Page 1 of 30
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
Page 2 of 32
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)
Page 3 of 32
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
Page 4 of 32
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
Page 5 of 32
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
Page 6 of 32
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
Page 7 of 32
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.
Page 8 of 32
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)
Page 9 of 32
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
Page 10 of 32
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)
Page 11 of 32
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
Page 12 of 32
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
Page 13 of 32
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
Page 14 of 32
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
Page 15 of 32
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
Page 16 of 32
(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
Page 17 of 32
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.
Page 18 of 32
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%
Page 19 of 32
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:
Page 20 of 32
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.
Page 21 of 32
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
Page 22 of 32
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
Page 23 of 32
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
Page 24 of 32
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 :
Page 25 of 32
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
Page 27 of 32
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
Page 28 of 32
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;
Page 29 of 32
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
Page 30 of 32
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
Page 31 of 32
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.
Page 32 of 32