ICAN 2025 Advanced Taxation | Mixed

Nancy Nigeria Limited, a manufacturer of soaps and detergents, was incorporated on April 1, 2020, but commenced business on July 1, 2020. At the 2023 Annual General Meeting of the company, the shareholders approved resolutions for the increase in the company’s share capital in 2024 and request for long-term bank loan in the first quarter of 2025, to fund expansion of the company’s operations. In December 2024, the company made preliminary request to its bankers and part of the documents to be submitted included the audited financial statements and tax clearance certificate (TCC) of the last three years. The company has been paying its taxes regularly, but it is yet to request for TCC since the commencement of business. The appointment of the company’s former tax consultants was terminated in early 2024, after the discovery by the Federal Inland Revenue Service (FIRS) of the tax consultancy firm’s professional misconduct in the annual returns filed on behalf of a client. The matter is currently before a Court of competent jurisdiction. Your firm of tax consultants has been engaged to procure the TCC for the company, after recomputing the tax liabilities from inception to the financial year ended December 31, 2024. The Managing Director stressed that the company is willing to make additional tax payments, if a case of under-payment of taxes is established. After accepting the engagement, your Principal Partner, during interaction with the Managing Director, opined that based on the provisions of the Companies Income Tax Act 2004 (as amended), the FIRS may consider instituting back duty audit on the company, hence the need for early preparation for their visit. The Managing Director seems not to understand the submission made by the Principal Partner. The company has provided all the financial records necessary for the conduct of this assignment.

Dandy Producing Company Limited operates in both onshore and offshore in the riverine areas in Nigeria. It has been in the oil prospecting business for many years. The company applied for and was granted a petroleum prospecting licence (PPL) on January 1, 2023 after studying the provisions of the Petroleum Industry Act, 2021. The company’s financial records for the year ended December 31, 2023 are as follows: Revenue earned: Value of crude oil sold 486,000 Value of condensate from associated gas sold 128,000 Value of natural gas liquid from associated gas sold 112,500 Income from refinery operations 25,100 Gross revenue 751,600 Expenses deducted: Production cost 330,400 Cost of gas reinjection wells 1,600 Drilling cost incurred 6,650 Depreciation of plant, machinery and fixtures 2,010 Decommissioning and abandonment cost 2,500 Repairs and maintenance 4,200 Royalty cost incurred and paid 171,500 Niger Delta Development Commission charge 340 Finance cost and bank charges 615 Terminaling cost 2,345 Donations to approved charity homes 195 Concession rentals 74,110 Host community fund 23,200 Local government municipal levy 250 Environmental remediation fund 2,800 Cost incurred in seeking information for oil deposits 540 Net profit 128,345 Additional information made available: (i) Losses brought forward from previous year was N380 million. (ii) Repairs and maintenance: Repairs of plant and machinery 970 Repairs or alteration of production utensils 3,230 (iii) Drilling cost incurred comprised: Tangible drilling cost for first exploration well 3,990 Drilling of the first two appraisal wells 2,660 (iv) Production allowance after commencement of the Petroleum Industry Act, 2021 amounted to N6,401 million. (v) Capital allowances computed and agreed: For the current year 2,750 Unrecouped brought forward 1,350 (vi) Exchange rate agreed with the CBN was N752 to a USD ($).

The growth and development of digital trade facilitate globalisation through the establishment of borderless economic relationship. The digital economy in the first quarter of 2024 accounted for up to 15% of global gross domestic product (GDP) and is expected to contribute one-fifth of GDP by 2026. The Africa Digital Economy Summit (AfriDES) reported that the Nigeria’s digital economy’s contribution to the nation’s GDP in quarter 1 of 2024 was 14.8%. However, as a result of the nature of transactions involved in the digital space, Nigeria, like many other developing countries, is yet to reap the full potentials of digital economy. The Tax Reform Committee is seeking for memoranda from accounting and tax professionals and the general public, on how the nation’s digital economy can be repositioned for better contribution to the nation’s development. As a professional accountant with experience in fiscal policy, you have been invited by the Committee to present a memorandum on digital economy in Nigeria.

A clarion call for mergers and acquisitions as a business strategy for corporate entities in Nigeria was canvassed by various speakers at a workshop organised for small and medium-sized business operators. The guest speaker was emphatic about this issue when he submitted that over 90% of Nigeria’s small and medium-sized enterprises (SMEs) will not be able to survive the expected “economic hurricane” that comes with the full implementation of the African Continental Free Trade Agreement. According to him, only highly capitalised entities will be able to compete favourably with companies from South Africa, Kenya, Egypt, Morocco and others, within the continent. A professional accountant and one of the speakers at the event opined that whatever arrangement of mergers, acquisitions or takeover to be chosen to improve capital base, has its tax implications, hence professional accounting or tax consulting firms should be engaged for advice and guidance. The founder and majority shareholder of a hitherto thriving clothing and fabric company was one of the participants at the workshop. Due to intense competition from the Asian market, the company’s fortunes had dwindled in the last five years. The shareholders have been contemplating a complete re-organisation and restructuring of the business. The workshop has given the founder another option (merger or acquisition), which the company may explore. Your tax consulting firm has just been engaged to provide advice on specific issues concerning mergers and acquisition as well as re-organisation and restructuring.

LIS Limited is engaged in the manufacture of leather bags and shoes. The company commenced business in 2010. Due to downturn in the economy, which has significant effect on the purchasing power of customers, there has been a remarkable fall in the demand for its products. The shareholders of the company, at its Annual General Meeting in December 2022, approved the request made by the management to relocate the factory from Bauchi State to Ibadan, Oyo State. The following activities/transactions took place immediately after the Annual General Meeting: (i) the company’s warehouse in Azare town, Bauchi, which cost N11 million in 2018 was sold for N16.5 million in June 2023. The amount formed part of the cost of the new factory in Ibadan, which was completed in December 2023 at N22 million; (ii) in March 2024, the Bauchi factory, which cost N35 million in 2010 was sold to a private company owned by the Managing Director’s old school mate, for the sum of N55 million. The market value of the factory by an independent valuer, was put at N60 million, N50 million of the sales proceeds, was however applied to the construction of the factory in Ibadan, while N5 million was retained in the company’s bank account; and (iii) the retained amount of N5 million is expected to be used in the acquisition of shares in a Nigerian listed company in 2025.

The use of unethical business strategies by some major multinational companies in reducing or evading taxes in their countries of residence, especially in the developing countries (such as Nigeria), are well documented. From available data and evidence in Nigeria, the use of transfer pricing practices, which are considered to pose major risk to the direct tax base, is found to be the most significant strategy being used to short-change the government in revenue generation. Of recent, many of these multinational companies have shifted their focus by operating in tax haven environments. Although, governments in some developed countries have come up with various legislative mechanisms to mitigate this act, this cannot be said of governments in developing countries. At a recent event held to discuss strategies to improve tax revenue, some tax experts have suggested strengthening the transfer pricing regulations and possible adoption of strategies employed by developed countries in mitigating the effect of tax sheltering potential of tax havens.

According to the National Bureau of Statistics, the solid mining sector contributed 7.86% to the overall gross domestic product (GDP), in the first quarter of 2024. Although, this figure is higher than those recorded in the first quarter of 2023 (6.73%) and fourth quarter of 2023 (4.47%), in real terms, the mining sector grew by 6.30% year-on-year in the first quarter of 2024. The abysmal performance of the sector to the growth and development of the Nigerian economy has been a cause of concern to the government. In a bid to address this issue, the Federal Government has unveiled series of transformative strides aimed at revitalising the sector. At the forefront of this transformation is the complete overhauling of the procedures involved in the possession and purchase of minerals as provided for in Sections 92 - 96 of the Nigerian Minerals and Mining Act, 2007 (as amended). The Federal Government is also reviewing the possibility of encouraging both incorporated and proposed mining companies enjoy the various taxation incentives as enshrined in the Industrial Development (Income Tax Relief) Act and other pioneer incentives regulations released by the Nigerian Investment Promotion Commission (NIPC) in 2014 and 2017. The Managing Director of a mining company, which was incorporated three years ago, has approached your firm of Chartered Accountants to provide advice on government policy direction in the sector.