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THE CHARTERED INSTITUTE OF TAXATION OF

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

STUDENTS’ COMPANION APRIL 2013

PROFESSIONAL EXAMINATION PROFESSIONAL 1

OLD SYLLABUS

QUESTION AND SUGGESTED SOLUTIONS

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THE CHARTERED INSTITUTE OF TAXATION OF NIGERIA

APRIL 2013: PROFESSIONAL EXAMINATION

PROFESSIONAL 1: BUSINESS TAXATION

ATTEMP T ALL QUESTIONS. SHOW ALL WORKINGS. TIME: 3 HOURS

PE 1 OLD SYLLABUS

PE 1 BUSINESS TAXATION

1. DBD Construction Company Ltd has been on Irrigation and building construction for

many years. The following details were made available to you as the company’s Tax

Consultant to make available the details of tax payable to the FIRS for the month of

March 2008.

Date Details Amount (N)

01/03/08 Bought a Concrete Mixer 8,000,000

02/03/08 Bought Scaffolding Pipes 2,500,000

05/03/08 Bought Pocket Vibrator 300,000

07/03/08 Bought Chippings 70,000

08/03/08 Bought load of sand 60,000

09/03/08 Bought Tipper load of gravel 90,000

10/03/08 Bought Sharp Photocopier 60,000

12/03/08 Bought Executive Tables 13,000

14/03/08 Bought Office Chairs 25,000

05/01/08 A contract for N6,000,000 while progress payment

was made on 06/03/08 3,500,000

09/01/08 A labour contract based on architect valuation of

N2,000,000 was won and due for payment on 08/03/08

And payment of N700,000 was received on 30/03/08

Additional Notes

VAT was paid on all its purchases.

Required:

Compute the VAT payable (if any) for the month of March 2008 and state when and in

what manner payment should be made. (10 marks)

b Write short notes on the following:

i. Vatable Persons (2 marks)

ii. Remedy available to a person aggrieved by an assessment under VAT

administration. (2 marks)

iii. VAT Input (2 marks)

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iv. VAT Output (2 marks)

v. VAT Refund (2 marks)

(Total 20 marks)

SOLUTION

1 a DBD CONSTRUCTION COMPANY LIMITED

COMPUTATION OF VALUE ADDED TAX PAYABLE FOR MARCH, 2008

N N

Income

Progress payment on 06/03/08 3,500,000

Progress payment on 30/03/08 700,000

4,200,000

Output VAT on Income received at 5% 210,000

Direct expenses

Concrete mixer 800,000

Scafolding pipes 2,500,000

Poker Vibrator 300,000

Clippings 70,000

Load of sand 60,000

Tipper Load of Gravel 90,000

3,820,000

Cost for 50% of Contract Certified 1,910,000

Input VAT on direct expenses at 5% 95,500

VAT payable N 114,500

Working Note:

i. Direct expenses

Cost of the concrete mixer, scaffolding pipes and Vibrator are direct

expenses and will be written off with the contract; but the furniture, and

the photocopier are taken as capital expenditure (capital asset acquisition),

the VAT of which is not allowable for deduction.

ii. The VAT input is appropriated as follows

Contract certified x Direct expenses x 5% Total contract

= 3,500,000

6,000,000 x 3,820,000 x 5% = 111,416 – VAT payable

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X

b i VATable Personal: VATable person is one who deals in VATable goods

and services for consideration or services.

ii) Remedy available to person aggrieved by an Assessment under VAT

- The aggrieved tax payer makes his objection known by writing a

notice of objection to the FIRS, within 30 days from the date the

notice of assessment is served

- Such notice must be for a review and revisal of the assessment and

the grounds of objection must be clearly stated.

- The assessment will be revised by the FIRS where it agrees with

the tax payer and a revised assessment will be served to the tax

payer.

- The tax payer pays the assessment if he agrees with the revised

one.

- Where the tax payer is still not satisfied, he can appeal to the Tax

Appeal Tribunal and this should be done within 30 days.

iii) VAT Input: VAT Input represents VAT paid by a business to other

business on VATable goods and services purchased It is VAT on supplies.

The 1998 amendment to the Decree has defined the VAT input that will be

treated as allowable deduction against VAT output.

An input tax is only allowed, if it is a tax on goods purchased or imported

directly for resale and goods which form the stock in-trade used for the

direct production of any new product on which the output tax is charged. It

was formerly clarified that input tax on any overhead, services and general

administration of any business which otherwise can be expended through

the income statement and on any capital item and asset shall not be

allowed as input tax. For contract of services, input taxes are not allowable

as deduction against output VAT. Where the overall input VAT of a

contractor exceeds his overall output VAT, as a result of VAT deducted at

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source by an Oil and Gas company, the contractor shall be entitled to a

refund from the excess. (3 marks)

iv) VAT Output: This represents VAT charged on VATable goods and

services sold (1 mark)

v) VAT REFUND: The Federal Inland Revenue Service (Establishment) Act

2007 has provided for a refund within 90 days subject to an appropriate

audit by FIRS; Refund is made in two ways. By e-payment, directly to the

tax payer’s account. In addition, the tax payer has the option of using the

established overpayment as a set –off against future VAT payable.

Excess input VAT may be carried forward as credit against future VAT

payable.

2 a. Make a list of statements that you will need to put forth as an argument to emphasise

that withholding tax is not another form of tax but another method of collecting tax.

(10 marks)

b. Montgomery Bank Ltd is a company engaged in banking activities in the country.

Below are the information relating to its operation during the accounting period

ended 30th

September 2007:

Net Profit per account N1,800,000 after charging depreciation of N260,000.

Loss on sale of Fixed Assets is N25,000.

General Provision for Bad Debts is N160,000 after crediting rental income of

N50,000 and loan interest of N250,000. Included in the loan interest is an amount of

N55,000 derived from Agricultural loans and the breakdown is as follows:

REPAYMENT GRACE PERIOD LOAN INTEREST

PERIOD N

Above 7 years Not Less than 2 years 20,000

5-7 years Not less than 11/2 years 15,000

2-4 years Not less than 1 year 12,000

Below 2 years Nil 8,000

55,000

You are required to compute the adjusted profits of the bank for the relevant year of

Assessment. (10 marks)

(Total: 20 marks)

SOLUTION

2 a Argument to emphasise that withholding TAX is not another form of tax but

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another method of collecting tax.

i) Witholding tax is an advance payment of income tax and not a separate

tax. Witholding tax is deducted at source on payments for certain

transactions such that when the ultimate tax liability of the tax payer is

determined, credit is given for the tax deducted at source on the settlement

of the tax payers’ liability for the relevant year except where it is regarded

as final tax.

ii) Witholding tax does not amount to double taxation;

iii) Witholding tax is merely a tax collection device;

iv) Witholding tax deducted from the income of a particular accounting year

is to be utilized to set-off the income tax liability of the relevant

assessment year.

v) Excess or unutilized withholding tax in a particular year is available for

refund or tax credit only after the accounting of the relevant year have

been agreed, usually via a tax audit.

vi) Witholding Tax could be a final tax. The common examples are the

income on non-resident taxpayers and dividend income (Franked

Investment)

b BANK LIMITED

COMPUTATION OF ADJUSTED PROFIT FOR THE YEAR 2008 YOA

N N

Net profit as per account 1,800,000

Add;

Disallowable expenses

- Depreciation 260,000

- Loss on sales of Fixed Asset 25,000

- General Provision 160,000 445,000

1,355,000

Less: non-taxable interest 35,300

Adjusted Profit 1,319,700

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3. a. The Federal Government legislated Decree No. 7 of 1993 to establish Education

Tax. What is Education tax? (3 marks)

b. Pioneer legislation is a tax incentive and the legislation which grants relief to certain

industries is backed up by the Industrial Development Income Tax Relief Act 1971

as amended. Make a list of companies and industries that are granted pioneer status.

(5 marks)

c. P.P. Limited is an Electronics Company based in Victoria Island in Lagos State of

Nigeria who has traded for many years. From the information below relating to the

financial year ended 31st December 2009, compute the tax liability of the company

for the relevant year of assessment.

N’000

Turnover 10,260

Cost of Sales 6,840

3,420

Other Income 1,050

4,470

Less: Administrative Expenses

Staff Salaries & Wages 1,644

Depreciation 599

Medical 117

General Expenses 169

Loss on sale of equipment 243

Donations and Subscriptions 108

Repairs & Maintenance 401

Burial expenses 255

Motor vehicle running 281

Transport and travelling 113

Cash shortage 84

Audit Fees 150

Net profit 306

Additional Information

i. The company has no car or truck, most of the running are done with commercial

vehicles

ii. Donation given out include a sum of N50,000 granted to Agbede District Club

of Dressing Association.

iii The burial expense was exclusively spent during the outing ceremony of the

M.D’s mother.

iv. The cash shortage was recorded by the cashier, but the insurance policy cover

was for a maximum of N30,000.

v. The Capital Allowance computed for the year was N280,000.

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vi. The un-recouped loss was N800,000 and this has been recorded for upward of

five years. (12 marks)

(Total: 20 marks)

SOLUTION

3 a. Education tax is promulgated by the Federal Government legislated Decree now

Act No 7 of 1993 now CAP E4 LFN 2004 and it came into effect from 1994 year

of assessment. The Act imposes an education tax rate of 2% of the total assessable

profits on all companies registered in Nigeria.

Education tax is being administered by the Board of Trustees of the Education

Tax Fund usually appointed by the President of Nigeria. Federal Inland Revenue

is responsible for the collection of education Tax. In 2011, the Tertiary Education

Trust Fund Act was enacted to replace Education Tax CAP E4 LFN 2004. Under

the TETFUND Act, the rate of tax is 2% charged on the assessable profit of all

companies registered in Nigeria.

Both the Education Tax Act Cap E4 LFN 2004 and the Education Tax Fund

(Amendment) Act No 17 2003 were repealed by section 18 of TETFUND Act,

2011.

MONTOGOMERY BANK LIMTED (1/2 mark)

COMPUTATION OF ADJUSTED PROFIT FOR THE 2008 YEAR OF ADJUSTMENT

(1/2 mark) (

1/2 mark)

N (1/2 mark) N (

1/2 mark)

Net profit as per Account 1,800,000 (1/2 mark)

Add:

Disallowable expenses

- Depreciation 260,000 (1/2 mark)

- Lost on sales of Fixed Assets 25,000 (1/2 mark)

- General Provision 160,000 (1/2 mark) 445,000 (

1/2 mark)

2,245,000 (1/2 mark)

Less: non-taxable interest 35,300 (1/4 mark)

2,209,700 (1/2 mark)

Total (10 marks)

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Workings

AGRICULTURAL LOAN INTEREST:-

REPAYMENT GRACE LOAN INTEREST INTEREST EXEMPT

PERIOD PERIOD

N N

Above 7 years Not less than 2 years 20,000 x 100% ¼ 20,000 (1/4 mark)

5 – 7 years Not less than 11/2 years 15,000 x 70% ¼ 10,500 (

1/4 mark)

2 – 4 years Not less than 1year 12,000 x 40% ¼ 4,800 (1/4 mark)

Below 2 years Nil 8,000 x 0% x ¼ - (1/4 mark)

55,000 35,300 (1/4 mark)

(10 marks)

b It is difficult to get the list of companies that have been declared pioneer but the

industries that have declared are 68 and have been granted. Note that such

companies must have been certified by pioneer certificates to be pioneer

companies and their products must have been declared as pioneer products.

Including Pup 14-4-2013. The pioneer Industries that have been granted are over

60 as at 2012. See TEJUTAX Vol. 2 pages 1653-1655.

Companies That Are Granted Pioneer Status

1) The manufacturer of cement

2) The Manufacturer of salt

3) The manufacturer of Ceramic product

4) The manufacturer of pharmaceuticals

5) The manufacturer of Textiles and Fiber

6) The manufacturer of glass and glass ware

7) The manufacturer of Leathers

8) The manufacturer of parts and paper pulp

9) Integrated diary productions e.t.c.

c P.P. NIGERIA LIMITED

COMPUTATION OF TAX LIABILITY FOR ENDED 31ST

DEC2009 YOA

N ‘000 N ‘000

Net profit as per account 306

Add: Disallowable exp

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Depreciation 599

Loss on sales of equipment 243

Donation 50

Burial Expenses 255

Cash Shortage 30 1,177

Adjusted profit 1,483

Add: Balancing Charge -

Less loss b/f -

Assessable profits 1,483

Less: Capital Allowance

Bal bfwd -

Charged for the year 280

Relief 662

3 of (1,483,000) 280

Balance carried forward -

Chargeable income 1203

Tax at 30% N360,900

Education Tax at 2% (1,483,000) N 29,660

4 a Omoluabi Nigeria Ltd is a manufacturer of plastics. The company paid the sum of

N450,000 as corporate tax for the 2010 year of assessment The following

information are made available:

a. Capital Allowance N400,000

b. Depreciation is 20% of fixed assets.

c. Turnover is 5 (five) times of profit before tax.

You are required to compute:

i. Assessable profit. (3 marks)

ii. Adjusted profit. (3 marks)

iii. Depreciation (3 marks)

iv. Turnover for the relevant years of assessment. (3 marks)

v. Education tax. (3 marks)

b i. How is the Education tax being distributed? (2 marks)

ii. How is the amount due to higher education distributed? (3 marks)

(Total: 20 marks)

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SOLUTION

4 Workings

1. Computation of Assessable Profit

The current tax rate applicable currently in Nigeria is 30% – carry any income

Tax Rate

Tax already paid = N 450,000

Assessable profit = 450,000

0.30 = N1,500,000.00

2. Computation of depreciation

= 1,000,000 x 20% = N200,000

3. Computation of Turnover

N

Profit before tax 1, 700,000

Add: Depreciation 200,000

Adjusted profit 1,900,000

Less: Capital Allowance 400,000

Assessable Profit 1,500,000

Corporate tax @ 30% 450,000

Since Profit before Tax is 1,700,000

Turnover = 1,700,000 x 5 = N8,500,000

Education Tax Computation

= 20% of N1,900,00

= N 38,000.00

b) Note that Education Tax Act has been repeated by the TETFUND Act 2011.

Distribution of Education Tax

1. Higher education 50%

2. Primary education 40%

3. Secondary education 10%

(1) The amount due to higher education is to be distributed in the following ratio

University Polytechnic Colleges of education

2 : 1 : 1

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5. The number of unregistered businesses in Nigeria is on the increase (artisans and sole

traders). These businesses are running but not in the tax net of the Government. This attitude

of not paying tax should be checked as a means of boosting revenue and ensuring justice

and equity.

Advise the relevant tax authority of ways of ensuring that all potential tax payers are duly

assessed. (20 marks)

SOLUTION

5 It is a reality that a lot of unregistered businesses, artisans and sole traders are thriving

but not within the tax net of the government. Indeed, the phenomenon is growing on a

daily basis but efforts should be made to halt it. There are lot of general merchandise

businesses that are not registered with the Corporate Affairs Commission, but what have

high turnover and profits which are not disclosed to any revenue agent. No doubt, the

situation is creating injustice and unequality among the citizens.

Therefore, the following suggestions have become imperative in order to correct the

anomally.

a) i Enforcement of Law

The existing law in Nigeria has made provision for every citizen to be

clearly expressed but there is no enforcement of that law. The government

agency setting to enforce this law has not made use of all powers

conferred on it. The government should ensure that the enforcement

agents carry out their duties as , exercising all the powers conferred on

them by the law. The enforcement should range from reminder, warning,

penalty fines and later presentation

ii) Identifying the tax payers.

There are so many ways by which the government can identify all the tax

payers even the artisans. Most of the artisans can be identified through

their societies, cooperatives and shop identification exercise. Also most of

having business barons could be identified through the assessment of

and other government agencies.?

iii) Manufacturing Exercise

After identifying the potential tax payers, there is the need for monitoring

exercise on a periodic basis. The government should make use of the field

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workers and employ more staff if the need arises. There is a need to do the

follow up in order to keep a track records of all potential tax payers.

iv) Proper Utilization of funds collected

The government should be accountable to the populace on the funds

collected for tax payers. The funds so collected should be used for

developmental purpose to the benefit of the citizens, by doing so, the

citizens will appreciate the essence of paying taxes to the government any

given period of time.

v) Awareness Programme

The government should create the necessary awareness programme on a

regular basis. Most of the citizens are not aware of the importance of tax

payment particularly the uneducated ones. Therefore, the need for proper

education can not be over emphasized.

There is the need to organize workshops, seminars and even enlighten

campaigns on Radio, Television and using town criers.

vi) The Importance of Tax Clearance Certificate should be strengthened.

Hitherto, the importance of TAX Clearance Certificate was felt and it was

different transacting any business without producing it but the situation

has changed. The essence of using the document should be emphasized

and it must be a prerequisite to qualifications for transacting business with

government agencies, Banks etc. The moment this principle is imbibed,

the better for the government

.

CONCLUSION

There is no gain saying the fact that if government can implement the above

recommendations, the imbalance created will be drastically reduced and at the

same time boost the revenue.

With these recommendations, all the potential tax payers will be caught and

brought within the tax net of government.

PE1 INTERNATIONAL TAXATION

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1 Mr. Steve Johnson who is not a resident in Nigeria has a Nigeria income of N250,000 in

2005 from which N22,500 tax had been deducted at source. He also earned N100,000 from

Gambia from which N5,000 had been deducted as tax by the Gambian Tax Authority.

Required

a. Compute Mr. Steve Johnson’s total Nigerian tax. (10 marks)

b. Compute his Double Taxation Relief, if any. (5 marks)

c. Compute his tax payable. (5 marks)

(Total: 20 marks)

SOLUTION

1 Since Gambia is a commonwealth country like Nigeria, the CWR shall apply. Ignore relief

(i) MR. STEVE JOHNSON

Computation of Total Nigeria Income for 2005 year of Assessment.

N N

Total Nigeria Income 250,000

Gross Foreign Earnings 100,000

Global Income 350,000

Tax Computation

1st N30,000 @ 5% = 1,500

Next N30,000 @ 10% = 3,000

Next N50,000 @ 15% = 7,500

Next N50,000 @ 20% = 10,000

Next N160,000 @ 25% = 47,500

69,500

(ii) Calculation of Double Taxation Relief:

NTR = 69,500 x 100

350,000 = 19.88%

CWR = 5,000 x 100

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100,000 = 5%

Since the common wealth rate of tax does not exceed the Nigeria rate of tax, the rate at

which relief shall be given will be ½ CWR. This is 2.5%, so the tax payable will be

computed as follows:

(iii) Calculation of Net Tax Payable:

N

Nigeria Tax as computed above 69,500

Less: Double Taxation Relief (N100,000 x 2.5%) 2,500

67,000

Deduct Tax already paid in Nigeria 22,500

NET TAX PAYABLE 44,500

2 a What constitute a valid self-assessment filling when it comes to an off shore Company?

(8 marks)

b State all avenue open to an international tax payer to seek redress against an unfair

assessment. (12 marks)

(Total: 20 marks)

SOLUTION

2 a A valid self-assessment has the following qualities as it relates to offshore companies.

(i) It must be rendered at the due date in 6 months which is the end of the

accounting date of the company.

(ii) It must be accompanied by all relevant schedules.

(iii) It must be accompanied with a cheque/draft for the payment of tax assessed.

(iv) all instalmental payment must be made in not more than 6 instalments

b An aggrieved international tax payer can take the following steps:-

(i) Raise a valid objection to the assessment

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(ii) Appeal to the body of Appeal Commissioner

(iii) He can also go to the High Court of Justice.

(iv) He can go to the Court of Appeal

(v) He can also go to the Supreme Court

3 Briefly explain the following forms of transfer

a. Transfer of tangible goods (5 marks)

b. Transfer of services (5 marks)

c. Transfers of Research and Development (R&D) (5 marks)

d. Transfer of Intangibles (5 marks)

(Total: 20 marks)

SOLUTION

3 I Transfer of Tangible Goods:

This covers intercompany sales and purchases of goods such as raw materials

intermediate products, spare parts, and finished products, the cost of manufacturing a

particular brand of goods may be borne by the parent cost centre and sold within the

group.

The assigned price for the transfer of goods between members may be higher than the

price of the same or similar goods. (5 marks)

II Transfer of Services

The service centrally run may include marketing, advertisement, corporate finance, legal

service, consultancy credit and accounting services. The centralization is either in the

parent company (Head Office) itself or in another company formed for the purpose. The

cost may be pooled into a base for allocation of members. Where the parent renders

services exclusively for the subsidiary.

However, problem may still arise in comparing the service with what would have

applied between unrelated parties in similar circumstances. (5 marks)

III Transfer of Research and Development (R & D):- There are cost contribution

arrangements whereby the member may have a share in the cost of (R & D). The (R & D

) may not have any direct benefits to the members. Like the provision of service, the

problem there is the matching of costs payable by the Nigerian subsidiary with the

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nature and quantum of benefits. In this way the payment for (R & D) does not represent

an arm’s length price for value received. (5 marks)

IV Transfer of Intangibles:- These include copyrights trademarks, patents protection cost,

corporate logo costs, intangible in manufacturing, advertisement and marketing soft

wares, the right to use industrial commercial or scientific equipment etc.

Royalties and rents are paid for intangibles. The concern of the Nigerian authorities is

not only with the transfer pricing but also with the type of technology transferred. The

view is that absolute technology may be transferred in some assets for the price of new

technology. (5 marks)

4 a. Mapota Airlines is an Air transport company, registered in the United States of America.

On its scheduled flight to West Africa, the plane landed in Lagos to pick up passengers

whose destination is either Amsterdam or Paris. Transactions carried out in Nigeria by

this company through an authorized agent who sells tickets and meets necessary

financial obligations of behalf of Mapota Airline are as follows:

The agent sold N6million worth of tickets on behalf of the company in 2008 and

incurred the following local expenses in Nigeria.

N

Wages to Laborers and security men 40,000

Office expenses 25,000

Electricity and rates 15,500

Trade subscription 4,500

85,000

In order to obtain Tax Clearance Certificate for the purpose of remitting proceeds from

air transport business from the home country, the agent consulted you to prepare the tax

payable to the Federal Board of Inland Revenue. He informed you that:-

a 20% of total tickets sales proceeds is allowed annually by the Federal Inland

Revenue to cover depreciation allowance of assets.

b 30% of tickets sales proceeds is allowed annually to cover share of Head Office

overheads.

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c Local expenses in Nigeria are allowable in full.

You are required to:

i Compute the tax payable in Nigeria

ii State other option (s) for the company in computing tax payable.

(20 marks)

SOLUTION

4 a MAPUTO AIRLINE

COMPUTATION OF TAX PAYABLE IN NIGERIA

NM NM

Sales Proceeds 6

Deduct:

Allowance Head Office Expenses

(30% of N6M) 1.8

Depreciation Allowance

(20% of N6M) 1.2

Local Expenses 0.085 3.085

Chargeable Profit 2.915

Income Tax @ 30% N874,500

NOTES:

(i) The Tax rate of 30% is applicable.

(ii) The minimum of 2% of full sums receivable in this case will give a tax of

N120,000.00. Since this is less than the tax computed, the tax payable will still

be the tax computed.

b The option available to the company in computing its tax payable is as follows:

From the above, the ratio of profit of the company before depreciation allowance to its

turnover is 2,915,000 + 1,200,000 x 10

6,000,000 = 68.58%

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The ratio of depreciation to finance is also fixed at 20%. It should be noted from the

question that these ratio were fixed by the Federal Board of Inland Revenue in Nigeria.

The Act provides that these two ratios should be certified by the tax authority of USA

where the company was registered. Therefore if the company feels that the ratio of

profit as fixed above is excessive and or the ratio of the depreciation allowance is

inadequate, the company has a period of six years within which to claim that its tax

liability be computed on the basis of the ratio that will be certified by the USA authority.

If the company fails to agree with the Board on this matter, the provision of C.I.T.A.

regarding objections and appeal shall apply with necessary modifications.

5 a State five objectives of international taxation in any country. (10 marks)

b List any five common forms of tax evasions in Nigeria. (10 marks)

(Total: 20 marks)

SOLUTION

5 a Any five objectives of International taxation in any country are:-

(i) Increase Revenue

(ii) Income – re-distribution

(iii) Avoidance of capital flight

(iv) To create an economy society free of distribution of investment decisions

(v) Fair allocation of savings

(vi) To create incentive for hard work

(vii) To reduce evasion and tax avoidance

(viii) Reduction of complexity of the system both for tax payers and tax

administration

b The Five Forms of Evasion Common in Nigeria are:

(i) Non- declaration of Income

(ii) Under declaration of Income

(iii) False declaration

(iv) Fictitious claims of expenses

(v) Artificial Transaction

(vi) Fraudulent claims

PE1 PERSONAL TAXATION

1 a Define the following under the provision of Capital Gain Tax Act:

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i Incorporeal Properties (2 marks)

ii Rollover Relief (2 marks)

iii Connected Persons in relation to:

(a) Individual (b) Trustee (c) Partnership

(d) A company and another company (6 marks)

b Mrs. Duduyemi Alafise got born again in one of the Pentecostal Churches in

Nigeria where Trinket is forbidden. She decided to sell her Trinket Treasure Box

acquired in Britain at a sum of N4.5 million for N6 million.

The buyer Mrs. Sofowora was unable to pay the seller outrightly therefore

desided to enter into a sale agreement with Mrs. Duduyemi Alafise providing for

four (4) installments at an interval of 2 months : N2.5 million, N1.5 million, N1.5

million and N0.5 million respectively. The first installment was paid on the day of

sale 1st November, 2010.

Required: Determine the Capital Gains and CGT for the relevant years of

assessment.

(10 marks)

(Total: 20 marks)

SOLUTION

1 a Definition of the following under provision of Capital Gains Tax Act:

i. Incorporeal Properties: These are assets that have values but are not tangible.

They are also called fictitious assets. Example includes Patents, Copyright,

Trademarks, and Goodwill etc.

ii. Rollover Relief: Roll over Relief is granted to a company where the sales proceed

on the disposal of certain chargeable assets are utilized in the acquisition of a

new asset of the same class, in replacement of an old asset.

iii. Connected Persons in relation to :

Individual: A person is connected with an individual if that person is

that individuals husband or wife or (spouse) of relative or spouse of a

relative of the individual spouse.

Trustee: A person in his capacity as trustee of a settlement is connected

with any individual who in relation to the settlement is a settler and

with any person who is connected with such an individual.

Partnership: A person is connected with any person with whom he is in

partnership and with the spouse or relative of any individual with whom

he is in partnership.

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A company and another company: A company is connected with

another company if

The same person has control of both:

A group of two or more persons has control of each company

A company is connected with another person if that person has control

of it or if it and that person connected with it together have control of

it.

Any two or more persons acting together to secure or exercise control

of a company.

b. DUDUYEMI ALAFISE

COMPUTATION OF CAPITAL GAINS TAX LIABILITY FOR THE RELEVANT TAX

YEARS

DATE TAX YEAR CAPITAL GAINS GCT

01/11/2010 2010 N2.5m x N1.5m N625,000 @ 10%

N6m N62,500

01/01/2011 2011 N1.5m x N1.5m = N375,000 @10%

N6m N 37,500

01/03/2011 2011 N1.5m x N1.5m = N375,000 @10%

N6m = N37,500

01/05/2011 2011 N.5m x N1.5m = N125,000 @10%

N6m N 12,500

N87,500 SUMMARY

N Tax Year 2010 62,500

Tax Year 2011 87,500

N1.5m @ 10% 150, 000

COMPUTATION OF CAPITAL GAIN N

Sales Proceeds 6,000,000

Less: Cost of Acquisition 4,500,000

Capital Gains 1,500,000

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2 a Tenny and Kenny have been in business as partners for years sharing profit and

losses in ratio 2: 3 respectively. The Partnership capital of N900 million was

contributed in the profit and loss sharing ration and the contribution attract an

interest of 10% per annum.

During the year ended 31st

December 2007, their books of account showed

adjusted profit of N300,000 after accounting for 15% and 18% of capital

contribution as salary for the partners respectively. Depreciation stood at N50,000

for Tenny.

You are given the following additional information:

i Kenny contributed N15,000 to Pension Scheme

ii Tenny maintained 4 dependant relatives on which he expended N10,000

annually.

iii Tenny received N100,000 as gratuity from his former employement

iv Tenny has life assurance policy which attracts a capital sum of N200,000

but pays annual premium of N20,000.

v Kenny is married with four children aged 18, 14, 10 and 8 years.

Required: compute

i Each Partners assessable Income (12 marks)

ii Kenny’s income tax for the relevant years of assessment

(4 marks)

b State the category of persons taxable under the relevant tax Act of Nigeria.

(4 marks)

(Total: 20 marks)

SOLUTION

2 a TENNY & KENNY

COMPUTATION OF PARTNERS ASSESSABLE PROFIT New Rate.

TENNY KENNY TOTAL

N N N

Adjusted Profit 300,000

Shares in Ratio 2:3 120,000 180,000 300,000

Depreciation 50,000 -

Salary 54,000,000 97,200,000

Interest on capital 36,000,000 54,000,000

Total Earned Income 90,170,000 151,380,000

Less: Reliefs Based on New Rates

CRA: Higher of 200,000

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Or1% of Gross Income (G.I) 901,700 1,513,800

Plus 20% 0f G.I 18,034,000 30,276,000

Life Ass. Relief 20,000 -

Statutory Deduction (CPS) 15,000

i. Partners Ass. Income 71,214,300 119,575,200

ii. KENNY’S INCOME TAX FOR THE RELEVANT YEAR USING NEW RATE

N

1st N300, 000 @ 7% 21,000

Next N300, 000 @ 11% 33,000

Next N500, 000 @ 15% 75,000

Next N500, 000 @ 19% 95,000

Next N1, 600,000 @ 21% 336,000

Above N116, 375,200 @ 24% 27,930,048

New Tax Payable ₦ 28,490,048

TENNY & KENNY

COMPUTATION OF PARTNERS ASSESSABLE PROFIT Old Rate.

TENNY KENNY TOTAL

N N

N

Adjusted Profit 300,000

Shares in Ratio 2:3 120,000 180,000 300,000

Depreciation 50,000 -

Salary 54,000,000 97,200,000

Interest on capital 36,000,000 54,000,000

Total Earned Income 90,170,000 151,380,000

Less: Reliefs Based on Old Rates

Personal Allowance

(5,000 + 20% 0f (90,170,000

& 151,380,000) 18,039,000 30,281,000

Children allowance (4 x N25, 000) 10,000 10,000

Dependant Relative 4,000 4,000

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Life Assurance 20,000 20,000

i. Partners Ass. Income 72,097,000 121,065,000

ii. KENNY’S INCOME TAX FOR THE RELEVANT YEAR USING OLD RATE

N

1st N30, 000 @ 5% 1,500

Next N30, 000 @ 10% 3,000

Next N50, 000 @ 15% 7,500

Next N50, 000 @ 20% 10,000

Above N120, 905,000 @ 24% 30,226,250

New Tax Payable 30,248,250

b. Category of Persons taxable under the relevant Tax Act of Nigeria

i. PITA – Persons taxable are:

Individuals, Communities and Families

Group of individuals

Itinerant workers

Trustees, Executor

Director of companies, Professionals, Traders carrying on business in

their names

ii. CITA/ET- Persons taxable are:

Companies that are Nigeria companies and foreign companies i.e.

companies other than a Nigeria company

Companies engaged in shipping or air transport, cable undertakings

Multinational companies

Insurance companies and Banks

Companies engaged in solid minerals and gas activities

iii. PPTA – Relevant Act

Category of persons taxable under this Act are :

Petroleum producing companies

Every company engaged in petroleum operations

iv. CGTA- Category of persons taxable under the CGTA are :

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Any company that has disposed assets

Others are individuals, communities that have disposed off assets.

Legatee, trustee of a settlement

v. FIRS Act: Those taxable are any person, body corporate or organization,

Bankers, unincorporated body of persons.

vi. VAT- those taxable under the VAT are :

Individuals, body of individuals, trustee, executor, any person that

carries out economic activities

Person exploiting tangible or intangible property for the purpose of

obtaining income therefrom by way of trade or business or a person or

agency of Government acting in that capacity.

2 a Tenny and Kenny have been in business as partners for years sharing profit and

losses in ratio 2: 3 respectively. The Partnership capital of N900 million was

contributed in the profit and loss sharing ration and the contribution attract an

interest of 10% per annum.

During the year ended 31st

December 2007, their books of account showed

adjusted profit of N300,000 after accounting for 15% and 18% of capital

contribution as salary for the partners respectively. Depreciation stood at N50,000

for Tenny.

You are given the following additional information:

i Kenny contributed N15,000 to Pension Scheme

ii Tenny maintained 4 dependant relatives on which he expended N10,000

annually.

iii Tenny received N100,000 as gratuity from his former employment

iv Tenny has life assurance policy which attracts a capital sum of N200,000

but pays annual premium of N20,000.

v Kenny is married with four children aged 18, 14, 10 and 8 years.

Required: compute

i Each Partners assessable Income (12 marks)

ii Kenny’s income tax for the relevant years of assessment

(4 marks)

b State the category of persons taxable under the relevant tax Act of Nigeria.

(4 marks)

(Total: 20 marks)

3 a An employment income is an income derived from the gain or profit from an

Page 26 of 32

employment exercise. However, some employment incomes are exempted from

tax.

List the employment incomes affected. (6 marks)

b Define earned and unearned income and distinguish with examples (4 marks)

c List five (5) offences that will attract penalty in taxation (5 marks)

d Highlight the benefits of withholding tax system. (5 marks)

(Total: 20 marks)

SOLUTION

3 a. Employment Incomes exempted from Tax Act are:

i. Any reimbursement of expenses to the employee from which he is not expected

to make profit

ii. Official emolument of the President, Vice President, Governors and Deputy

Governor prior to PITA Amendment 2011.

iii. Pension granted under the pension Act

iv. Income earned outside Nigeria by a temporary guest lecturer, teacher, nurse,

doctor and other professionals and brought into Nigeria provided the income is

paid into a domiciliary account.

v. Compensation for loss of office

vi. Gratuities

b. Earned Income: income derived from a trade, business, profession, vocation or

employment carried on or exercised by an individual and pension derived by him in

respect of any previous employment. It is a reward for effort. Examples are Salary,

Pension, Profit or Income from Trade, Vocation or Profession.

Unearned Income: These are incomes from rent, dividend, royalty, discounts. These are

also known as investment incomes.

c. Offences that attract Penalty in Taxation

i. Failure to file a return or to keep records

ii. Failure to deduct, or having deducted, fail to remit such deduction to the Tax

authority within 30 days from the date the amount was deducted or the time

the duty to deduct arose.

iii. Aiding and abetting

iv. Obstructing, hindering, molesting or assaulting any officer of the Board in

performance of his functions under the Act.

v. Making false or misleading statement

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vi. Counterfeiting or falsifying documents

vii. Failure to pay tax on due date

viii. Failure to keep books of account

ix. Issuing Share warrant not duly stamped

x. Failure to issue tax invoice

xi. Failure to register

xii. Failure to notify change of address

xiii. Failure to make attribution

xiv. Resisting an Authorized officer

d. Benefits of Withholding Tax System

i. It enhances voluntary tax compliance

ii. It ensures a regular flow of tax revenue to the offers of various governments

iii. It reduces the incidence of tax evasion

iv. It helps to broaden the tax base by bringing otherwise unknown taxpayers into

the tax net.

v. It makes tax payment less cumbersome to the taxpayer who may not have to

bother

himself going to the tax office to pay his tax

vi. It helps educate the tax payer and the collection agents on tax matter

vii. Withholding tax helps brings obscure transactions to the notice of the tax

authorities’ thus increasing tax yield.

4 There had been a lot of heat generated by the use of consultants to accelerate revenue

collection by some State Government. Your client read some publications in the National

Newspapers about the existence of the Joint Tax Board and the State Internal Revenue

Board as bodies of Tax Administrators in Nigeria. He therefore wants you to explain the

following:

a The different between the Joint Tax Board and the State Internal Revenue

Board/Services (8 marks)

b The composition of the Joint Tax Board (6 marks)

c The duties of the State Internal Revenue Board. (6 marks)

(Total: 20 marks)

SOLUTION

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4 a. The difference between the Joint Tax Board and State Internal Revenue Board:

The Joint Tax Board was established to ensure uniform application of tax laws in Nigeria.

It acts as a clearing house to co-ordinate the activities of the State Tax Authorities and

the Federal Inland Revenue Service in the administration of tax laws

While The State Internal Revenue Board on the other hand is the tax authority for each

state that is charged with the administration of the income tax laws of the state.

b. The composition of the Board:

i. The Joint Tax Board consists of :

a. The chairman of the Federal Board of Inland Revenue Service who also

act as the chairman of the Joint Tax Board

b. One member from each State, being a person experienced in income tax

matters nominated either by name or office from time to time by the

Governor of the State.

c. An officer appointed by the Joint Tax Board Commission who is

experienced in income tax matters to act as Secretary to the Joint Tax

Board. The secretary is not a member of the Board but only in

attendance at board meetings for the purpose of maintaining records of

the boards’ proceedings and decisions of the Board.

d. The legal adviser of the Federal Inland Revenue Services is also expected

to be in attendance at meeting as adviser.

There are some coopted members on the Board; such as

representatives of the Federal Road safety Commission, representative

of Ministry of Finance etc.

c. The duties of the State Internal Revenue Board include:

Ensuring the effectiveness and optimum collection of all taxes and

penalties due to the Government under the relevant laws;

Making recommendations where appropriate to the Joint tax board on

Tax policy, tax reform, tax legislation, tax treaties and exemption as may

be required from time to time;

Appointment, promotion, transfer and discipline of employees of the

State services;

General control of the management of the services on matters of policy,

subject to the provision of the law setting up the service;

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Issuing instruction or directives on technical aspects of assessments

including interpretation on Income Tax Act.

5 Recently, a new amendment was made to the Personal Income Tax Act Cap, P8, Laws of

the Federation of Nigeria 2004, on 14th

June, 2011. As a Tax Consultant to many

employers of labour and business enterprise; explain any eight (8) of the following

provision to your client:

i Consolidated Relief and Allowance (CRA) (21/2 marks)

ii Tax Income Rate (21/2 marks)

iii Minimum Tax (21/2 marks)

iv Filing of Annual Return and the Penalties for failure. (21/2 marks)

v Additional Tax Exempt Income Incorporated to the Act (21/2 marks)

vi Additional Requirement for the Tax Clearance Certificate and Penalty for failure

to demand and verify (21/2 marks)

vii Service of the notice of Assessment (21/2 marks)

viii Power to Distrain (21/2 marks)

ix Tax Dispute (21/2 marks)

x Temporary Workers. (21/2 marks)

(Total: 20 marks)

SOLUTION

5 Explanation of the following:

i) Consolidated Relief and Allowance (CRA): Section 33, sub-section of the PIT

ACT which grants personal relief of N5,000 plus 20% of earned income to every

individual has been substituted with a new consolidated Relief Allowance (CRA)

of N200,000 subject to a minimum of 1% of gross income whichever is higher,

plus 20% of the income. The amendment further states that the balance of the

income after the deduction of the CRA and tax exempt deductions shall be

assessed to tax at the new rates specified in the sixth schedule.

ii) Income Tax Rate: The Income Tax Table in the sixth schedule of the PITA has

been substituted with new Income Tax Rates. The first tax band has been

widened from the initial base of N30, 000 at the rate of 5% to N300, 000 but

now at the rate of 7% while the last band of above N160, 000 taxed at the rate

of 25% has been replaced with N3, 200,000 at a marginally reduced rate of 24%.

The tax on the emolument of some low and medium income earners would

reduce while those in the high income bracket would pay more taxes.

iii) Minimum Tax: The minimum tax rate under the PITA has been increased from

0.5% of the gross emolument to 1% of total income where an individual has no

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taxable income because of large personal reliefs or the taxable income produces

tax payable lower than the minimum tax. While the expectation from the

amendment to the sixth schedule is reduction in employee tax, but this is not in

the case for low earners.

iv) Filing of Annual Returns and Penalty for failure: Sundry amendments were

introduced by PITA 2011 which affected filing of returns. Section 81 of PITA was

amended such that it introduced new filing requirement for PAYE returns. It

requires every employer to file a return with the relevant tax authority of all

emoluments paid to its employees not later than 31st January of every year in

respect of all employees in its employment in the preceding year.

Penalty : liable on conviction to a penalty of N500,000 in the case of a body

corporate, and N50,000 in the case of an individual.

v) Additional Tax Exempt Income Incorporated to the Act: In addition to the list of

tax exempt incomes in the PITA Act, the following are henceforth been added to

interest earned on the following instruments as tax exempt:

a) Bonds issued by the Federal, State or Local Government and their

agencies

b) Bonds issued by corporate and supra-nationals

c) Interest earned by holders of bonds and short terms securities listed in

(a) and (b) above.

vi) Additional Requirement for the Tax certificate and Penalty for failure to

demand and verify: Under section 85 sub-section 4 of Act, the following have

been added to the list of transactions for which Tax Clearance Certificate would

be required:

a) Change of ownership of vehicle by the vendor

b) Application for a plot of land; and

c) Any other transaction as may be determined from time to time by the

tax authority

The penalty for failure to demand and verify is N5, 000,000 or three (3)

years Jail or both.

vii) Service of the Notice of Assessment: The uses of courier service and electronic

media (e-mail) have been added to the mode of serving notice of assessment.

The date of service in the case of delivery by courier would be evidenced by the

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proof of delivery, while that of email would be the date it is sent. Therefore,

taxpayer is advised to be checking their e-mails regularly otherwise, assessment

sent by the electronics media would be left unattended to.

viii) Power to Distrain: A new section 104 has been introduced to replace the old

section 104 of the PIT Act. Some of the salient points of the new provisions in

the section are as follows:-

a) It is mandatory for tax authorities to apply under oath, to a high court

judge sitting in chambers for issuance of a warrant to distrain defaulting

taxpayers of their properties;

b) The tax authority is empowered to keep the goods taken away for

14days after which, if tax owed and the charges incident to the distress

are not paid, the goods may be sold; and

c) An order of a Court of competent jurisdiction is required before

immovable properties can be disposed of by the tax authority.

ix) Tax Disputes: Section 60 of the Act has been introduced to the old provision

whereby disputes under the Act were hitherto referred to the Body of Appeal

Commissioners, which some State Tax Authorities have apparently failed to

establish. Henceforth, such dispute would be adjudicated upon by the Tax

Appeal Tribunal established under the Federal Inland Revenue Service Act,

2007.

x) Temporary Workers: Section 3, sub-section 1 of the PIT Act was amended to

include temporary and casual workers amongst those whom employers should

compute and remit PAYE. This is against the former practice whereby they were

treated as contract staff and WHT of 5% was deducted from their wages. This

would increase the net- pay of the low income temporary workers, who will

now be assessed to tax at the minimum rate of 1% of their gross income.

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