THE CHARTERED INSTITUTE OF TAXATION OF NIGERIA … 1.pdf · from, brought into or received in...

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THE CHARTERED INSTITUTE OF TAXATION OF

NIGERIA (Chartered Institute by Act No. 76 of 1992)

STUDENTS’ COMPANION APRIL 2012

PROFESSIONAL EXAMINATION PROFESSIONAL 1

QUESTION AND SUGGESTED SOLUTIONS

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THE CHARTERED INSTITUTE OF TAXATION OF NIGERIA

APRIL 2012: PROFESSIONAL EXAMINATION

PROFESSIONAL 1: BUSINESS TAXATION

ATTEMPT ALL QUESTIONS. SHOW ALL WORKINGS. TIME: 3 HOURS

1. Modi Telecommunications Limited is a company based in Bologna, Italy with a

representative office in Nigeria. Its main business is in the area of private

communication which is carried out all over the world.

The following data were obtained for the 75 million minutes recorded worldwide

during the year ended 31st December 2006.

Italy to the rest of Europe - 29.900,000 minutes Italy to the Americas - 15,750,000 minutes Italy to the rest of Africa - 6,750,000 minutes Italy to Nigeria - 10,600,000 minutes Nigeria to Italy - 8,800,000 minutes Nigeria to the rest of the world - 3,200,000 minutes

The following additional information were provided: N

i. Salaries and Personnel Cost 57,840,000 ii. Licences and other Operational costs 157,910,000 iii Repairs and Maintenance 20,500,000 iv Depreciation of Fixed Assets 134,000,000 v General Provision for Doubtful Debts at 2% of Turnover vi Income Tax Provision 45,000,000 vii Calls are made at the rate of 5Lira for every 3 minutes. It was agreed that the rate of

exchange shall be N4 to every Lira.

Required:

a. Compute the Income Tax Payable on Nigerian operation for the relevant tax

year. (14 marks)

b. How would your computation be affected if you were informed that Nigerian

Income should be taken as 22.5% of turnover and the capital allowance is 35%

of Depreciation charged in the accounts? (6 marks)

Assessor’s Comment

This question was a no go area for the students. The general performance was poor. Most

candidates did not understand the requirements of the question and this accounted for their

poor performance.

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Solution to question 1:

(a) MODI TELECOMMUNICATIONS LIMITED

Computation of Tax Liability for 2007 Tax Year

₦ ₦

(i) Global Income (75m x 4 x 5∕3) 500,000,000

(ii) Nigerian Income (12m x 4 x

5∕3)

80,000,000

(a) Global Adjusted Profit

Income

500,000,000

Less: Salaries

57,840,000

Licences e.t.c

157,910 000

Repairs and Maintenance

20,500,000

236,250,000

Adjusted Profit

263,750,000

b) Adjusted Profit Ratio (APR)

=Global Adjusted Profit x

100% Global Income

= 263,750,000 x100%

500,000,00

52.75 %

c) Depreciation Ratio (DR)

= Global Depreciation x

100% Global Income

=134,000,000 x 100%

500,000,000

26.8 %

d) Nigerian Adjusted Profit

= APR x Nigerian Income

= 52.75 % x 80,000,000

42,200,000

(e) Capital Allowance

i.e. DR X Nigerian Income

=26.8% x 80,000,000

21,440,000

Relieved

21,440,000

21,440,000

NIL

Taxable profit

20,760,000

Tax liability at 30 %

20,760,000 x 30 %

6,228,000

Education Tax

42,200,000 x 2 %

844,000

Total

7,072,000

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(b) MODI TELECOMMUNICATION LIMITED

Computation of tax Liability for 2007 Tax year

₦ ₦

Adjusted Profit

(22.5% x ₦500,000)

112,500,000

Capital Allowance

(35% x ₦134,000,000)

46,900,000

Relieved

46,900,000 Nil

46,900,000

Taxable Profit

65,600,000

Tax at 30%

₦65,600,000 x 30%

19,680,000

Education Tax at 2%

₦112,500,000 x 2%

2,250,000

21,930,000

2 a. In accordance with the provisions of section 8 of CITA 1990 (as amended),

tax is imposed on the profits of any company accruing in, derived from,

bought into, or received in Nigeria;

You are required to name six of such profits. (5 marks)

b. Lagos Lagoon Industry Limited is a company engaged in the brewery

business. It is reputed for the production of assorted Lager Beer. Its statutory

profit and loss account for the year ended 30th September 2001 revealed the

following position:

Notes N Turnover 28,000,000 Profit before Taxation 1 6,766,000 Taxation (1,255,000) 5,511,000 Extra-Ordinary Item 2 525,000 Profit after Tax &Extra-Ordinary Item 6,036,000 Proposed Dividend (3,036,000) Retained Profit 3,000,000

Notes to The Accounts: 1. Profit Before Taxation: N

Profit before tax is stated arrived at: (i) After charging: - Depreciation 465,000 - Directors Remuneration:-

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- Fees 10,000 - Others 125,000 - Loss on Sale of Fixed Assets 155,000 - Loss on Sale of Investment (non – Trade) 144,000 - Stock obsolescence written off 50,000 (ii) After crediting: - Realized Exchange gain 195,000 - Bank deposit interest 35,000

2. Extra-Ordinary item is related to depreciation written back to profit and loss account as a result of revaluation of the company‟s Land and Building on July 2001.

3. A further breakdown of certain expenditure heading in the detailed profit and loss account showed the following:

N (a) Financial Expense is made up of - Share issue Expenses 25,000 - Legal Cost (re-Tax Appeal) 15,000 - Gratuity to retired Employee 65,000 - Legal Cost re-land acquisition 15,000 - Legal Costs incurred in Defending right to company‟s property 18,000 - Legal Cost of re-Acquisition or Short Lease 17,000 - Others (Allowable) 70,000

225,000

(b) Provision for Doubtful Debts arrived at as follows:- N - Balance b/f (1/10/2000): - General Provision 15,000 - Specific Provision 35,000

50,000

Less: Trade Debts written off 15,000 Staff Debts written off 5,000 Balance c/f (30/09/2001) - General Provision 25,000 - Specific Provision 70,000 115,000

(65,000)

(c) General Overhead consists of: *Donations to:- - Nigeria Institute of International Affairs 15,000 - Boys Scout of Nigeria 10,000 - Girls Guide of Nigeria 10,000 - National Party of Nigeria 20,000 - Lions Club 15,000 *Architects fee: re-factory extension 25,000 *Industrial Training Fund Levy 17,500 *Others (Allowable) 37,500

150,000 (d) The agreed capital allowance was N5,250,915.

You are required to compute:

i. Adjusted Profit for the year ended September 30, 2001 (15 marks)

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ii. Income tax Payable for the relevant tax year. (5 marks)

(Total: 20 marks)


This question was okay and well balanced as Part „A‟ was a good test of section 8 of CITA

1990, while Part „ B ‟ tested the knowledge of students on adjusted profit. Most students did

fairly well.


(a) Profit subject to Tax or Chargeable Profit:

The act in section 8 imposes tax on the profits of any company accruing in, derived

from, brought into or received in Nigeria. The Taxable profits under this section are

those in respect of the following:

i. Any trade or business for whatever period of such trade or business may have

been carried on

ii. Rent or any premium arising from a right granted to any person for the use or

occupations of any property.

iii. Dividend, interest, discounts, royalties, charges or annuities

iv. Any source of annual profits or gain not falling within the preceding categories.

The purpose of this (clause) is to ensure that no taxable profits escaped the tax net

of the Board.

v. Any amount deemed to be income under a provision of the Act or, with respect to

any benefit arising from a pension or provident fund of the personal income Act

vi. Fees, dues and allowances (whenever paid) for services.

vii. Any amount of profits or gains arising from acquiring or disposing short term

instruments like Federal Government Securities, Treasury bills, Treasury and

Saving Certificates, Debenture Certificates and Treasury bonds.

(b) Lagos Lagoon Industries Limited:

(i) Computation of Adjusted Profit for the Year Ended 30th September, 2001

₦ ₦

Net Profit per account

Add :

6,766,000

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Depreciation 465,000

Loss on sale of fixed assets 155,000

Loss on sale of investment 144,000 764,000

7, 530,000

Financial expenses:

Share issue expenses 25,000

Legal cost re-tax appeal 15,000

Legal cost re-land acquisition 15,000 55,000

General Overhead:

Donation to NPN 20,000

Donation to Lion Club 15,000

Architects fee no re-factory extension 25,000

Bad debt w/off 15,000 75,000

Adjusted Profit 7,660,000

(ii) Computation of income tax payable for 2002 Tax Year

₦

Assessable Profit 7,660,000

Less: Capital allowances 5,250,915

2,409, 085

Tax Payable ₦2,409, 085 at 30% 722,725 =50

Education Tax ₦7,660,000 x 2% 153,200 = 10

875, 925 =50

3 a. For the fund (Education Trust Fund) to be properly administered, a Board of

Trustees must be established:

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i. List five specific functions assigned to the Board of Trustees.(5 marks) ii. List five conditions/circumstances under which a Member or a Trustee

will cease to hold office. (71/2 marks)

b. List the composition of the Board of Trustee of Education Trust Fund. (71/2 marks)

(Total: 20 marks)


The question tests the functions of composition of and when a member ceases to hold office

of the Board of Trustees of the Education Trust Fund.

Candidates‟ performance was very good. They understood the requirements of the question

and answered well, scoring high marks.

This is what is expected of the candidates for all other topics of the syllabus.


a. (i) Functions of Board of Trustees:

The Board of trustees should have responsibility to:

i. Monitor and ensure collection of tax by the Federal Inland Revenue Service and

ensure transfer to the fund.

ii. Manage and disburse tax.

iii. Liaise with the appropriate Ministries or Bodies responsible for collection or safe

keeping of the tax

iv. Receive requests and approve admitable projects after due consideration

v. Ensure disbursement to various levels and categories of education.

vi. Monitor and evaluate execution of the project

vii. Invest funds in appropriate and safe securities.

viii. Update the Federal Government on its activities and progress through annual and

audited reports.

ix. Review progress and suggest improvement within the provisions of this Act.

x. Do such other things as are necessary or incidental to object of the fund under the Act

or as may be assigned by the Federal Government.

a. (ii) Conditions and circumstances under which a member of Trustee will cease to hold

office:

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A member of the Board of Trustees shall cease to hold office if:

1) He becomes of unsound mind.

2) He becomes bankrupt or makes a compromise with his creditors.

3) He is convicted of a felony or any offence involving dishonesty

4) He is guilty of serious misconduct in relation to his duties.

5) A member of the board of trustees may be removed from office by the Head of

State, Commander In Chief of the Armed Forces, if he is satisfied that it is not in

the interest of the fund or the interest of the public that the member should

continue in office.

6) A member of the Board of Trustees, other than an ex-officio member, may resign

his appointment by a notice in writing under his hand, addressed to the Head of

State, Commander in Chief of the Armed forces.

7) Where a vacancy occurs in the membership of the Board of Trustees. It shall be

filled by the appointment of a successor to hold office for the remainder of the

term of office of his predecessor, however that the successor shall represent the

same interest and shall be appointed by the Head of State, Commander In Chief

of the Armed forces.

b. Composition of the Board of Trustees of Education Tax Fund.

The Board of Trustees shall consist of the following:

i. A Chairman;

ii. Eight other members;

iii. A representative each of the Federal Ministries of Finance and Education who

shall not be below the rank of a Permanent Secretary;

iv. The Executive Secretary who shall be the Secretary to the Board of Trustees;

v. The membership of the Board of Trustee shall reflect the six geo-political zones

of the Federation.

4 Owolabi Mining and Exploration Limited is a well-known company which commenced business in 2000. It engages in the business of mining of solid minerals which it exports to Europe and the Americas. For the year ended 31st December 2006

the following result was presented. Profit and loss account for the year ended 31st December 2006 is as follows:

N N Export Sales 2,498,840 Local Sales 273,400 2,772,240 Mining Cost 513,900 Transportation Cost 126,480 Rent 242,000 Auditors Remuneration 100,000 Insurance 130,000 Preliminary Expenses written off 50,000 Salaries & Wages 257,780

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Telephone and Electricity 109,560 Bad Debt 167,120 Directors fees 160,000 Office Expenses 30,000 Income Tax Provision 157,000 Donation & Subscription 40,000 Motor Vehicle Expenses 91,120 Depreciation 203,600 2,378,820 Net Profit 393,420

The following additional information were provided:

(i) The company has a paid up share capital of N10,000,000. There is no foreign

capital input. An extract of the balance sheet was provided as follows:

N

Share Capital 10,000,000

Reserves 900,000

Total 10,900,000

This is represented by the net asset of the company.

(ii) It has been established that both the mining and transportation costs are the

relevant direct cost.

(iii) The sum of N200,000 included in the Rent Account is the amount paid as rent

for the General Manager. The basic salary of the General Manager has been

reported as N160,000.

(iv) Included in the donation is N 17,000 given to the Islamiyat Women Society of

which the general manager‟s wife is the Chairperson.

(v) Capital allowances on assets have been agreed with the FIRS as N 433,570

(vi) Analysis of the bad Debt account shows the following:

N General provision for Doubtful Debt c/f 70,000

Specific provision for Doubtful Debt c/f 96,000

Bad Debt Written Off 140,000

Loan to Customer Written Off 45,120

General Provision for Doubtful Debt b/f (30,000)

Specific Provision for Doubtful Debt b/f (36,000)

Bad debt written off recovered (118,000)

Profit & Loss Account 167,120

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You are required to:

a. Compute the Tax Liability for the relevant tax year (14 marks)

b. What are the incentives available to any company in the Mining of Solid

Minerals in Nigeria (6 marks) (Total: 20 marks)


The objective of Part A of the question is to test candidates‟ knowledge of basis period for

profit and to be able to adjust accounting profit for tax purposes. Majority of the candidates

did not even know the current year of assessment that is applicable.

Also, very few were able to compute the adjusted profit for the tax purposes.

The Part „B‟ was a bonus but also, very few candidates were aware of the tax incentives that

are peculiar to the Mining industry. The overall performance was below average.


a. OWOLABI MINNING AND EXPLORATIONS LTD

Computation of Tax Liability for 2007 Tax Year

₦ ₦

Net Loss reported

(393,420)

Add:

Preliminary expenses w/o 50,000

Income Tax provision 157,000

Depreciation 203,860

Rent for staff 40,000

Donation 17,000

Increase in General provision 40,000

Loan to customer w/o 45,120

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552,980

Adjusted profit

159,560

Capital Allowance 433,570

Relieved (106,905) (106,905)

Unutilised Capital Allow c/f 326,665

Taxable profit 15,796

Education Tax (2% of

₦159,560)

3,191

Total

1977

b. Any company in the mining of Solid Minerals in Nigeria will have the following

incentives available to it.

i. Where the company has a turnover that does not exceed ₦1,000,000 in any year,

small business tax rate will be applied in assessing it to tax. This provision is for

the first five years only.

ii. Any dividend declared by the company within the first five years is exempted

from tax.

5 a The enabling law on withholding tax requires that each withholding tax

cheque paid to the relevant tax authority must be accompanied with a payment

schedule which is a list of those that suffered the deduction that make up the

amount on the cheque.

You are required to list out Ten (10) particulars which must be stated in the

payment schedule. (10 marks)

b) Oluwarinu is resident in Oyan, Osun State. He has been in business for many

years after retiring from a tertiary institution where he was a Professor. His

business records contained the following transactions for the year 2008.

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N

January 15 Payment received in respect of supplies made to the

University of Abuja 950,000

April 2 Dividend received on shares held in Nigeria companies 45,000

Sept. 20 Rent received from Tenants in his house in Ibadan 180,000

Dec.15 Professional fees collected on consultancy services rendered to a company 190,000

Dec. 28.Royalties received on books authored by him 90,000

The various agents deducted the withholding taxes from the gross amount due

to Prof. Oluwarinu before paying him the net. The withholding taxes were

promptly remitted to the appropriate tax authorities. Withholding tax rate of

10% was applied to the rent, dividend and royalties while 5% rate was applied

on supplies.

Required:

Compute the withholding taxes due for the relevant year of assessment

showing the withholding deducted and gross amount receivable. Show all workings.

(10 marks) (Total: 20 marks)


The question is okay; all the students attempted the question. In „A‟ part of it, the students

scored good marks, but the students could not compute correctly the Withholding Tax.


a. The particulars which must be stated in the payment schedule forwarded to the

relevant tax authority are:

i. Name of the tax payers who suffered the deductions.

ii. The addresses of those who suffered the tax deduction.

iii. The nature of their activities and/or services

iv. Their tax file number (PIN)

v. The total amount payable

vi. The rate of tax applied

vii. The amount of tax withheld

viii. The balance paid to the taxpayer

ix. The date of payment

x. The tax period of the contract for which returns were being made

xi. The cheque numbers and dates

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b. COMPUTATION OF WITHHOLDING TAX DEDUCTED FROM OLUWARINU

FOR THE YEAR 2008

DATE

TRANSACTION

NET

AMOUT

WHT

RATE

AMOUNT

DEDUCTED

GROSS

AMOUNT

₦ ₦ ₦

January 15

Supplies

950,000

5%

50,000

1,000,000

April 12 Dividend

45,000

10%

5,000

50,000

September

20

Rents

180,000

10%

20,000

200,000

December 15 Fees

190,000

5%

10,000

200,000

December 28 Royalties

90,000

10%

10,000

100,000

Workings:

₦

i. Withholding tax on supplies

950,000 x 5/95

50,000

ii. Withholding tax on dividends 45,000 x10/90

5,000

iii.

Withholding tax on rent

180,000 x 10/90

20,000

iv. Withholding tax on fees

190,000 x 5/95

10,000

v. Withholding tax on royalties

90,000 x 10/90

10,000

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PROFESSIONAL 1: INTERNATIONAL TAXATION

ATTEMPT ALL QUESTIONS. SHOW ALL WORKINGS. TIME: 3 HOURS

1. Fixed base in a concept being used in taxing non- resident individuals and companies in

Nigeria from any trade or business.

a. State the conditions that are available in Section 13(2) of the Companies Income

Tax Act (CITA) 2004 for taxing non – residents. (15 marks)

b. State the two (2) principles that govern the taxing rights of a tax jurisdiction and

briefly explain them. (5 marks)

(Total: 20 marks)


The question tests the concept of „Fixed Base‟ in International Taxation. Only very few

(about 30%) of the candidates attempted the question and the performance was very poor.

The commonest pitfall is the inability of students to understand the general principles

involved in taxing non-residents.

Candidates are advised to properly grasp principles of taxing non-residents when preparing to

sit for examinations in International Taxation.


1. a) Under section 11/2, of CITA below are the conditions available for taxing non-

residents.

i. If the company has a fixed base in Nigeria to the extent that the profit

is attributable to the fixed base.

ii. If it has no fixed base but habitually operates trade or business through

person in Nigeria to conclude contracts on its behalf or habitually

maintains stock of goods or merchandise in Nigeria for which

deliveries are regularly made

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iii. If the trade or business activities involve a single contract of survey

deliveries, installation or construction, the profit for that contract.

iv. When associated enterprises are involved and the business activities

between them are believed by the Board that the transaction was not at

arm‟s length. That portion of the transaction which was not done at

arm‟s length would be subjected to tax.

b) The two principles that govern the taxing rights of a tax jurisdiction are

i. Residency rule

ii. Source rule

i. Residency rule:- This determines the extent to which income of a tax

payer is liable to tax within a tax jurisdiction. When a tax payer is a

resident of a country, then he is taxed on his worldwide income.

ii. Source rule:- If a tax payer is non-resident but derives income from the

country (Source country) then the non-resident tax payer is taxed on

the income derived from the source country is the income that would

be tax only on the business activities or trade carried out in the most

country

2. a. Tax Haven is defined as a country that imposes little or no tax on the profits

from transactions carried on from that country. Furthermore, it is said that there

is no single definition for it, rather, there are several categories of preferential

treatments that would be considered as tax haven.

You are required to list those preferential treatments that would be considered as

Tax Haven. (10 marks)

b. Explain the two ways in which a Nigerian resident company that has paid tax on

income derived outside the country will be entitled to relief when computing the

tax liability on its global income. (10 marks)

(Total: 20 marks)


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The question tests candidates‟ knowledge of Tax Haven and general principles involved in

taxing income from outside the tax payers‟ country of residence.

More than 80% of the candidates attempted the question and performance was fair.

However, a few of the candidates were not diligent enough to understand the principles

behind Tax Haven despite the fact that it was well defined by the examiner.

Candidates are advised to pay good attention to minute details in future examinations.


2. a. The preferential treatment that would be considered as tax haven are:

i. Where no tax is paid at all;

ii. Where minimal tax is paid and

iii. Where certain types of activities are granted privileges.

b) The two ways in which a Nigerian resident company that has paid tax on

income derived from outside the country will be entitled to relief when

computing the tax liability on its global income are:-

i. Through the commonwealth Tax relief the commonwealth rate does

not exceed one half of the rate of tax paid at which the relief is to be

given

ii. Through the double taxation agreement, this is sub-divided into two:

The credit and the exemption method. Under the credit method, credit

is given to the tax paid on income derived from the source country

while in the exemption method Income we derived from the other

contracting state is not included in the global income.

3. Wale, Zongerus and Bianca are partners in business. They agreed to share profit at the

ratio 2:3:5. The adjusted trading profit for the year ended 31/12/09 was N2.5m. The

interest on capital and salaries accrued for each partner are as follows:

WALE N ZONGERUS N BIANCA N

Interest on Capital 80,000 120,000 160,000 Salaries 600,000 650,000 800,000

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Wale has a building in a well located area in Lagos from which he receives N750, 000

Rent per annum. Zongerus supplied Cotton Wool to a Textile Company in Oyo State

from where he realized a sum of N800,000 annually. However, Bianca invested in

stocks and realised N250, 000 dividend, all net of withholding taxes.

Wale is married with two children who are in a reputable higher institution of learning.

Zongerus recently got married but his wife is just about to put to bed. He also has aged

parents of 65 and 70 years who have retired from service and whom he expended a sum

of N20,000 and N40,000 respectively per annum. Bianca, on the other hand, is married

with eight children, all are in educational institutions.

Required:

a. Compute the total income of each partner for 2010 year of assessment.(8 marks)

b. Determine the tax liability of each partner. (12 marks)

(Total: 20 marks)


The question tests candidates‟ ability to derive taxable income from partnership business. All

the students attempted the questions and the performance was good. More than 90% passed

this question.

Candidates are advised to keep on the habit of understanding basic principles as demonstrated

here in future examinations.


3. Wa, Zo and Bia in partnership

a. COMPUTATION OF TOTAL INCOME OF EACH YEAR PARTNERS FOR

THE YEAR 2009.

Wa Zo Bia total

Profit Sharing Ratio 2 3 5 Income from Partnership N N N

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Profits 500,000 750,000 1,250,000

Interest on Capital 80,000 120,000 160,000

Salaries 600,000 650,000 800,000

TOTAL N1,180,000 N1,152,000 N2,500,000

Income from other Sources

Rental Income 750,000 - -

Contract of Supply - 800,000 -

Dividend (Gross) - - 277,778

Grand Total N1,930,000 N2,320,000 N2,487,778

Workings

Wa, Zo and Bia

i. Dividend (Net) 250,000 ÷ 90% = N277,778

ii. Personal Allowance Wa, 20% of 1,180,000 + 500 = N236,000

iii. Children Allowance Wa, 2 Children x N2500 = N5,000

Z0 -

Bia 8 Children ( subject to maximum of 4 children)

N2,500 x 4 = N10,000

iv. Dependent Relatives

Zo 2 dependents at N2,000 x 2 = N4,000

v. Z0 tax Payable

1st 30,000 @ 5% = 1,500

Next 30,000 @ 10% = 3,000

50,000 @ 15% = 7,500 50,000 @ 20% = 10,000

Next 1,687,000 @ 25% = 421,750

Total N443,750

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Bia Tax Payable

N

1st 30,000 @ 5% = 1,500

Next 30,000 @ 10% = 3,000

50,000 @ 15% = 7,500

50,000 @ 20% = 10,000

Next 1,593,000 @ 25% = 398,250

Total N420,250

Wa Tax Payable

N

1st 30,000 @ 5% = 1,500

Next 30,000 @ 10% = 3,000

50,000 @ 15% = 7,500 50,000 @ 20% = 10,000

Next 1,529,000 @ 25% = 383,250

Total N404,250

b) DETERMINATION OF TAX LIABILITY OF EACH PARTNER FOR 2010 YEAR OF ASSESSMENT

Wa Z0 Bia

Income from trade / Business N N N

Income for the Year 1,930,000 2,320,000 2,487,778

Less Reliefs

Personal Allowance 236,000 469,000 447,000

Children Allowance 5,000 - 10,000

Dependent Allowance - 4,000 -

Chargeable Income 1,689,000 1,847,000 2,030,77

Less dividend - - 277,778

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Net Chargeable Income 1,689,000 1,847,000 1,753,000

Tax Liability 404,250 443,750 420,25

4. a. List any five (5) major Tax Treaty Models that you know. (5 marks)

b. Tax treaty is usually called by different names. Itemise any five (5) of such names

(5 marks)

c. State the processes involved in putting in place a Tax Treaty. (10 marks)

(Total: 20 marks)


The question tests candidates‟ knowledge of Tax Treaty models and principles.

More than 90% of the candidates attempted the question and the performance was fair.

Candidates should remember that principles involved in Tax treaties are common in

International taxation examinations.


4. a) The major tax treaty models that are known:

i. Nigerian Model/Draft ii. United Nation Model Tax Convention between developed and

developing countries iii. Organization for Economic Cooperation and Development (OECD)

Model Tax Convention on Income and Capital iv. USA model Income Tax Convention; and v. ASEAN Model income Tax Treaty

b) The different names by which a tax treaty is called are:

i. Avoidance of Double Taxation Agreement (DTA) ii. Tax Convention

iii. Tax Agreement iv. Bilateral Tax Agreement v. Bilateral Tax Treaty

vi. Double Taxation Relief

c) The process involved in putting in place a tax treaty are:

i.

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Initial Contacts

Initiation

Exchange of DTA drafts between the two countries

Correspondence and Communication

ii.

Negotiations

Negotiation Team

Physical Meeting

Joint Draft Texts

iii. Reconciliation of unresolved issues iv. Constitutional Requirements / Legal Procedure

v. Publication vi. Notification and Effective date of Implementation vii. Termination

5. Higher Technology Nigeria, a company resident in Nigeria, is a part of the

manufacturing group, “Hi-Tek” a leading manufacturer and distributor of mining

machinery. Higher Technology Nigeria imports machinery manufactured by two other

group companies. Hi-Tek Germany and Hi-Tek Poland. The machines are purchased by

Higher Technology Nigeria from Higher Technology France, the group‟s centralised

inventory company.

Other additional information is as follows:

Higher Technology Nigeria (The Company) started trading in 2004. Previously an

unrelated company, Minemax Distribution, had carried out the distribution of Hi-Tek

machinery in Nigeria. You have been able to obtain a copy of the last set of accounts of

Minemax Distribution Ltd for the year ended 31st December, 2003 and they show a

Gross Margin/ Sales of 50%.

Higher Technology Nigeria is not an overly active company. It has five (5) employees,

who operate from a large warehouse just outside of Abuja. It maintains a stock of spare

parts and a few machines for display purposes. Generally, Higher Technology Nigeria

imports machines as and when they are ordered by the clients and then arranged for

delivery using a contracted transport company. There is no value added to the machines

in Nigeria.

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Of the five (5) staff, two (2) are Sales Representatives, two (2) are Technical Assistants

and there is the CEO. The Technical Assistants provide technical support for the Hi-Tek

machinery including reviews of sales proposal put forth by Higher Technology Nigeria

to its clients.

HIGHER TECHNOLOGY NIGERIA

PROFIT AND LOSS ACCOUNT SUMMARY 2004 TO 2008

Required:

Based on the information provided undertake a Transfer Pricing Risk Assessment of

Higher Technology Nigeria and address the following questions:

a. What is of particular concern to you and why? (10 marks)

b. Will you investigate further? If so, what further information will you ask for?

(10 marks)

(Total: 20 marks)


The question tests candidates‟ knowledge of Transfer pricing and basic assessment in

addition to artificial transactions.

Above 20% of the candidates attempted the question and the performance was very poor.

The commonest pitfall is candidates‟ inability to understand the basic principles involved in

transfer pricing system and risk assessment.

2004(N‟000) 2005(N‟000) 2006(N‟000) 2007(N‟000) 2008(N‟000)

Turnover 1,250 2,324 3,200 4,159 4,359 Cost of Sales 811 1,446 2,051 2,587 2,711 Gross Profit 439 878 1,149 1,572 1,648 Gross Profit to Turnover

35% 38% 36% 38% 38%

Operating expenses 508 911 1421 1,855 1,933 Profit before Tax (69) (33) (272) (283) (285) Profit margin (5.52%) (1.42%) (8.5%) (6.8%) (6.54%) Purchase from Group Companies

770 1,374 1,948 2,458 2,575

Management fee to Hi-Tek USA

0 0 160 208 218

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There was also very poor understanding of what constitutes artificial transactions. Candidates

are to remember that issues of transfer pricing, offshore risk assessment and artificial

transactions are very common in International taxation examinations and should prepare so.


5. a) Based on the information provided, areas of particular concern may include

i. Related party purchase account for around 90% of total Cost of Goods Sold (COGS). Hi-Tek Nigeria which appear to be distributor entity,

has made operating loses each year since it began trading in 2004. Furthermore, the gross margins made by Hi-Tech Nigeria over the 2004-2008 period are significance lower than those made by the

previous unrelated distributor.(Minimal distribution although, direct conclusions cannot be drawn from this as it is unclear from

information providing the external to which sales of Hi-Tek machine comprise minimise sales.

ii. A management service fee was introduced in 2006 contributing further

to the loss position of Hi-Tek Nigeria. Notably, this appears to be calculated as 5 % of turn over

iii. Employees appear to be providing services to Hi-Tek Nigeria for no

consideration

b.) Given the ongoing loss position, reduced gross margins and the

high percentage of related party purchases, further investigation may be warranted with focus on the purchase transactions. However,

.as part of this investigation, it may be fruitful to further investigate Hi-Tek Nigeria for a possible artificial transaction.

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PROFESSIONAL 1: PERSONAL TAXATION

ATTEMPT ALL QUESTIONS. SHOW ALL WORKINGS TIME: 3 HOURS

1. Mallam Usmanu Dan Lagos retired from the public service of the Federal Government

of Nigeria on 31st January, 2010. In order to remain active after retirement, he took up

employment with a private company with effect from 1st April 2010. The following

information are provided by Mallam Usman Dan Lagos:-

N

(a) Salary for Year 2009 120,000

Salary for January 2010 12,000 Salary in the new employment 300,000 per annum

(b) Pension receive from February 2010 80,000 per annum (c) Dividend received (Gross) Paid 3/4/2009 10,000

Paid 31/12/2009 5,000 Paid 30/6/2010 6,000 Paid 31/12/2010 8,000

(d) Christmas Bonus paid in December 2010 12,500 (e) Rent collected in Year 2009 84,000

Rent collected in Year 2010 100,000 (f) Transport Allowance (New Employment) 36,000 per annum (g) Housing Allowance (New Employment) 240,000 per annum

(h) Other Allowances (New Employment): - Utility 16,000 per annum

- Meal Subsidy 6,600 per annum - Entertainment 10,000 per annum

(i) Expenses on property:

Water Rate: - 50% paid in the year 2009 3,000 - 50% paid in the year 2010 3,000

Insurance on property 12,500 per annum

(j) Mallam Usman Dan Lagos is married with five children who are:

Jijiwa - Born 5/7/98 - Attending School Kabir - Born 29/3/93 - Out of School, but unemployed

Mohammed - Born 4/5/93 Jubril - Born 21/8/1999 Ahmed - Born 22/1/2008

(k) Capital Allowances on his Building N5,000

(l) He holds a life assurance policy on his life and pays N22,000 annually on a

capital sum of N200,000.

(m) Mallam Usman Dan Lagos has an aged Uncle on whom he spends only

N5,000 per annum. The Uncle has a rental Income of N6,100 per annum.

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You are required to compute the income tax payable by Mallam Usman Dan Lagos for

2010 year of assessment. (20 marks)


Candidates‟ performance is good. Candidates‟ pitfalls are: inclusion of Non taxable income in

computation; inability to properly classify incomes into earned & unearned incomes and non

inclusion of relevant income as well as inclusion of allowable expenses as taxable income.


1. MALLAM USMAN DAN LAGOS

COMPUTATION OF INCOME TAX FOR 2010 YEAR OF ASSESSMENT

Earned Income ₦ ₦

Salary (Old Employment) 12,000

-New Employment (9/12 x 300,000) 225,000

Christmas Bonus 12,500

Transport Allowance ( 9/12 x 36,000) 27,000

Housing Allowance (9/12 x 240,000) 180,000

Utility Allowance (9/12 x 16,000) 12,000

Meal Subsidy (9/12 x 9,600) 7,200

Entertainment Allowance (9/12 x 10,000) 7,500

483,200

Less:

Rent 150,000

Transport 20,000

Utility 10,000

Meal Subsidy 5,000

Entertainment 6,000 (191,000)

292,200

Unearned Income:

Dividend Received (Gross)

On 3/4/2009 10,000

On 31/12/2009 5,000

15,000

Rental Income(Note) 60,500

Statutory Total Income 367,700

Deduct Reliefs:

Personal Allowance (N5000+20% X

₦292,200)

(N5,000+ 58,440) = 63,440

Children = N2,500 x 4 10,000

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Life Assurance Relief 22,000 95,440

Chargeable Income 272,260

Tax Payable:

On 1st 30,000 at 5% 1,500

Next 30,000 at 10% 3,000

Next 30,000 at 15% 7,500

Next 30,000 at 20% 10,000

Next 112260 X 25% 28,065

50,065

Notes

1. Calculation of Rental Income:

Rent Received (PYB) 84,000

Deduct Water Rate (3000 +3000 6000

Insurance 12,500 18.500

65,500

Less Capital Allowance 5,000

Chargeable Rental Income 60,500

2. Dependant relative relief cannot be

granted with the level of the income of the dependent relative

3. Pension received is no more subjected to Tax with the 1999 constitution in Nigeria

2. Mrs. Ogeroge Josephine who is into retailing of rice, trading as Lonejose Ventures

commenced business on the 1st July 2006 and decided to make her accounts to 30th

September of each year. The following profit/(loss) figures were obtained from her

books of accounts for the period/year stated:-

N

15 months to 30th September 2007 (3,024,000)

Year ending 30th September 2008 540,000

Year ending 30th September 2009 1,560,000

Year ending 30th September 2010 (360,000)

You are required to compute the Total Assessable Profits for all the relevant years of

assessment. Ignore Capital Allowance. (20 marks)


Candidates‟ performance was fair. Though some candidates‟ performance was very poor.

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2. MRS OGEROGE JOSEPHINE

BASIS PERIOD FOR ASSESSABLE PROFIT AND

ASSESSABLE PROFITS FOR THE RELEVANT YEARS OF ASSESSMENT.

NORMAL BASIS

Tax Year Basis Period Assessable Profit

(₦)

2006 1/7/2006 – 31/12/2006 6/15 x 3024000 (1,209,600)

2007 1/7/2006- 30/6/2007 12/15 x 3024000 (2,419,200)

2008 1/7/2006 – 30/6/2007 (2,419,200)

2009 1/10/2007 – 30/9/2008 540,000

2010 1/10/2008- 30/9/2009 1,560,000

2011 1/10/2009 – 30/9/2011 (360,000)

ELECTION BASIS

Tax Year Basis Period Assessable Profit (₦)

2006 1/7/2006 – 31/12/2006 (1,209,600)

2007 1/1/2007- 31/12/2007 (1,679,400)

2008 1/1/2008 – 30/12/2007 795,000

2009 1/10/2007 – 30/9/2008 540,000

2010 1/10/2008- 30/9/2009 1,560,000

2011 1/10/2009 – 30/9/2011 (360,000)

Notes (a)

Normal Basis

2006 Tax

Year

1/7/2006- 31/12/2006 6/15x (3,024,000)

(N1,209.600)

2007 Tax

Year

1/7/2006- 30/6/2007 12/15 x (3,024,000)

(N2,419,200)

Notes (b)

Election Basis

2007 Tax

Year

1/1/2007- 31/12/2007 9/15x (N3,024,000)

N1,814,400

1/10/2007 – 31/12/2007

3/12x540,000

N135,000

N1,814,400 + N135,000 (N1,679,400)

2008 Tax

Year

1/1/2008- 30/9/2008 9/12 x 540,000

405,000

1/10/2008 – 31/12/2008

3/12 x 1,560,000

390,000

405,000 +390,000 N795,000

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Summary

Normal Election

2006 1/7/2006 – 31/12/2006 (1,209,600) 1/7/2006 – 31/12/2006

(1,209,600)

2007 1/7/2006 – 30/6/2007 (2,419,200) 1/7/2007 – 31/12/2007

(1,679,400)

2008 1/10/2006 – 30/9/2007 (2 419, 200) 1/1/2008 – 31/12/2008

795,000

(6,048,000)

(2,094,000)

Note:

The normal basis of assessment gives the tax payer for the 2nd & 3rd years higher loss relief of

(2,419,200 + 2,418,200) i.e. (4,838,400) as against if opt for election which will enable him

claim only [(1,679,400) + 795,000)]

i.e. ₦884,000) only. Mrs. Ogeroge Josephine will therefore forfits her right of Election.

3. a. Enumerate Ten (10) incomes which are exempted from tax under the Nigeria Tax

Laws. (15 marks)

b. In the Nigeria contract, give (5) five instances where tax can be avoided (5 marks)

(Total: 20 marks)


On the average, candidates performed very well which resulted in scoring very good marks.


3a. The following incomes are exempted from tax:

1. The emoluments payable from United Kingdom funds to members of visiting

or other forces and to persons in the permanent service of the United Kingdom

Government in Nigeria in respect of their offices under the United Kingdom

Government and the emoluments payable to members of any civilian

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component, and the income of any authorised service organisations,

accompanying the visiting forces:

Provided that this exemption shall not apply to any individual who is a citizen

of Nigeria or who ordinarily resides in Nigeria.

2. All consular fees received on behalf of a foreign State, or by a consular officer

or employee of the State of his own account, and all income of such officer or

employee, other than income in respect of any trade, business, profession or

vocation carried on by an officer or employee or in respect of any other

employment exercised by him with Nigeria:

Provided that this exemption shall not apply where the officer or employee is

engaged on domestic duties or where the officer or employee ordinarily resides

in Nigeria and is not also a national of the foreign State.

3. The income of a local government or government institution.

4. Interest on any loan granted by a bank on or after 1 January, 1997 to a person:

(a) engaged in:

i. agricultural trade or business;

ii. the fabrication of any local plant and machinery; or

(b) As working capital for any cottage industry established by the person under

the Family Economic Advancement Programme.

If the moratorium is not less than 18 months and the rate of interest on the loan

is not more than the base lending rate at the time the loan was granted.

5. The income of any ecclesiastical, charitable or educational institution of a

public character in so far as such income is not derived from a trade or

business carried on by such institution.

6. The income of a national of the United States of America from employment b y

the International Co-operation Administration, being an administration or

agency formed and directed by the Government of that country.

7. The income of a national of the United States of America from employment by

the International Development Services as agents or the International Co-

operation Administration.

8. An income in respect of which tax is remitted or exempted under the

provisions of the Diplomatic Immunities and Privileges Act or of any

enactment, order or notice continued in force or effected by that Act.

9. The income of a trade union registered under the Trade Unions Act, in so far

as the income is not derived from a trade or business carried on by that trade

union.

10. Gratuities payable to a public officer by the Government of the Federation or

of a State in respect of services rendered by him under a contract of service

with that Government and described as gratuities either in the contract or some

other document issued by or on behalf of Government in connection with such

contract.

11. Gratuities payable to an employee in the private sector in respect of services

rendered by him under a contract of service with his employer and described

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as gratuities either in the contract or some other document issued by or on

behalf of the employer in connection with such contractor:

Provided that-

(a) where the period of services does not amount to ten years, the exemption

provided under this Schedule shall not apply;

(b) where the total gratuity payable exceeds the amount of ₦100,000, the

amount of any excess shall not be so exempt but shall be deemed to be

income of the employee on the last day of his employment, including any

terminal leave arising therefrom;

(c) where the period of service (or where service is not continuous, the

aggregate period of service in any 63 consecutive months) does not amount

to five years, then, if the total gratuities exceed a sum calculated at the rate

of ₦1,000 per annum for such period or aggregate period the amount of any

excess shall not be so exempt but shall be deemed to be income of the last

day of the employment, including any terminal leave arising therefrom.

12. Pensions granted to a person under the provisions of the Pensions Act relating

to widows and orphans.

13. The income of a statutory or registered friendly society in so far as such

income is not derived from a trade or business carried on by such society.

14. Gratuities payable to a member or former member of the staff of the Nigerian

College of Arts, Science and Technology by the College in respect of services

rendered by him under a contract of service with the College and described as

gratuities either in the contract or in some other document issued by or on

behalf of the College in connection with the contract, subject to the like

provisions as those contained in the provision to number (10) above.

For the purposes of this exemption, “member of the staff” means an

individual appointed to an office specified in the Second Schedule to the

Nigerian College of Arts, Science and Technology Act.

15. Wound and disability pensions granted to members of the armed forces or of

any recognised national defence organisation or to persons injured as a result

of enemy action.

16. Gratuities payable to an employee or former employee under a contract of

service with a body established pursuant to the Nigerian Research Institutes

Act or any Act repealed by that Act or by the West African Council for

Medical Research Act, being a gratuity so described either in his contract of

service with the body or in some other document issued by or on behalf of the

body in connection with that contract.

17. A sum received by way of death gratuities or as consolidated compensation.

for death or injuries.

18. The income of a co-operative society registered under the Nigerian Co-

operative Societies Act, not being income from any trade or business carried

on by the Society other than the co-operative activities solely carried out for

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and with its members or from any share or other interest possessed by that

Society in a trade or business in Nigeria or elsewhere carried on by some other

person or authority.

19. A sum withdrawn or received by an employee from a pension, provident or

other retirement benefits fund, society or scheme approved by the relevant tax

authority under the provisions of paragraph (g) of section 20 of PIT

(Amendements) Act, 2011 other than a sum which is deemed to be income of

the employee under an express provision of this Act, and a sum withdrawn or

received by an employee from a national provident fund or other retirement

benefits scheme established under the provisions of any enactment for

employees throughout Nigeria.

20. The income of an individual from employment by the Ohio University of

Athens, Ohio, as agent for the International Co-operation Administration, in

connection with any scheme for the training of teachers in Nigeria.

21. (1) Interest accruing to a person who is not resident in Nigeria as specified in

the following sub-paragraphs:

(a) the interest on a loan charged on the public revenue of the Federation and

raised in the United Kingdom;

(b) the interest on a bond issued by the Government of the Federation to secure

repayment of a loan raised from the International Bank for Reconstruction

and Development under the authority of the Railway Loan (International

Bank) Act;

(c) the interest on any money borrowed by the Government of the Federation

or of a State on terms which include the exemption of interest from tax in

the hands of a non-resident person;

(d) where the Minister of Finance so consents, the interest on any moneys

borrowed outside Nigeria by a corporation established by a law in Nigeria

upon terms which include the exemption of such interest from tax in the

hands of any non-resident person;

(e) the interest on deposit accounts, provided the deposits into the account are

transfers wholly made up of foreign currencies (funds) to Niger ia on or

after 1 January 1990 through Government approved channels and the

depositor does not become non-resident after making the transfer while in

Nigeria.

(2) For the purpose of the exemption referred to in sub-paragraph (1) of this

paragraph, a person shall only be deemed to be resident in Nigeria for a year of

assessment if he is in Nigeria for a period or periods amounting to 183 days or

more in any twelve-month period commencing in the calendar year and ending

either in the same year or the following year.

b. i Where capital expenditure are incurred with the purpose of claiming capital

allowable

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ii Where a foreign investment is made with the aim that the income therefrom

will be exempted from tax.

iii Where certain expenses are incurred, which would not have been otherwise

being incurred, just because such are allowable and will thus reduce profit for

tax purposes

iv Where a business invests in certain sectors of the economy such as

agricultural, manufacturing and mining because of the special relief and

incentives available to such businesses.

v Where a loss incurred, such a loss may be carried forward for relief.

4. a. According to Part X, Section 85C of Personal Income Tax Act, 1993, a State Internal

Revenue Service is empowered to put in place, a Technical Committee to assist her in the

discharge of its statutory duties. Discuss the composition and functions of the Technical

Committee of the State Internal Revenue Boards.

(10 marks)

b. What functions do you expect the Local Government Revenue Committee to

perform? (4 marks)

c. Enumerate the duties of the Technical Committee of the Federal Inland

Revenue Service Board. (6 marks)

Total (20 marks)


Candidates performed poorly on the Essay question. This was a reflection of their low or little

appreciation of the functions of the Tax regulatory agencies.


4a. Functions of the Technical Committee of the State Internal Revenue Board is made of

the following members:

i. Executive Chairman of the State Board as Chairman

ii. All Directors within the State Service

iii. The Legal Adviser to the State Service

iv. The Secretary of the State Service.

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Functions of the Technical Committee of the State Internal Revenue Board include the

following:

i. Have powers to co-opt additional staff from within the State Service in the

Discharge of its duties.

ii. Consider all matters that require professional and technical expertise and make

recommendations to the Board.

iii. Advise the state Board on its power and duties.

iv. Attend to such other matters that may from time to time be referred to it by the

Board.

b. The followings are the functions of the Local Government Revenue Committee.

i. It is responsible for the assessment and collection of all taxes, fines and rates

under its jurisdiction and shall account for all monies so collected in a manner to

be prescribed by the Chairman of the Local Government.

ii. It is responsible for the day-to-day running of the Local Government Treasury.

The Local Government Treasury shall be its operational arm.

C The Technical Committee of the Federal Inland Revenue Service performs the

following functions:

a. Consider all matters that require professional and technical expertise and make

recommendations to the Board.

b. Advise the Board on its powers and duties

c. Attend to such other matters that may from time to time be referred to it.

Composition of the Technical Committee. of the Federal Inland Revenue Service

Board:

i. The Executive Chairman of FIRS as Chainman

ii. All the Directors and heads of departments of the Service.

iii. The Legal Advisers of the FIRS and

iv. The Secretary of the Board.

5. Avis Nigeria Enterprise commenced a small scale business in July, 2008, producing

treated water packaged in sachets and 500 ml plastic bottles. Proper books of accounts

are maintained and the following information were extracted:

PROFITS: N

i. Period ended 31st December 2008 180,000

ii. Year ended 31st December 2009 260,000

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iii. Year ended 31st December 2010 380,000

CAPITAL EXPENDITURE:

i. 4/2/2008 - Motor Vehicles 145,000

ii. 7/5/2008 - Plant & Machinery 85,000

iii. 10/6/2008 - Furniture 120,000

iv. 15/3/2010 - Motor Vehicle 135,000

v. 16/6/2010 - Motor Vehicle 75,000

You are required to:

Compute the Liability of Avis Nigeria Enterprise for the relevant years of assessment. Assuming no right of Election. (Total: 20 marks)


25% of the candidates attempted the question. The performance of the candidates was below

average. The major pitfall was on the computation of Capital allowance, especially Annual

allowance. Inability to memorize and apply the appropriate rate of qualifying Capital

allowance.


5. AVIS NIGERIA ENTERPRISE

COMPUTATION OF CAPITAL ALLOWANCES

FOR THE RELEVANT YEARS OF ASSESSMENT

Motor Vehicle

Plant &Mach. Furniture Total Allowance

% % %

Initial Allowance 50 50 25

Annual Allowance 25 25 20

2008 Year of Assessment ₦ ₦ ₦ ₦

Basis Period:1/7/2008 – 31/12/08

Cost 145,000 85,000 120,000

I.A (72,500) (42,500) (30,000) 145,000

A.A (9,063) (5,313) (9000) 23,376

TWD V 63,437 37,187 81,000 168,376

2009 Year of Assessment

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Basis Period1/7/08 – 30/6/09

A.A. (18,125) (10,625) (18,000) 46,750

TWDV 45,312 26,562 63,000


Basis Period Y/Ended 31/12/09

A.A. (18,125) (10,625) (18,000) 46,750

TWDV 27,187 15,937 45,600


Basis Period Y/Ended 31/12/10

Additions 210,000 - -

237,187 15,937 45,000

I.A. (105,000) - -

A.A. (44,375) (10,625) 18,000)

TWDV 87,812 5,313 27,000

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THE CHARTERED INSTITUTE OF TAXATION OF NIGERIA APRIL 2012: PROFESSIONAL EXAMINATION

PROFESSIONAL EXAMINATION 1: REVENUE LAW ATTEMPT ALL QUESTIONS. TIME: 3 HOURS

1. a. Who are taxable persons under:

i. The Personal Income Tax Act?

ii. The Capital Gains Tax Act? (15 marks)

b. Mr. Alaba wants to be personal income tax compliant with effect from January,

2011. As an expert in tax matter, advise him on the steps he should take under the law. (5 marks)

(Total: 20 marks)


The question is on Personal Income Tax and Capital Gain Tax.

All the candidates attempted the question and almost all of them mis- interpreted the question.

They failed to give what the examiner required from them, especially the „B‟ part of the

question. Students substituted „‟Compliant ‟‟ for „‟Complainant‟‟.


1. a) (i) Section 2 , Personal Income Tax Act prescribes taxable persons to include

every individual or corporation sole or body of individuals deemed to be

resident for that year in the relevant state. Section 2(1) (b) expressly excludes:

i. Employees of the Nigeria Army, Navy, Air- force and police other

than in civilian capacity

ii. Officers to the Nigeria Foreign Services

iii. A person resident outside Nigeria who derives income or profit from

Nigeria section 2 (4), (5) and (6) also categorize the following persons

as taxable; communities, families and trustees.

(ii) Under the capital Gains Tax Act any person to whom gains accrue on

disposal of asset is a taxable person.

b. Section 41, Personal Income Tax Act requires every taxable person to file a

return of his income in the prescribed form of the tax authority of the state

i.e.the State Internal Revenue Board. His income shall be his previous year‟s

earnings.

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Mr Alaba should be advised to take this step and await the assessment of the

tax authority

2. Examine the legality of the use of tax consultants in tax administration in Nigeria. (20 marks)


Almost all candidates attempted the question. It was observed that over 90% merely

discussed the “Roles” of tax consultants instead of the “Legality” of employing tax

consultants in “Tax administration”. The slant of candidates‟ approach missed the demand of

the question. Thus, candidates were awarded nominally 2 or 3 marks only. But the question

tests a current issue in tax administration in Nigeria.


2. The idea of engaging tax consultants in the assessment and collection of tax in

Nigeria has been controversial.

The 1999 constitution vest the powers of tax collection and administration in

the government organs. Section 85 (a) to (e) of the PITA Constitute the State

Internal Revenue Boards as the tax authority. The taxes and levies (Approved

list of collection) Acts State that “no person, other than the appropriate tax

authority, shall assess or collect, on behalf of the government, any tax or levy

listed in the schedule to this Act “Section 4 of this Act defines “tax authority”

to mean the Federal Board of Internal Revenue, the State Board of Internal

Revenue or the Local Government Revenue Committee, or a Ministry,

Government Department, or any other Government body charge with

responsibility for assessing or collecting the particular tax”

To this extent it is illegal to engage tax consultants in tax assessment and

collection- Section 4 (5) of the Constitution

The mute point is the threshold cases of other taxes, other than the one

specifically mentioned under the constitution, imposed by the State in exercise

of its residual powers or the Local Governments.

Unless a statute expressly prohibit a conduct it is not easily classified as

illegal. Of course, other tests of illegality like public policy, public morality

may weigh heavily against a course of conduct, but such conduct does not

become illegal on these basic until a court of law has so pronounced them.

Therefore, it might not be desirable for government to engage private persons

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in the collection or administration of tax generally, the argument of the

legality of the practice stops at the doorstep of the statutes.

3. a. What constitutes the basis of assessment under the Companies Income Tax Act?

(6 marks)

b. Two broad categories of chargeable income are recognised under the Companies

Income Tax Act. Mention them and their sub – categories. (14 marks)

(Total: 20 marks)


This particular question exposed the unpreparedness of candidates for this paper. About 98%

of the candidates attempted the question while about 95% didn‟t provide the correct answer.


3. a) i. The basis of assessment under the CITA is the income of the year

preceding the year of assessment

ii. S.20 – CITA, States that tax is chargeable on the sum of assessable

profits from all sources in the year of assessment less any set off for

losses increased or decreased by any charges and allowances in respect

of capital expenditure.

iii. Where the company produces no assessable income in a year of

assessment, a fair and reasonable percentage of the turnover will be

chargeable.-S 27(1) CITA.

iv. For a newly formed company the assessable income of the company in

its first year of business shall be the amount of profit for that year-S. 25

(2) CITA

v. If an existing company request for adjustment to the actual profit of the

current year, assessment may be based on the current year profit. This

is- most likely where the profit for the current year falls below that of the

previous year (year of assessment)-S. 25 (3) CITA

b) The two categories of chargeable income under the CITA are:

i. Total profit comprises income and chargeable gains derived from

aggregate of trading activities of the company.

ii. Investment income is consisted of:.

a. Interests

b. Rents

c. Premiums

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d. Discounts

e. Annuities

f. Dividends

g. Allowances for service rendered, etc.

4. Delta Plastics Plc, a company incorporated in Nigeria, engages in international trade

within the ECOWAS. Its 1,000 strong work force is spread across Nigeria and the

ECOWAS. The Company recently sold its fleet of Bedford trucks and posted N50

million profit from the sale. The Managing Director gives the Transport Manager

N1million out of the profit as gift for facilitating the transaction at such a huge profit.

The Board of Directors approves the replacement of the disposed trucks with brand new

ones at a cost of N250million. The Company proposes to declare N10.00 dividend per

share and jumbo allowances for its directors from the previous year‟s trading surplus.

i. Identify each and every taxable transaction of the Delta Plastic Plc and the

relevant tax regime respectively. (12 marks)

ii. Discuss the trans-boundary tax elements of the incomes and expenditures of Delta

Plastics PLC. (8 marks)

(Total: 20 marks)


Almost all candidates attempted the question. About 70% of them demonstrated good

understanding of the demands of the question. However, they still scored below average

because most of them failed to correctly designate the tax heads appropriate to each

transaction stipulated by the question.


4. i) a. Employees –Personal Income Tax except employees outside

Nigeria-

S. 2 (1) (b) (ii)

b. Disposal of Assets - Capital Gains Tax

c. Gift - Personal Income Tax

d. Asset Acquisition/New Purchases – Vat

e. Dividend - Companies Income Tax

f. Allowances (Directors)- Personal Income Tax

ii) Under the companies Income Tax Act, Section 8, provides that a company in

Nigeria shall be assessed upon the “profit acquiring in, derived from, brought

into or receive in Nigeria”

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Also, Section 8 (2) CITA provides that income shall be deemed to be derived

from Nigeria

a. If there is a liability to pay by a Nigerian company or a company in

Nigeria,

Regardless of whichever way the interest may have occurred.

b. If the interest accrues to a company in Nigeria.

From the foregoing provisions, Delta Plastic Ltd. Is liable to

companies‟ income tax in Nigeria for its trading profits in other

(ECOWAS) Countries.

5 “A good tax system must satisfy the criteria set out by Adam Smith in his famous

canons of taxation. The Nigerian indirect tax legislations juxtaposed with these canons

are a failure.” Discuss. (Total: 20 marks)


Almost all the candidates attempted the question and about 75 % of them demonstrated good

understanding of the examiner‟s demands of the question. However, 60% scored below

average.


5. An indirect tax is a tax demanded from one person in its expectation and

intention that he shall indemnify himself at the expense of another person. In

other words, the tax burden is passed on to another end user or consumer.

Examples of Indirect Tax are:

i. Import duties

ii. Customs and Excise duties

iii. Sales tax

iv. Estate duty

v. Stamp duty

There are currently legislations creating and regulating these taxes in Nigeria.

But a survey of accruals from these sources cumulatively fall far below other

direct taxes incomes, like VAT and income taxes.

The bane of indirect taxes in Nigeria includes:

i. Illiteracy

ii. Lack of motivation and education

iii. High level corruption

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iv. Inefficiency

v. Absence of transparency and accountability

The legislations failed the test of a good tax system, which are:

i. Equity

ii. Certainty

iii. Convenience and

iv. Efficiency

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