Case Stimulus
Hyland Nigeria Limited commenced business as a manufacturer of stationery on January 1, 2021. The company, in December 2020 acquired all the assets and liabilities of a foreign company operating in Nigeria, Lowland Incorporated, and got it reconstituted for turn-around and better profitability.
The directors of the newly reconstituted company have just considered the draft financial statements and annual tax returns prepared by the Financial Accountant for the year ended December 31, 2021.
In the course of the board meeting, diverse opinions were expressed by members on the treatment of dividends received (N3,600,000) by the company on equity holdings from another Nigerian public limited liability company. The dividends received are also part of the proposed profits to be distributed to shareholders of the company in form of dividend payment. All efforts made by the Financial Accountant to explain the position of the Companies Income Tax Act 2004 (as amended) on dividends were rebuffed by majority of the members. Being a reconstituted company, one of the directors posited that the possibility of the company enjoying some tax reliefs/incentives from the government, which may impact the company’s profitability positively, was very high.
The Managing Director of the company, following the decision of the board, has contacted your firm of tax consultants to help provide professional advice on the issues discussed.
The following details were extracted from the company’s financial records for the year ended December 31, 2021:
Turnover 278,500
Cost of sales (118,600)
Gross profit 159,900
Dividend received (net) 3,600
Other operating income 1,800
The following additional relevant information was provided:
(i) Subscription and donations consisted of:
Subscription - Manufacturers Association of Nigeria 400
Donations – state flood victims’ relief fund 4,900
Royal Elites Brothers’ Klub 100
(ii) Allowance for doubtful debts included:
General provision 12,500
Specific provision 16,800
Bad debts recovered (4,600)
(iii) Repairs and maintenance was made up of:
Repairs of manufacturing plants 490
Improvement to industrial building 1,400
Maintenance of delivery van 300
Deduct:
Directors’ emoluments 2,100
Administrative staff salaries 35,500
Rent and rates 22,750
Motor running expenses 2,200
Traveling expenses 1,960
Power and lighting 13,800
Telephone and postage 1,540
Depreciation 7,500
Subscription and donations 5,400
Allowance for doubtful debts 24,700
Finance costs 2,640
Repairs and maintenance 2,190
Legal and professional fees 3,630
Other operating expenses 12,990 (138,900)
Net profit 26,400
(iv) Legal and professional fees included:
Audit fee 3,000
Legal fee in respect of reacquisition of lease 630
(v) Other operating expenses were:
Expenses on increase in share capital 2,500
Fines for traffic offence 250
Christmas/Eid Kabir gifts to customers 3,100
Embezzlements by cashiers 500
Sundry (all allowable) 6,640
(vi) Tax written down values of qualifying capital expenditure (QCE) as at December 31, 2020:
QCE Amount
Industrial building (1) 4,200,000 January 2, 2017
Non-industrial building (1) 5,400,000 April 13, 2017
Manufacturing plants (2) 3,600,000 November 10, 2019
Motor vehicles (5) 2,500,000 December 12, 2019
Furniture and fittings (8) 1,800,000 June 5, 2020
(vii) Additional assets acquired during the year ended December 31, 2021:
Motor vehicle (Delivery van) 1,400,000 February 13, 2021
Furniture and fittings (3) 900,000 March 7, 2021
Manufacturing plant (1) 1,200,000 July 1, 2021
(viii) Unrelieved losses as at December 31, 2020 was N55,900,000.
(ix) Unutilised capital allowances as at December 31, 2020 was N16,155.000.