ICAN 2022 Advanced Taxation | Mixed

Dadinkowa Nigeria Limited has been in business since 2009 as a manufacturer of sugar cubes. The company sources its sugar cane from the Northern part of the country. However, due to activities of some miscreants which prevented some of the local farmers to go about their farming activities, the company has been facing a lot of issues in getting the needed raw materials for its operations since 2016. The company has issues with tax authorities on the treatment of some items (such as allowing/disallowing donation and dividend received at will) in the financial statements submitted and annual returns filed. The high overhead cost, particularly energy cost, make the operating environment not encouraging. In order to address this unpleasant business situation, the board of directors of the company, at its special meeting held recently, decided to “close business operations” temporarily or in the long-run, relocate to a neighbouring country, if the situation does not improve in the coming financial year. As the company’s tax consultant, you were informed of the decision of the Board by the General Manager when you visited the company to obtain documents that you intend to use to conduct tax audit and file statutory tax returns in respect of the just concluded year. He was of the opinion that your professional advice will be highly needed as he did not want the organisation to go on temporary closure next year or relocate to another country. In the course of your discussion, you suggested ways by which issues raised by the Board could be addressed. The General Manager was pleased with your informal submissions and decided to inform the Managing Director. A meeting has been scheduled between the Managing Director and your firm next week.

Professional accountants who are engaged in either tax practice or tax administration are confronted with many challenges due to changing operating environment, particularly disruptive technologies. While clients are demanding cutting edge services from professional accounting firms, it is worrisome to note that majority of tax administrators in Nigeria are still carrying out their work manually. In a paper you recently delivered at a seminar organised by The Institute of Chartered Accountants of Nigeria (ICAN), you submitted that tax practitioners and administrators could make use of information technology to enhance their work and remain relevant in today’s dynamic environment. Among the participants at the seminar was a principal partner of an “old firm of chartered accountants”, who confessed to you that his firm was finding it difficult to satisfy its clients efficiently and effectively due to a wide range of issues, new layers of complexity and regulatory pressure. He has therefore approached you to organise a two-day in-house training for his staff on “Technological tools, impact and challenges to tax practice and administration.”

Disposal of assets is an important concept in the determination of capital gains tax payable. Section 6 of Capital Gains Tax Act 2004 (as amended) specifically provides that a disposal of assets by a person occurs where any capital sum is derived from a sale, lease, transfer, an assignment, a compulsory acquisition or any other disposition of assets, notwithstanding that no asset is acquired by the person paying the capital sum. In the same vein, Section 2 (4) of Finance Act 2020 states the period for filing of self-assessment returns and when payment of the tax computed in respect of chargeable assets disposed is to be made. Nice-One Nigeria Limited, a manufacturing concern, with head office in Calabar and branches in Ikeja, Kano and Abuja, has been in business for several years, reporting its accounts to December 31 of every year. The extracts from the books of accounts of the company during the year ended December 31, 2021, revealed the following transactions: (i) Disposal of an option On February 1, 2021, the company sold an option on a piece of land in Ikeja for the sum of N8,500,000 to Eco-Raheem Limited, which subsequently exercised the right by purchasing the land for N32,200,000. (ii) Acquisition of asset in exchange for debt On March 15, 2021, one of the company’s debtors in Calabar, Mr. Baba Tee, reached an agreement with the company by exchanging his piece of land, which was valued at N15,000,000, for the debt of N13,500,000. The company, on May 7, 2021, disposed of the land for N18,000,000. Incidental expenses incurred towards the disposal of the land was N250,000. (iii) Disposal of a building The company has a staff estate, which comprises five buildings in its Abuja branch. In order to source for funds to construct a new staff estate in Kano, the company, on August 12, 2021, sold one of its buildings in the Abuja estate for N110,000,000. The cost of acquisition of the five buildings in the estate was N250,000,000. The cost of acquisition of the building sold was N75,000,000, while the remaining buildings unsold were professionally valued at N240,000,000. The company also incurred for the purpose of the disposal of the building, N400,000 on building repairs and professional valuers’ fee of N1,100,000. (iv) Disposal of industrial plants One of the company’s industrial plants in Kano branch, which cost N4,500,000, was disposed of on September 15, 2021, for N6,000,000. A new plant was bought for the purpose of the company’s operations the following month for N8,000,000. During the installation of the new plant, it was found out that the plant could not efficiently satisfy the requirements of the company and it was subsequently sold on December 2, 2021 as “second-hand” for N7,300,000. The company incurred the sum of N25,000 as disposal expenses. The Managing Director of the company is of the opinion that issues around the transactions undertaken by the company in the financial year are “technical”, which only competent professional accountants, with experience in tax matters, can conveniently handle. Accordingly, your firm of accountants was contacted to help provide tax advice on each of the above transactions.

As investors and policy makers adapt to the global energy transition in a bid to offer an effective hedge against swings in oil prices, the Federal Government has recognised that it is beneficial for the country to diversify its economy. The attention of the country is now towards the development of the solid minerals sector. The Nigeria Minerals and Mining Act 2007 (as amended) was enacted to regulate the industry. Incentives for operators in the sector are as provided for in section 5 of the Act. One of the earliest investors in the mining sector, Dutse Mines (Nigeria) Limited, was granted a mining title by the Mining Cadastre Office (MCO) for exploitation of limestone in Nkalagu in the south-eastern zone of Nigeria in 2008. In spite of so many challenges the company is facing, it has managed to remain afloat in business. The company has, of recent, been having tax disputes with the relevant tax authority, and your firm of chartered accountants has been engaged to help resolve them. In the 2022 tax returns filed by the company, the major area of dispute between the company and the tax authority was disparity in the treatment of certified exploration and processing expenditure of N60,000,000 incurred during the course of the year. Your firm is provided with the following extracts (and supporting documents) from the books of the company for the year ended December 31, 2021: Turnover: - Export 1,125,000 - Local 705,000 Sundry income 28,500 1,858,500 Expenses: Excavating expenses 260,000 Salaries and wages 307,200 Directors’ remuneration 22,300 Electricity and telephone 8,630 Transport and traveling 13,300 Allowance for doubtful debts 26,000 Auditors and professional fees 10,000 Donations 9,500 Repairs and maintenance 24,900 Depreciation 70,000 General/miscellaneous expenses 15,200 Legal expenses 12,000 Bank charges 7,200 Insurance premium 75,000 Exploration and processing expenditure 60,000 Income tax provision 180,000 Education tax provision 5,000 1,106,230 Net profit 752,270 The following additional information was provided: (i) The figure for sundry income included an amount of N8,500,000 realised as profit from disposal of the old excavating machine. (ii) Allowance for doubtful debts were made up of: Bad debts written off 2,500,000 General allowance for doubtful debts 10,500,000 Specific allowance for doubtful debts 8,000,000 Loan to customer written off 5,000,000 (iii) Included in donation was N5,000,000 given to victims of environmental degradation, as part of the company’s social responsibility to the host community. (iv) Legal fees included an amount of N750,000, which was paid as penalty for late filing of tax returns. (v) The tax written down values of qualifying capital expenditure at the end of 2021 tax year revealed that: Motor vehicles (2 years remaining) 25,000,000 Furniture and fittings (utilised for 2 years) 22,500,000 Mining expenditure (6 years remaining) 40,000,000

Mr. Barau Olubami completed his first degree in a reputable university in Nigeria seven years ago. After the compulsory youth service, he wrote and passed the professional examination and was subsequently admitted as an associate member of the Institute of Chartered Accountants of Nigeria. He had four-year training in a professional audit firm before he decided to establish his accounting firm. The firm consists of him as the principal partner, two accounting graduates (as Assistant Auditors/Consultants), a secretary and an office assistant. Within six months of his professional practice, he was able to get three clients to which he provides services, that include preparation of tax records, computation of end of year tax liabilities, filing of tax returns, advisory to clients on tax matters, compliance with tax legislations and management of tax audit and investigation. In one of social events he attended with his father, he was introduced to Mr. Chidi Odamo, his father’s school mate in his polytechnic days. Mr. Odamo is the Chief Executive of Odamo Nigeria Limited, a company that manufactures paints. In a private chat they both had, Mr. Odamo complained bitterly that his current tax consultant has not been helping him to pay less amount of tax liability to the relevant tax authorities, unlike what his friends in the same industry are enjoying through the assistance of their tax consultants. Mr. Olubami informed Mr. Odamo that he knew his current tax consultant very well as he was his senior in the university. He also submitted that his (Olubami’s) firm is the tax consultant to another company in the same industry with Odamo Nigeria Limited. He then promised Mr. Odamo that if he is given the tax consultancy/audit work, he knows how to resolve the issue with the tax officials and the company will be the better for it. The engagement with the current tax consultant was terminated two weeks after Mr. Odamo and Mr. Olubami had “fruitful” discussion and the latter’s firm was appointed as the company’s new tax consultant after both parties agreed to a clause in the engagement contract that aside the professional fees, the firm is entitled to 20% of tax saved. During the review of previous tax returns filed with and tax paid to the tax authority, he observed a significant material error of the sum of N3 million made by the tax authority in favour of his client (Odamo Nigeria Limited). Since, this could not be regarded as tax saved by his firm, he decided not to inform the company as this is considered as “by-gone”. During the course of the year’s tax audit, documents and information received from the company’s accountant were not independently validated. These documents were sent to the two Assistant Auditors to work with. Specifically, sales were grossly understated; the cost of new vehicle and furniture and fittings were understated while some expenses incurred were overstated. At the completion of the work done by the two Assistant Auditors/Consultants, Mr. Olubami held a meeting with the company’s Managing Director and presented a draft report, which showed that the company’s total tax liability for the year was N12 million. He promised him that with the assistance of his “contact” at the Revenue Service, the tax liability would be reduced to N7 million. The company’s Managing Director advised him to go ahead and file appropriate returns as the matter was fully settled. Self-assessment returns were filed and perhaps with the connivance of unscrupulous tax officials, the company paid N7 million tax liability. However, if a thorough job was done, the company’s tax payable for the year would have been N18.25 million.

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.

In the last three years, some major oil producing companies had decided to divest their investments from the Nigerian oil and gas sector. One of the reasons for this might be the new global energy order, which seems to favour the evolution of “green environment” as against the present use of hydrocarbons with its inherent environmental degradation and pollution. Similarly, in response to the yearnings of various stakeholders in the oil and gas sector, the Federal Government had enacted the Petroleum Industry Act (PIA) 2021. Generally, the Act provides the legal, governance, regulatory and fiscal framework for the Nigerian petroleum industry, the development of host communities and for related matters. Notable commentators and professionals in the sector did suggest that the divestment of major oil and gas operators in Nigeria could be beneficial to the local investors if funds are sourced and deployed to businesses in the sector. Mergers and Acquisition of indigenously-owned oil producing companies had been noted as one of valuable options in this regard.