ICAN 2021 Advanced Taxation | Mixed

DIY Limited was incorporated on June 12, 2010, and commenced commercial activities on October 1, 2011. The primary activities of the company are the manufacture, distribution and sale of solar panels for domestic use. DIY Limited has its main factory in Daura, Katsina State, Northern Nigeria and distributors in Kaduna, Abeokuta, Onitsha and Ilorin. Extracts from the company’s audited financial statements for 2016 to 2018 are as follows: DIY Nigeria Limited Years ended 31 December 2018 N’000 2017 N’000 2016 N’000 Revenue 520,000 403,650 310,500 Cost of production (132,600) (110,500) (85,000) Research and development cost (85,800) (71,500) (55,000) Product promotion expenses (21,060) (23,400) (18,000) Damaged products written off (19,890) (22,100) (17,000) Other overheads (142,870) (102,050) (78,500) Profit before tax 117,780 74,100 57,000 Tax (17,500) (41,000) (17,500) Retained earnings 100,280 33,100 39,500 Dividend distributed and paid (80,000) (40,000) (30,000) Note: 20% of “other overheads” represent depreciation and amortisation for each of the years reported, while capital allowances for the respective years represent 150% of depreciation and amortisation. Chief Musa Jugula (MJ), the owner and founder of DIY Limited, owns 70% of the shares of the company while the remaining 30% shares are currently held by his three children and two wives. Chief MJ has just returned from a business trip to Ghana to explore opportunities for expansion of the business. He is considering either setting up a branch or a full-fledged subsidiary. While at the airport lounge in Accra awaiting for his flight back to Nigeria, he overheard two of his fellow passengers discussing a recently signed agreement that will integrate all the 55 countries in Africa, promote trade in goods and services by eliminating tariffs and non-tariff barriers. From the little conversation he heard, it seems like a welcome development but he is unsure if this will affect his business in Nigeria positively and its likely impact on his planned expansion into Ghana. The forecast financial performances for 2021 to 2023 are as follows: Nigeria 2023 N’000 2022 N’000 2021 N’000 Revenue 1,040,000 645,840 589,950 Cost of production (265,200) (176,800) (161,500) Research and development cost (171,600) (114,400) (104,500) Product promotion expenses (42,120) (37,440) (34,200) Damaged products written off (39,780) (35,360) (32,300) Other overheads (285,740) (163,280) (149,150) Profit before tax 235,560 118,560 108,300 Tax (35,000) (65,600) (33,250) Retained earnings 200,560 52,960 75,050 Ghana 2023 GH¢ 2022 GH¢ 2021 GH¢ Revenue 7,428.57 6,150.86 4,213.93 Cost of production (1,894.29) (1,683.82) (1,153.57) Research and development cost (1,225.71) (1,089.52) (746.43) Product promotion expenses (300.86) (356.57) (244.29) Damaged products written off (284.14) (336.76) (230.71) Other overheads (2,041.00) (1,555.05) (1,065.36) Profit before tax 1,682.57 1,129.14 773.57 Tax (250.00) (624.76) (237.50) Retained earnings 1,432.57 504.38 536.07 Note: The exchange rate of Ghana Cedi to Naira is ¢1 = N70.

The quest for economic development in every sector of the country has enabled the Federal Government to come up with various tax incentives, especially for pioneer companies. Nature Agricultural Products Limited, a medium-sized company, was incorporated on January 10, 2015, as a manufacturer of animal feeds. The company thereafter applied for a pioneer status and was granted a pioneer certificate with a production day of March 1, 2015. The following details were provided in respect of business operations of the company: N (i) Net profit for the year ended February 28, 2019 15,350,000 The above net profit was arrived at after charging the following: Depreciation 1,725,000 Legal charges for purchase of leasehold rights 1,500,000 Loss on revaluation of plantation 2,104,000 Fines for traffic offence 70,000 Expenses on increase in share capital 1,201,000 (ii.) Capital expenditure incurred on or before February 28, 2018: (iii) Accumulated profit as at February 28, 2018 N3,968,000 The management of the company did not apply for extension of the pioneer period.

The price of crude oil had fallen from over US$100 per barrel in the past few years to under US$40 per barrel recently in the international market. This has resulted in a squeezed margin despite efforts to cut costs. Krude Explora Nigeria Limited, an indigenous oil servicing company, which has been operating in the oil and gas sector for 23 years, faces a going concern risk due to falling profitability and liquidity challenges. It is probable that the company will default on its loan facility of US$ 122.5 million from B2B Energy Bank Plc. If this happens, the company will likely be taken over by Asset Management Corporation of Nigeria (AMCON). Coincidentally, Wakanda Oil Exploration Limited, a multinational oil servicing company, operating across Africa and the Middle East has just sent an offer to acquire Krude Explora Nigeria Limited. The proposed acquisition will solve the liquidity problems in the short term, while efficiency and scale from the acquisition will hopefully return the company to profitability.

“The concept of residence determines the extent to which the income of a taxpayer is liable to tax under a tax jurisdiction”. Gen Power Incorporated is an international power plant company based in New York, USA. It has subsidiary outlets in many parts of the world, especially in developing countries with major challenges in power generation and distribution. Kem Limited, Lagos, Nigeria is the only subsidiary company of Gen Power Incorporated in West Africa. In 2018, the Nigerian government awarded a contract for the sum of US $3 million to the foreign company for the construction of a power plant in a Northern commercial city that will generate 5 megawatts. The management of Gen Power Incorporated felt that, with little assistance from it, especially in the area of certain category of personnel, the Nigerian subsidiary company, Kem Limited, has the capacity to execute the contract. Thus, Kem Limited was given the mandate to perform the task. In executing the job, the following expenses were incurred: N’000 Materials and other direct inputs 320,800 Hire of special equipment 31,500 Foreign experts cost and emoluments 65,300 Personnel costs 110,400 Administrative expenses 52,000 Depreciation of assets 60,700 Repairs and maintenance 7,200 Fuel and oil 8,200 Miscellaneous expenses 27,100 Other relevant information: (i) The exchange rate is N362 to US $1. (ii) A similar special equipment could be hired from another company for N25 million. (iii) Included in administrative expenses was N12 million transferred to revenue reserve. (iv) Repairs and maintenance was made up of: N’000 Maintenance of vehicles 2,000 Improvement to the office building 1,700 Repairs of equipment 2,100 Renewals of tools and implements 1,400 7,200 (v) Miscellaneous expenses included N4 million, being loss on exchange for import payment of materials used for the project (vi) Capital allowances agreed with the tax authorities was N57 million.

DD Nigeria Limited, a private limited liability company, was incorporated in March 2010. The company produces highly successful spring water. The Board of Directors of the company comprises a non-executive Chairman, his wife as the Managing Director and the Chairman’s childhood friend. For the day-to-day running of the business, the Managing Director is being assisted by the Production Manager, Sales/Marketing Manager, Administrative Officer and Accounting Officer (a diploma graduate). The company has a track record of steady growth in profitability and market share. In a bid to cut down its cost of raw materials, particularly polythene, the Board at its recent meeting decided to acquire a polythene company in the neighbourhood that is witnessing dwindling fortunes due to insufficient funds to finance its working capital. The Board has also lost confidence in the Accounting Officer as his poor knowledge in tax related matters was brought to the fore during recent visit to the company by officials of the Federal Inland Revenue Service. The Managing Director has approached your firm of tax consultants to help provide professional advice on tax matters in respect of some transactions and activities that occurred in the last one year. Records of the following transactions were made available to you: (i) The company purchased plant and machinery at a cost of N5,000,000 on April 1, 2019. Plant was later disposed on September 15, 2019 for N3,500,000. The undisposed machinery was valued at N4,300,000. Incidental expenses incurred on disposal was N250,000. (ii) The company sold an acre of land, which was acquired on May 22, 2018, at a cost of N6,750,000 for N12,500,000 on October 19, 2018. In the following month, the company bought another land, which was to be used for the purpose of the business, for N15,000,000 to replace the one sold. It was however, subsequently disposed for N18,000,000 in June 2019. (iii) Part of the industrial building (where the production unit is located) was damaged in October 2020 during a protest by some youths in the area. The company, in November 2020, received N2,200,000 as compensation under policy of insurance. The company has intention of utilising the fund for acquisition of another building.

Nigeria is generally described as a Federation with three levels of government with varying but sometimes overlapping tax powers.