
Income from Passengers’ flight on other routes 60,330,000
Income from Passengers’ flight from Nigeria 15,360,000
Income from cargo loaded into Aircraft on other routes 61,632,000
Income from cargo loaded into Aircraft from Nigeria 14,100,000
151,422,000
Deduct:
Depreciation 11,356,650
Staff Salaries 14,859,372
General Provisions 540,720
Other Expenses 25,002,858 (51,759,600)
Net Profit 99,662,400
You are required to:
(i) To compute the total profit of Gateway Airline Limited for Nigeria Income Tax purpose.
12 marks
(ii) To calculate the income tax liability for the relevant year of assessment. 8 marks
(Total: 20 marks)
2 Big Risk Insurance Co. Ltd, a company carrying on both life and non-life Insurance businesses, rendered
gross premium income of N14,500,000 in its accounting period ended 31st December, 2002. The total
investment income of N2,400,000 was also received in the accounting year.
From the analysis of the amounts listed below, together with the capital allowances given, you are
required to compute the tax liability of the company for the relevant year of assessment.
N
(i) Premium income received on life insurance 3,450,000
Premium income received on burglary and accident insurance 2,450,000
Premium income received on industrial hazard etc 8,600,000
14,500,000
(ii) The management of the company calculated about N1,200,000 as reserves for unexpired risks as at
31st December 1998, and about N1,500,000 was also calculated as at 31
st December 1999 on non-
life Insurance. The sum of N240,000 surplus on actuarial revaluation on life policy was distributed.
N
(iii) As at 31st December 2002 actuarial valuation was 4,000,000
Administrative expenses for life department 50,000
Page 6 of 24
Salaries for life department staff 200,000
Other allowable expenses for life department 10,000
(iv) Investment income:
Dividend received (net of 5% withholding tax) 1,275,000
Gross interest received on debenture stock 175,000
Interest on fixed deposit in banks 950,000
2,400,000
(v) Total expenses relating to non-life N
Claims 3,550,000
Commissions 1,420,000
Administrative expenses 4,150,000
Depreciation 880,000
10,000,000
(vi) Loss on sale of fixed assets included in administration expenses was N40,000.
(vii) Capital allowances N
Capital allowances b/f 145,000
Initial allowances for the year 450,000
Annual allowances for the year 1,205,000
Balancing allowance 21,000
Balancing charge 31,000
(20 marks)
3 (a) List the powers of Federal Inland Revenue Service Board under the Federal
Inland Revenue Service (Establishment) Act 2007. 5 marks
(b) Define the following terms:
(i) Tax 2 marks
(ii) Taxation 3 marks
(c) List exhaustively the composition of the Federal Inland Revenue Service Board.
10 marks
(Total: 20 marks)
4 Ade Nigeria Limited has been in manufacturing business since January 2004. At the commencement of
the business, the company acquired so many assets among which were two assets that were sold in 2008.
The details of the assets sold are as follows:
ASSET COST SALES CONSIDERATION
N N
Machinery 800,000 2,400,000
Land and Building 1,200,000 4,000,000
In 2009, machinery and land and building were bought for N4,800,000 and
N7,200,000 respectively to replace the ones sold
Required:
(a) Calculate the roll over relief available to Ade Nigeria Limited in respect
of these two classes of assets on the assumption that new assets were bought to replace the old
ones. 15 marks
(b) List five assets disposal, the gains on which capital gains tax would not be chargeable.
5 marks
(Total: 20 marks)
Page 7 of 24
5 (a) Write short notes on the following types and forms of assessment:
i Original assessment. 2 marks
ii Revised/amended assessment. 2 marks
iii Additional assessment. 2 marks
iv Best of judgement (BOJ). 2 marks
v Self assessment. 2 marks
(b) i Discuss the conditions that will make an assessment to be final
and conclusive . 6 marks
ii List two reasons why a back duty assessment could be instituted against a tax payer.
4 marks
(Total: 20 marks)
PROFESSIONAL EXAMINATION 1: INTERNATIONAL TAXATION
INSTRUCTION: ATTEMPT ALL QUESTIONS. SHOW ALL WORKINGS TIME: 3 HOURS
1 The main focus of bilateral tax treaties is the elimination of double taxation and fiscal evasion.
a (i) Define “double taxation” and “fiscal evasion” with respect to International
Taxation.
(ii) Mention two types of double taxation.
(iii) State three ways adopted by a typical tax treaty to eliminate double
taxation. 10 marks
b Mention four methods through which challenges posed by transfer pricing to the determination of
the correct tax liability of an enterprise could be resolved.
10 marks
2 Define the following terms under international tax:
a Contracting states 4 marks
b Competent authority 4 marks
c Treaty shopping 4 marks
d Diplomatic channel 4 marks
e Tax sparing 4 marks
(Total: 20 marks)
3 Mamadu Construction Company Limited engages in irrigation and building construction for many years.
Messrs Dowell and company was appointed as a Tax Consultant to enable the company to understand the
thrust of Value Added Tax particularly as it affects its operation. There has been a dispute as to the
amount of Value Added Tax the company is liable to pay to the Integrated tax office. To assist you in your
assignment as a tax consultant to the company, the following details are made available to your firm.
DATE DETAILS AMOUNT(N)
1/9/08 Bought a Concrete Mixer 333,333
3/9/08 Bought Scaffolding pipes 1,000,000
4/9/08 Bought a Poker Vibrator 233,333
5/9/08 Bought Chippings 45,000
6/9/08 Bought an ½ Trailer load of Granite 65,000
7/9/08 Bought an ½ Trailer load of Gravel 56,000
8/9/08 Bought a Sharp Photocopier 55,000
9/9/08 Bought an Executive Table 17,500
10/9/08 Bought Office Chairs 27,750
Page 8 of 24
14/9/08 Negotiated a contract for 4,500,000
(and received progress payment of N2,250,000 on 4/9/08)
15/9/08 Won a labour only contract for 1, 250,000
(based on Architect valuation, due for payment on 5/9/08
and eventually paid on 28/9/08 was N250,000).
VAT was paid on all the company’s purchases.
You are required to:
a Compute the VAT payable (if any) for the month of September 2008 and
b State when and in what manner VAT payment should be made
(Total: 20 marks)
4 a Why is the concept of “residence” so important in international tax? 5 marks
b Mention the criteria employed as tie breaker under Article 4(2) of a typical double taxation
agreement in the event of dual residence involving an individual.
15 marks
5 a Article (2) allows for the allocation of expenses. List any five (5) of the conditions that must be
satisfied for the allocation of the expenses. 5 marks
b Build co, resident in state B, visits state C a few times in May 2008(In total, for 2 weeks) to
acquire and conclude a contract with client Co; resident in state C, to construct a new office
building for client Co. Build Co. subsequently concludes a contract with specialized company Prep
Co; also resident in state B, to do the preparatory work and lay the foundation for the building at
the designated plot of land in state C. Prep Co. starts to work there on 1st October, 2008, finalises
its part of the project and leaves state C on 31st December, that same year.
Due to heavy rainfall, Build Co. cannot start constructing the building until 1st March, 2009.
In April, 2009, it contacts client Co. because, having completed the building, capacity problem
prevent it from removing its equipment and cleaning up the site. Fortunately, Build Co. has a
100% subsidiary. Anonymous Co; also resident in state B, which is prepared to carry out these
activities. Client Co agrees, so their contract is amended and a new contract is concluded between
Client Co. and Anonymous Co. Build Co. finalises the construction and leaves state C in mid-
September, 2009. Anonymous Co. starts removing the equipment and cleaning the site; finalizing
and leaving state C in mid October of that same year.
Required:
(i) Does Build Co, Prep Co or Anonymous Co have a PE in state C?
(ii) If so, when would they come into existence and when would they end?
15 marks
(Total: 20 marks)
Page 9 of 24
PE 1 REVENUE LAW
SOLUTION TO QUESTION 1
a. The elements of tax appropriate to receipts and land documents, and leases is Stamp Duty. Stamp duties are
duties imposed on instruments.
Section 2 of the Stamp Duties Act defines Instrument as including “every written document” with reference to
instruments of marketable security.
Section 23 (3) captures Conveyance on sale and lease as registerable instruments – see also the Schedule.
Section 58 provides that any contract or agreement under seal or under hand only, for the sale of any equitable
estate or interest in any property whatsoever shall be charged with the same ad valorem duty to be paid by the
purchaser. In the same vein, Section 68 provides that an agreement for a lease, or with respect to the letting of
any lands or tenements, shall be charged with the same duty as if it were an actual lease made for the term and
consideration mentioned in the agreement.
b. In the event the documents are not stamped then the problem of the legal status of the documents will arise.
Today, there is no obligation to stamp a document, unlike a failure to pay income tax. Failure to pay income tax is
an offence.
However, by virtue of section 22 of the Stamp Duty Act, an instrument which is not duly stamped in accordance
with the law in force at the time it was executed shall not be tendered in evidence, except in criminal cases or to
prove fraud, refresh a witnesses’ memory or in bankruptcy.
In revenue case, the relevance of not stamping is as to penalty charge for failing to register the instrument at the
due date.
To avoid accumulation of penal charges, the receipts and lease agreements should be stamped by presenting
them to the Commissioner of Stamp Duties for assessment and stamping.
Penalty may be mitigated or remitted by the Commissioner.
SOLUTION TO QUESTION 2
a There is no universally accepted definition of tax. The Oxford English Dictionary defines tax as a “a compulsory
contribution to the support of government levied on persons, property, income, commodities, transactions etc,
now at a fixed rate mostly proportionate to the amount on which the contribution is levied”, Tiley, in his book,
Revenue Law, criticized this definition as being limited in scope as to the purpose of taxation and tells very little of
the meaning of a tax.
According to Webster’s Dictionary of English Language ‘tax’ means a charge imposed by government authority
upon property, individuals, or transactions to raise money for public purpose. This definition has also been
criticized as imperfect as it hardly help in distinguishing what is a tax from what is not a tax.
Generally, experts seem to agree on a descriptive approach highlighting the characteristics of tax. Thus, a tax is “a
compulsory levy imposed by an organ of government for public purposes
(Per Duff J in Lawson’s case). It has become settled that a tax has the three features set out in the definition:
I. a compulsory levy II. imposed by an organ of government
III. for public purposes. Without prejudice to this definition, fines, toll fees, social security contributions etc. do not fall within tax. That is
why it is not always safe to assert that it is that simple to recognize a tax merely by seeing it. Greater effort must
be put in to test each charge against the settled criteria of tax before reaching a conclusion.
b The Courts interpreted the law. In interpreting tax statutes Courts in Nigeria follow the English
Law Courts. In a tax legislation the courts use the literal rule of interpretation. The courts look
Page 10 of 24
merely at what is clearly said. Nothing is to be implied – Alhaji Ibrahim Ahmadu & Anor v.
Governor of Kogi State & Ors (2006).
It is a well settled rule of law that all charges upon the subject must be imposed by clear and unambiguous
language because they are considered as penalties (Per Lord Simmonds in Russell
v. Scott (1948).
However, the decision of Bello J.S.C (as he, then, was) in Mobil Oil Nigeria Ltd v. Board of Inland
Revenue (1977) seems to be a departure slightly from this traditional path, when, in construing the provisions of
the Companies Income Tax Act, he said that “regard shall be given to the cause
and necessity of the Act and then such construction shall be put upon it as would promote its purpose and arrest
the mischief which is intended to deter’’.
The Court of Appeal replicated the views of Bello J.S.C (as he then was) in Phoenix Motors Limited v. National
Provident Fund management Board (1993), saying that “if a statute is revenue based or revenue oriented, the
provisions thereof must be construed liberally in favour of revenue or in favour of deriving revenue by
government, unless there is a clear provision to the contrary. This is because it is in the interest of the generality of
the public and to the common good and welfare of the citizenry for Government to be in revenue and affluence to
cater for the people.
These decisions show that Nigerian Courts have departed from the universal rule of interpretation of tax statutes.
SOLUTION TO QUESTION 3
The chargeable tax on petroleum companies is at the rate of 85%. There is a concessionary rate of
65 – 75% on grounds that:
I. the company has not commenced sales of chargeable oil, or that II. the company has not fully amortised all production capitalized expenditure due to it.
The chargeable items include:
I. royalties which are not deducted as expenses II. all non productive rents
III. investment tax credit earned IV. sums incurred as liability to the Federal Government by way of custom or excise duty or similar charges. These are available as deductions from profit in computing the adjusted profits for the relevant accounting year.
SOLUTION TO QUESTION 4
Capital Gains Tax is a charge on certain gains accruing to a person other than a company during a year of
assessment.
The gain which is taxed is the excess of the proceeds of disposing of an asset over the cost to the taxpayer of the
acquisition of the asset.
Problems associated with the administration of the CGT in Nigeria includes:
I. lack of definite and ascertainable subject matter II. low compliance
III. taxpayers’ reluctance to disclose assets’ transactions fully and voluntarily IV. clumsy parameters for determining chargeable gain V. inflation effect
VI. inexactitude in year of assessment.
SOLUTION TO QUESTION 5
a The three tiers of government in Nigeria are federal, state and local governments. State powers are divided
among them, i.e. the power to legislate, adjudicate and enforce the law.
Page 11 of 24
The legislative power on tax matters is vested expressly in the National Assembly with respect to personal income
tax, profits tax and capital gains tax by virtue of the 1999 Constitution.
Taxation is under the Exclusive Legislative List implying that only the Federal Government can “impose” these
taxes. The power to “collect” is shared among the three tiers of government.
Apart from the taxes listed in the Exclusive List, the State and the Federal Governments can impose other taxes
pursuant to the Concurrent List. In exercise of their powers on the residual list States have imposed taxes on their
subjects and also exercised their power to collect.
In judicial matters, only the Federal High Court has jurisdiction over revenue matters. However,
State High Courts also have jurisdiction over taxes imposed by the State in exercise of its powers under the
concurrent and residual list.
b The functions of a tax system are:
I. to raise revenue to meet government expenditure
II. to redistribute wealth
III. to exert control; moral and economic
PE 1 PERSONAL TAXATION
SOLUTION TO QUESTION 1
(a) T he following are some suggestions as to the ways the tax authorities can ensure that all the potential
tax payers are duly assessed.
1. There should be intensive direct assessment drive by the tax authorities. This can be achieved by
achieving that all the locations where businesses are operating are visited and tax enumeration
carried out.
2. The tax authorities should ensure that the companies which award contracts to all such business
are made to quote their TIN (Taxpayer Identification Number) on their headed papers.
3. Any company that awards contract to a business entity that did not indicate its tax registration
numbers should be penalised and made to pay some tax based on the value of cotract awarded to
such businesses
4. Every student who is going to be admitted into a higher school must provide the tax clearance
certificate of his parent or guardian.
5. Filling of annual returns by business names to the Corporate Affairs Commission should be made
compulsory for such businessess to continue to remain in business.The Tax Clearance Certificate
as well as a clear indication of the tax file number.
(b) Assessment becomes final and conclusive where no valid objection or appeal has been lodged within
the time limit. It is also applicable where an assessment is made or agreed to revise or determine on
appeal has not been the subject of further appeal within the time allowed.
(c) In relation to an individual , “place of residence” means a place available for his domestic use in Nigeria
on relevant day, and does not include any hotel , rest house or other place at which he is temporarily
lodging unless no more permanent place is available for his use on that day.
Page 12 of 24
SOLUTION TO QUESTION 2
CHUKWU GARUBA
Computation of Tax liability for 2009 year Assessment
N N
Salary 5,700,000 Deduct Relief:
Personal Allowance 1,145,000
Children Allowance 10, 000
Dependent Relative Allowance 4,000
Life Assurance Policy 370,000
Pension contribution 25,000 1,554, 000
4,146,000
Tax Payable
N 1ST N30,000 at 5% 1,500 Next N 30,000 at 10% 3,000 Next N50,000 at 15% 7,500 Next N50,000 at 20% 10,000 Next N3,986,000 at 25% 996,500 1,018,500
(b)
i. Children Allowance
Children allowance is claimed on annual basis on children maintained by the claimant in the
preceeding year under the following conditions:
- The children must not exceed 4 in number
- The child must not exceed the age of 16
- If the child is aged above 16, then he/she must either be attending full time educational
institution or be apprenticed to a trade.
ii. Dependent Relative Allowance
It is claimed by the claimant on
- An aged or widowed parents maintained in the preceding year
- The aged parent must not earn a total income that exceed N600 per annum
- The number of dependents must not exceed 2
(c) The difference between adjusted profit and net profit is the fact that the net profit arise from accounting
entries where all expenses is deemed to have been incurred by the sole trader. Conversely, adjusted
profit seeks to be the difference between taxable income and allowable expenses only. This account for
why adjustments are made on the net profit to be able to arrive at the adjusted profit. This requires
adding back non –allowable expenses and deducting non-taxatble incomes
SOLUTION TO QUESTION 3
(a) Computation of Mr. Cameron WOOD‟S chargeable income for 2010 Assessment year
N N
Salary paid in london 625.000
Page 13 of 24
Salary paid in Nigeria 900,000 Less reliefc: Personal (5000 †20% ×1525,000) 310,000 Children (2,500 × 3) 7 500 Life assurance 60,000 ( 377,500 Chargeable income 1,147,500 Income Rate Tax
On 1st 30,0000 5% 1, 500 Next 30,000 10% 3000 Next 50,000 15% 7500 Next 50,000 20% 10,000 Next 987,500 25% 246,875 268, 875
Rate of Nigerian tax 268,875 = 17.64% 1,525,000
Tax payable on N625,000 at the Nigerian rate of 17.64% is N110,250 since United Kingdom tax is
N62,500. The credit to be given to Mr. Green is N62,500. The credit to be given cannot exceed the
foregn tax paid.
SOLUTION TO QUESTION 4
OLU, ADE AND OYE
Partnership computation of Adjusted Profit for the 2010 Year of Assessment
N N
Profit per Accounts 4,096,500
Add back:
Depreciation 52,500
Provision for doubtful debts 75,000
Staff loan written off 54,000
Partner Salaries 744,000
Partner loan interest 186,000
Interest on capital 37,200 1,148,700
Adjusted Partnership Profit 5,245,200
Less capital Allowance 86,100
5,159, 100
Page 14 of 24
Computation of Partners‟ Income
Olu ½ ADE ½ OYE ½
N N N N
Partner SalarIes 744,000 312,000 276,000 156,000
Loan Interest 186,000 54,000 53,400 78,600
Interest on Capital 37,200 7 200 10,500 19,500
Share of Profit 4,191,900 2, 095,950 1,397,300 698,650
Total I ncome 5, 159, 100 2,469,150 1,737,200 952,750
Working‟, share of profit
N N
Total Income 5,159,100
Less Partner Salaries 744,000
Loan interest 186,000
Interest on capital 37,200 967,200
4, 191, 900
Share of Profit
Olu 3/6 x 4,191,900 = 2,095,950
Ade 2/6 x 4,191,900 = 1,397,300
Oye 1/6 x 4,191,900 698, 650
4,191,9000
(b) The following five income are exempted from tax
1. The salary, allowances ,pension and gratuity of the President
2. The income of a statutory or registered building society or statutory or registered friendly society
other than income from any business carried on by the society.
3. Income accruing to or derived by an exempt organisation other than from any business.
4. The income of a public corporation or institution exempted from tax under any enactment.
5. Income of an individual entitled to priviledges under the diplomatic immunities.
6. Interest dividend or
(a) Any other income of an approved units trust scheme or mutual fund
(b) Any other income payable under an approved unit trust scheme or mutual fund to a holder of
that scheme.
Page 15 of 24
SOLUTION TO QUESTION 5
Mr. Toulassi Donkwa
Computation of Capital Gains Tax Liability for year 2007 Tax year
N
Sale Proceed 5,000,000
Less cost of acquistion
A, 5000 X 18,075 000 A + B X C 5000 + 17,000
4,108,000
Capital Gains 892,000
Capital Gains Tax liability N89,200
Note;
(1) Total cost of the property
Cost of whole property N15,000,000
Incidental expenses 75,000
Cost of construction on open space 3,000,000
18,075,000
(11) The sale to the cousin is a connected person transaction.Consequently, the higher of the actual
sales and marker value is used for the computation.
Computation of Capital Gains Tax Payable for 2008
N N
Sales proceed 18,000,000
Less advertising 60,000
Agency fees 100,000
Legal expenses 30,000
Improvement before sale 250,000 440,000
Net sale Proceed 17,560,000
Less :
Cost of Acquisition (NWI) 13,967,000
Capital Gains 3,593,000
Capital Gains Tax at 10% 359,300
Note: Note working 1
Cost of the remaining part of the asset
Page 16 of 24
N
Total cost of asset 18,075 000
Less: cost of part disposed 4,108,000
Cost of remaining part of asset 13,967,000
PE 1 BUSINESSS TAXATION
SOLUTION TO QUESTION 1
a. GATEWAY AIRLINES LIMITED
Computation of Taxable Profit for 2009 Tax Year
N N
1. Global Income 151,422,000
2. Nigeria Income 29,460,000
3. Global Adjusted Profit:
Net Profit Reported 99,662,400
Add:
Depreciation 11,356,650
General Provision 540,720
11,897,370
Adjusted Profit 111,559,770
b Computation of tax liability
Adjusted Profit
4. Adjusted Profit Ratio = -------------------- x 100
Global Income
111,559,770
= ----------------- x 100
151,422,000 1 = 73.5%
Depreciation
5. Depreciation Ratio = ------------------ x 100%
Global Income
11,356,65O
= ----------------- x 100
151,422,000 1 =7.5%
6. Nigeria Adjusted Profit
=Adjusted Profit Ratio x Nigeria Income
=73.67% x N29,460,000 = 21,703,182
7. Capital Allowance
Page 17 of 24
=Depreciation Allowance x Nigeria Income
=7.5% x N29,460,000 2,209,500
Relieved (2,209,500) (2,209,500)
19,493.682
(a) Taxable {Profit = N19,493,682
(b) Tax Payable at 30% (N19,493,683 x 30%) = N5,848,105 Note:
Nigeria Income is arrived at as follows: N
- Income from Passenger fight from Nigeria 15,360,000 - Income from Cargo Loaded from Nigeria 14,100,000 29,460,000
SOLUTION TO QUESTION 3
BIG RISK INSURANCE CO. LTD
Computation of Tax Liability for 2003 Tax Year
N N
Life Business 1,105,000
Non-Life Business 2,070,000
3,175,000
Add: Balancing Charge 31,000
3,206,000
Initial Allowance 450,000
Annual Allowance 1,205,000
Balancing Allowance 21,000
Capital Allowance 145,000
1,821,000
Relieved (1,821,000) (1,821,000)
Taxable Profit 1,385,000
Tax due at 30% (N1,385,000 x 30%) N415,500
NOTES
(a) Life Business N N
Investment Income:
Interest on Debenture 175,000
Interest on Deposit 950,000
Surplus on actuarial Valuation 240,000
Page 18 of 24
1,365,000
Deduct:
Administrative Cost 50,000
Salaries 200,000
Other 10,000
260,000
Adjusted Profit 1,105,000
I. The dividend income received net of withholding tax is frank investment income which is not to be subjected to further tax.
II. Surplus on actuarial valuation is chargeable to tax when distributed.
(b) Non-Life Business: N N Premium on Burglary 2,450,000
Premium on Industrial Hazards 8,600,000
11,050,000
Provision for Unexpired Risk N N
At the beginning 1,200,000
Accrued Premium 400,000
1,600,000
12,650,000
Provision for Unexpired Risks:
At the End 1,500,000
Claim 3,550,000
Commission 1,420,000
Administrative Expenses 4,110,000
(10,580,000)
(i.e N4,150,000 - N40,000) 2,070,000
Adjusted for loss on sale of fixed assets
Adjusted Profit 2,070,000
SOLUTION TO QUESTION 3
(a) Powers of the Board The Board shall:
I. Provide the general policy guidelines relating to the functions of the service II. Manage and superintend the policies of the service on matters on matters relating to the
administration of the revenue assessment, collection and accounting system under the Act or any enactment or law.
III. Review and approve the strategic plans of the service IV. Employ and determine the term and conditions of service including disciplinary measures of the
employees of the service V. Stipulate remuneration, allowance, benefits and pension of staff and employee in consultation VI. Do such other things which in it‟s opinion are necessary to ensure the efficient performance of the
functions of the ser ice under the Act.
(b) (i) Definition of Tax
Page 19 of 24
Tax is a compulsory levy imposed on goods and service for the support of government activities
and for all public needs.
(ii) Definition of Taxation
Taxation is the process of identifying tax payers, the appropriate rates chargeable and method
(c) Composition of the |Federal Inland Revenue Service Board
The Board shall consist of:
(i) The Executive Chairman of the service who shall be experienced in taxation as of the service to be appointed by the President subject to the confirmation of the Senate.
(ii) Six members with relevant qualifications and expertise who shall be appointed by the President to represent each of the six geo political zones.
(iii) A representative of the Attorney-General of Federation (iv) The Governor of the Central Bank of Nigeria or his representative (v) A representative of the Minister of Finance not below the rank of a Director (vi) The chairman of the Revenue Mobilization, Allocation and Fiscal Commission or his representative
who shall be any of the commissioner representing the 36 states of the Federation (vii) The Group Managing Director of the Nigeria National Petroleum Corporation or his representative
who shall not be below the rank of a Group Executive Director of the Corporation or its equivalent (viii) The comptroller-general of the Nigeria Custom Service or his representative not below the rank of
Deputy Comptroller-General (ix) The Registrar-General of the Corporate Affairs Commission of his representative not below the
rank of a |Director, and (x) The Chief Executive Officer of the National Planning Commission or his representative not below
the rank of a Director.
SOLUTION TO QUESTION 4
(a) ADE NIGERIA LIMITED
Computation of Roll Over Relief
N
Machinery
Sale Consideration 2,400.000
Cost of Asset (800,000)
Chargeable Gain 1,600,000
(To be relieved against new assets)
Cost of new asset 4,800,000
Revised cost of new asset 3,200,000
Roll-over Relief is N1,600,000 being the chargeable gain from sale of
original asset – machinery
N
Land and Building
Sale Consideration 4,000.,000
Original cost of asset (1,200,000)
Chargeable Gain 2,800,000
(To be relieved against new asset)
Page 20 of 24
Cost of new asset 7,200,000
Revised cost of new asset 4,400,000
Roll-over Relief is N2,800,000 being the chargeable gain from the sale of
original Land and Building.
(b) Capital Gains arising from the following assets disposal will not attract Capital Gains Tax.
I. Any capital gain arising from the disposal of any government security II. Any capital gain arising from the disposal of shares and securities III. Any capital gains from the disposal of a medal won for honour and Gallantry IV. Any capital gains on the disposal of life assurance policies and any Investment under super-
annuation fund scheme V. Any capital gain on the disposal of motor vehicle for private use
VI. Any capital gain on a chattel disposed for not more than N,1000 in any year of assessment VII. Any capital gain given on the disposal of a landed property by a forced acquisition by any
government in Nigeria, provided: (a) the taxpayer has not taken any previous step to dispose the asset by way of entering into
negotiation to sell (b) the taxpayer has not shown any previous intention to dispose off the asset e.g. by way of
advertisement VIII. Any capital gain accruing to local authorities IX. Any capital gains accruing to diplomatic bodies X. Any capital gain accruing to charitable institutions, statutory or registered friendly societies, co-
operative societies or trade unions XI Any capital gain on the disposal of a dwelling house
XII Any chargeable gain by way of compensation for loss of office
SOLUTION TO QUESTION - 5
(a) I. Original Assessment
This is the first assessment raised on a taxpayer in a particular year of assessment. An original
assessment may be the subject of an objection and appeal procedure.
II Revised /Amended Assessment
This is the assessment that is raised to replace an original assessment. The replacement, usually
arise from either a notice of objection or appeal that is successful.
III. Additional Assessment
An additional assessment will usually arise from a back –duty assessment. The additional
assessment is to cover a shortfall in tax that was previously paid.
IV Best of Judgement Assessment (BOJ)
This will usually arise where the taxpayer has either not filed returns or is not even registered for
tax purpose. Where this occurs, the Inspector of Taxes will simply use the best of his judgement
to estimate the assessable profit, capital allowance claimable and the tax payable. A best of
judgement assessment (BOJ) is also subject to objection and appeal procedure.
V. Self Assessment
This was introduced in 1993. It requires the tax payer to display some level of trust. This is
because the taxpayer is expected to complete a standard self assessment form. The typical self
assessment form should contain all the information expected to be found on a normal notice of
Page 21 of 24
assessment. Where a taxpayer files his returns by self assessment, two advantages accrue to the
taxpayer.
(a) The first is that the taxpayer could make payment in installments equally over six months. (b) Secondly, where all the installments are paid on due dates, 1% bonus is deductible on the
sixth installment.
(b) I Conditions that will make an assessment to be final and conclusive.
An assessment is considered final and conclusive where:
(a) No valid objection or appeal has been lodged within the Statutory time limit (b) No further notice has been given of the appeal against a decision of the Appeal
Commissioner or a judge. (c) The amount of total income or profit has been determined on objection or on appeal the
assessment as made to, revised or determined on appeal.
ii. Reasons why a back duty assessment could be instituted against a
taxpayer. Back duty assessment could be instituted on the occurrence of one or more of the
following events.
(a) Errors or omissions in the assessment or collection of taxes due to deliberate intention of the taxpayer
(b) False or doubtful claim of allowance in respect of current or previous years (c) Failure to disclose or include in full any income or earnings in the returns made available to
the tax office (d) Decrease in revenue or profit in the returns filed to the tax office (e) Tax has not been charged and assessed or has been charged or assessed at less than which
ought to have been charged or assessed.
PE 1 INTERNATIONAL TAXATION
SOLUTION TO QUESTION 1
a
I. Double taxation occurs when income is taxed both by the taxpayer‟s country of residence and in another country where the income arises. - The term double taxation means two taxes imposed on the property by the governing body
during the same tax period and for the same taxing purpose
- Double taxation occurs where two or more countries impose similar taxes on the same taxpayer of the same base.
Fiscal evasion simply means a criminal way of evading the payment of tax.
II. The two types of double taxation are: - economic double taxation - judicial double taxation.
III. The four ways adopted by a typical tax treaty to eliminate double taxation are:
Exemption method - Article 23 (A)
Credit method – Article 23 (B)
Mutual Agreement Procedure - Article 25
Exchange of Information - Article 26
Page 22 of 24
b The four methods through which challenges posed by transfer pricing to the determination of the correct
tax liability of an enterprise could be resolved are:
Comparable uncontrollable method
Resale price method
Cost-plus method
The safe harbor method.
SOLUTION TO QUESTION 2
(a) The two countries that are parties to the bilateral tax treaty are called contracting states.
(b) The term Competent Authority in all the tax treaties between Nigeria and other countries means the
Minister of Finance or his authorized representatives.
(c) Treaty shopping means an analysis of tax treaty provisions to structure an international
transaction or operation so as to take advantage of a particular tax treaty. The term
is normally applied to a situation where a person not resident of either the treaty
countries established an entity in one of the treaty countries in order to obtain treaty
benefits - OECD Definition.
Treating shopping also means shopping for the best tax rates offered by treaty countries in order to carry
out transaction in such a manner to take advantage of those tax rates.
d The Minister of Foreign Affairs is regarded as „‟diplomatic channel‟‟ through which the
Contracting states exchange information.
e Tax sparing is a provision in the treaties Act that seeks to protect the tax incentives
Which the government might have granted to companies as part of the economic
development strategy. The Nigerian government has granted various incentives to
entice Foreign Direct Investment (FDI) into Nigeria. The intention of the government
is that the benefits would accrue to the relevant investor but without a tax sparing provision, such benefit
would be captured by the tax policy of country of residence
of the investor. The income which the government has spared through its incentive
legislations thereby flows, not to the investor directly but to the government of the
country of residence.
SOLUTION TO QUESTION 3
a MAMADU CONSTRUCTION COMPANY LIMITED
Computation of Value Added Tax payable for September, 2008
Page 23 of 24
N N
Income
Progress payment on 4/9/2008 2,250,000
Progress payment on 28/9/2008 250,000
2,500,000 Output
VAT on income received
5% of N2,500,000 125,000
Direct Expenses
Concrete Mixer 333,333
Scalfolding Pipes 1,000,000
Poker Vibrator 233,333
Chippings 45,000
½ Trailer Load of Granites 65,000
½ Transfer Load of Gravel 56,000
Total Direct Expenses 1,732,666
Cost for 50% contract certified
= 50% of N1,732,666 = 866,333
Input VAT on the 50% direct Expenses:
= 5% of N866,333 = (43,316.65)
VAT Payable to FIRS 81,683,35
NOTES TO SOLUTION ABOVE
(I) Direct Expenses: Given the nature of the work of the taxpayer, it has been
assumed that the cost of the concrete mixer, scalfolding pipes and vibrators
are direct expense as they are written off with the contract. On the other hand
the cost of furniture and sharp photocopier are taken as capital assets acquisition, the VAT of
which is not allowed for deduction.
(2) The VAT Input is appropriate as follows:
= Contract Certified x Direct Expenses x 5%
Total Contract
= 2,250,000 x 1,732,666 x 5% = =N=43,316.65
4,500,000
b
The VAT computed in 3 a above must be paid within 21 days following the month of transaction. Consequently, the liability must be settled on or before 21st October 2008.
In remitting the tax, the appropriate VAT Form 002 would be completed and certified by an official of the company. TIN (Tax identification Number) must be well written in the space provide for it in the form.
The tax due is then paid into the designated Bank to which the company is located. The Bank Teller (new E-Ticket) evidencing payment is then filed with the completed VAT Form
002 with the Integrated Tax office (ITO) where treasury receipt will be issued to acknowledge the receipt of the VAT by FIRS.
SOLUTION TO QUESTION 4
a The concept of residence is so important in international tax because tax administrators
need to identify persons and corporate bodies as tax payers. This is the first major task
Page 24 of 24
of any tax administrator. In identifying tax payers under the domestic context, the universally accepted
concept is that of residence rule. Once you are a resident of a particular tax jurisdiction then you are
automatically a taxpayer of that tax jurisdiction.
This reason makes the concept of residence so important in International Taxation.
b The criteria employed as a tie-breaker under Article 4(2) of a typical DTA in the event of
dual residence involving an individual are:
i. He shall be deemed to be a resident of the state in which he has a permanent home available to him; if he has permanent home available to him in both states, he shall be deemed to be resident of the state with which his personal economic relations are chosen (centre of vital interest).
ii. If the state in which he has centre of vital interest cannot be determined or if he does not have a permanent home available to him in either state he shall be deemed to be resident of the state in which he has a habitual abode.
iii. If he has habitual abode in both state or in neither of them he shall be deemed to be resident of the state of which he is a national.
iv. If he is a national of both states or neither of them, the competent authorities of the contracting
states shall settle the question by mutual agreement.
SOLUTION TO QUESTION 5
a The five (5) conditions that must be satisfied for the allocation of expenses are: -
i. That the expenses must have been incurred for the purpose of the business of the PE i.e the burden lies on the Head Office to prove that the expenses are wholly,
exclusively, necessarily and reasonably incurred in earning the profits of the PE.
ii. That the expenses actually incurred and related to the activities of the PE are deductible. iii. That the ordinary expenses which include “executive and administrative expenses” wherever
incurred, for the purpose of the PE are to be allowed as cost. iv. That deductions not allowable for the determination of the profits of the PE include inter-company
royalties, rents and interest on loan, other than bank loan. v. That transfer between the Head Office and PE must be at Arm‟s length, and
vi. That commission and fees for specific services rendered are allowable at costs.
b
i. As regards Build Co. its visit to State C in May 2008 did not constitute a basic rule in PE. These visits also did not count in determining the time the building site lasted in State C as they
preceded the starting date of the building work.
Prep Co. operated as subcontractor to Build Co. in carrying out the preparatory activities for the
project. This time is attributed to Build Co. which means that the calculation of the period for
which Build Co. is active started from 1st October 2008. The temporary interruption of the work
due to heavy rain did not cause the site to cease, and thus, the counting includes these months.
When Build Co. left State C in mid September, the site had lasted 11 ½ months. This is less than
the threshold of 12 months in the OECD model, and so Build Co. would not have a PE in State C.
However, State C may have domestic anti-abuse legislation, under which the artificial
fragmentation of a contract in order to avoid the 12 months period is ignored. If State C did not
consider that this project has been fragmented in this way, and therefore challenged the situation
under this legislation, and the courts in State C accepted this argument on an appeal from Build
Co. against the tax assessment. Build Co. would have passed the 12 months threshold and
therefore have a PE in State C.
ii. Prep Co. has no PE as it stayed below the 12 month threshold. Anonymous Co. also has no PE unless it is also considered to have a PE under the anti-abuse legislation of State C.