ICAN 2023 Advanced Taxation | Mixed

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.

Tax legislations are becoming increasingly complex thereby creating more risks for professional accountants and tax practitioners. The role of technology in running a contemporary accounting firm and/or tax practice is changing rapidly, bringing along a wide range of issues, new layers of complexity and regulatory pressure. Your firm of chartered accountants is organising an in-house training for the newly employed audit officers and you have been mandated by the Senior Partner to prepare a paper on: “Risk and role of technology in accounting/tax practice.”

Transfer pricing has become a topical fiscal policy issue globally due to the need by various governments to prevent tax evasion and avoidance of economic double taxation. Developing countries, especially, are therefore encouraged to develop appropriate transfer pricing regulations that will seek to protect their tax bases and raise revenue without jeopardising investors’ interest. NADA Incorporated, Canada, is a multinational enterprise with head office in Quebec, Canada. The company, which was established more than three decades ago, has interests in oil and gas; textile; and telecommunication sectors in several countries in America, Europe and Asia, Rwandan and Kenyan companies took advantage of the successful commencement of the African Continental Free Trade Area agreement (ACFTA) through sales to the West African market in the third quarter of 2022. Based on the foregoing, NADA Incorporated plans to establish its presence in the Nigerian business environment. While deliberating on the feasibility of the proposed establishment of a textile company in the northern part of the country, the issue of transfer pricing regulations and practices were noted by the board of directors. The Nigerian Income Tax (Transfer Pricing) Regulations 2018 was accessed via a trusted online medium, read and analysed. However, the aspect of transfer pricing documentation and arm’s length comparability factors were not clear to the directors. You have been engaged by one of the promoters of NADA Incorporated in Nigeria (PROMOT Link) as the company’s Tax Consultant to help provide professional advice on the “grey areas” of interest.

Jaga Petroleum Limited was granted an oil mining lease (OML) in January 2001 for exploration of oil and gas in onshore and shallow water operations for twenty years and a further renewal of twenty years, if application is made. At the expiration of the initial license in December 31, 2020, the company decided not to apply for extension of its current license under the Petroleum Profit Tax regime and opted for automatic conversion on January 1, 2021, to the petroleum mining lease (PML) as enshrined in the Petroleum Industry Act 2021. The following details were extracted from the financial statements of the company for the year ended December 31, 2021: Revenue: Category Type Quantity (million barrels) Actual Price $ Fiscal Price $ Crude oil sold Bonny light 7.5 75 77 Forcados medium 5.2 69 70 Condensate from associated gas sold ABC condensate 4 55 54 Gas liquid from associated gas sold XYZ liquid 3.8 48 50 Expenses/expenditure: Item N’million Royalty incurred and paid for 118,900 Production cost 112,660 Concession rentals 25,200 Repairs of plant, machinery and fixtures 2,680 First exploration well costs 2,770 Repairs of production implement utensils 1,850 Cost of gas reinjection wells 1,250 NDDC charge 200 Purchase of information on existence of petroleum deposits 305 Customs duties 106 First two appraisal wells costs 3,900 Decommissioning and abandonment 1,500 Depreciation 2,820 Environmental remediation fund 1,800 State government ground rent fee 22 Finance costs 25 Host community costs 1,400 Miscellaneous expenses 1,129 Administrative costs 1,980 The following additional information was also made available: First two appraisal wells costs consisted of 60% tangible costs and 40% intangible costs. Expenditure for the purchase of information on existence of petroleum deposits included: N’million Acquisition of geophysical information 100 Geological data and information 120 Others 85 Miscellaneous expenses were: N’million Gas flare fee 720 Donations to orphanage homes 132 Terminalling cost 169 Stamp duty 18 Signature bonus paid for the acquisition of petroleum deposits 90 Agreed capital allowances for the year was N4,500 million. Production allowances after commencement of the Act: N’million Onshore operations 800 Shallow water operations 1,100 Assume that N440 is equivalent to US $1 and tax liabilities payable will be in local currency (Naira).

Fashion Stitches Limited, Lagos, is a private limited liability company that deals in sewing and sales of clothes, and allied materials for medium and upper class clients in highbrow areas of the country. Apart from its core staff in the sewing unit, there are others who are usually “on the move” traveling to major cities, such as Abuja, Kaduna, Ibadan and Port Harcourt, to receive orders from clients. While reviewing their activities in the first quarter ended March 31, 2022, the Operating Officer stated that the recent increase in cost of traveling and staff salaries, which had jumped up by over 150% compared to the corresponding period of 2021, had impacted negatively on the financial performance of the company. The management took a decision to relocate the business to the Federal Capital Territory (FCT), Abuja, where over 75% of their clients’ reside on or before November 15, 2022. Implementation of the decision will however involve the disposal and re-acquisition of some assets needed for the purpose of the business. The underlisted transactions took place between April and October 2022: (i) The property (land and building) in Lagos which was acquired in 2008 for N18,220,000 was sold for N65,100,000. Incidental cost of disposal included estate valuers’ fee of N1,627,500; renovation expenses of N1,800,000 and advertisement cost of N250,000. A new property was bought in the FCT for N80,000,000. (ii) Sewing machines and other tailoring equipment bought between 2015 and 2019 (which are now considered to be outdated), for N3,300,000 were disposed for N2,800,000. New set of machines and equipment were acquired for N7,130,000. (iii) A 10 KVA generating set which cost N1,500,000 in 2017 was disposed for N1,900,000 and another one was acquired for N2,450,000.

Tax planning is a right that taxpayers must exercise to reduce tax liability and improve profitability while fully complying with existing tax legislations to avoid penalties and further risks. Thin capitalisation and non-tax factors are important fiscal policy issues which corporate players and governments in different tax jurisdictions should not undermine.

Tax incentives are those special exclusions, exemptions or deductions from income or tax credits offered to taxpayers by the government as an encouragement to engage in specified activities. These fiscal incentives have generated a lot of debates among Nigerian lawmakers, economists, accountants, tax practitioners, tax administrators and the public. The Federal Government is, however, optimistic that the positive effects tax incentives have on the economy far outweigh the negative effects (via reduction in revenue). A notable wealthy businessman and Chairman of a conglomerate company, High Level Group of Companies, was surprised to know during legislative debate that over N6 trillion in tax incentives was provided for in the forthcoming national budget. The Chairman of the conglomerate has just approached your professional accounting firm to provide advice on some salient issues in respect of tax incentives available to companies in some specific areas.