Ican 2022 Advanced Taxation Question 6

Maigona Agro Limited is a Nigerian company operating in the agricultural sector. It has a large expanse of land in the Northern part of the country, which is used strictly for the cultivation of cotton seeds. As a result of the collapse of the textile/garment industry, specifically due to unfavourable business climate in Nigeria, the company in 2015 established a branch, BAM Textile Mills, in the United Kingdom. Part of the cotton produced locally are sold to BAM Textile Mills at a competitive price, for the production of finished product (branded textile clothing). A tax dispute recently arose between the Management of Maigona Agro Limited and officials of the Federal Inland Revenue Service (FIRS) on the correct assessment of profits made by BAM Textile Mills. The Managing Director is of the opinion that the tax paid by BAM Textile Mills in the United Kingdom should be the final tax since the company is only an overseas branch. He further averred that the provisions of the Companies and Allied Matters Act 2020 (as amended) are only applicable to companies incorporated in Nigeria. The Managing Director was furious when the company received a reminder of notice of assessment from the FIRS and has therefore threatened to approach the Tax Appeal Tribunal for redress. You have been engaged by the company as its Tax Consultant to provide professional advice on the tax implication of the profit made by BAM Textile Mills, UK and possibly representation at the Tax Appeal Tribunal sittings. The statement of profit or loss for the year ended October 31, 2021 (BAM Textile Mills result has been converted to Nigerian Naira at the prevailing exchange rate) and other relevant documents were handed over to you by the Managing Director. The extracts from the statements of profit or loss of the two corporate entities revealed the following: MAIGONA Agro Ltd BAM Textile Mills Total N’000 N’000 N’000 Gross turnover 975,100 1,820,500 2,795,600 Less: Cost of materials/inputs 350,200 672,000 1,022,200 Salaries and Wages 122,530 400,400 522,930 Administrative expenses 45,700 110,900 156,600 Depreciation 75,600 147,300 222,900 Donation 8,500 0 8,500 Share of head office expenses 33,300 50,000 83,300 Income tax paid in the UK 0 72,200 72,200 635,830 1,452,800 2,088,630 Net profit 339,270 367,700 706,970 Additional information: (i) The capital allowances of Maigona Agro Limited in respect of plant and equipment, farming tools and other qualifying capital expenditure as agreed with the tax authorities was N45,000,000. The amount of capital allowances of N57,000,000 claimable by BAM Textile Mills on qualifying assets was also certified by the tax authorities. (ii) Included in donation was N5,000,000 given to victims of COVID-19 (Omicron variant) pandemic in Nigeria.