STUDY MANUAL

ADVANCED TAXATION (PEB 2)

ASSOCIATION OF NATIONAL ACCOUNTANTS OF NIGERIA (ANAN)

© 2020

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 TABLE OF CONTENTS
MODULE 1

1.00 PURPOSE AND ADMINISTRATION OF TAXES . . . . 16

1.01 Learning Outcomes . . . . . . . 16
1.02 The Historical Development of Taxes . . . . 16
1.03 Tax Legislations . . . . . . . 18
1.04 Income Tax Management Act 1961 . . . . . 23
1.05 Income Tax Management (Uniform Taxation Provisions)
Decree No. 7, 1975 amendment . . . . . 23
1.06 Finance Miscellaneous (Taxation Provisions) 1985 Decree . 24
1.07 1987 Amendment . . . . . . . 24
1.08 1990 Amendment . . . . . . . 24
1.09 1992 Amendment . . . . . . . 24
1.10 1993 Act . . . . . . . . 24
1.11 1998 Act . . . . . . . . 25
1.12 Personal Income Tax Amendment Act of 2011 . . . 25
1.13 PITA Sections 2 and 108: Tax imposition and Interpretation . 25
1.14 PITA Sections 3: Income chargeable and Personal relief . . 26
1.15 Registration and Collection of Various Taxes,
Assessments and Appeals . . . . . . 26
1.16 Residency Issues in Taxation . . . . . 28
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1.17 Persons in Employment on 1 January . . . . 28
1.18 Collection, Recovery and Payment of Tax . . . . 35
1.19 Establishment of Tax Appeal Tribunals . . . . 36
1.20 Review questions . . . . . . . 51

MODULE 2

2.00 GENERAL PRINCIPLES OF TAXATION . . . . . . 54

2.01 Learning Outcomes . . . . . . . 54
2.02 Basis Period . . . . . . . . 54
2.03 Loss Relief . . . . . . . . 64
2.04 Capital Allowance . . . . . . . 69
2.05 Accounting for Taxes . . . . . . . 94
2.06 Review Questions . . . . . . . 95

MODULE 3
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3.00 PERSONAL INCOME TAX . . . . . . . 98
3.01 Learning Outcomes . . . . . . . 98
3.02 Income Chargeable to Tax . . . . . . 98
3.03 Determination of Residence and Relevant Tax Authority . . 101
3.04 Reliefs and Allowances Available to an Individual . . . 103
3.05 Table of Personal Income Tax Rate . . . . . 106
3.06 Taxation of Sole Traders . . . . . . 106
3.07 Taxation of Employees . . . . . . 110
3.08 Partnership Assessment . . . . . . 116
3.09 Taxation of Settlement, Trust and Estate . . . . 121
3.10 Specific expenditure and their treatments . . . . 124
3.11 Review Questions . . . . . . . 129

MODULE 4
4.00 COMPANIES INCOME TAX . . . . . . . 136
4.01 Learning Outcomes . . . . . . . 136
4.02 Chargeable Persons . . . . . . . 136
4.03 Chargeable Tax . . . . . . . 137
4.04 Allowable Expenses . . . . . . . 140
4.05 Disallowable Expenses . . . . . . 141
4.06 Deductible Donations . . . . . . 142
4.07 Offences and Penalties . . . . . . 145
4.08 Ascertainment of Total Profits . . . . . 146
4.09 Education Tax Fund . . . . . . . 181
4.10 Information Technology Development Levy . . . 185
4.11 Review Questions . . . . . . . 185

MODULE 5
5.00 PIONEER LEGISLATIONS (INDUSTRIAL DEVELOPMENT INCOMETAX RELIEF (ACT, CAP
179 LFN 1990) . . . . . . . . 189
5.01 Learning Outcomes . . . . . . . 189
5.02 Conditions for Pioneer Status . . . . . 189
5.03 Conditions for Application for Pioneer Status . . . 189
5.04 Production Day/Material Day . . . . . 190
5.05 Certification of Pioneer Companies . . . . 191

5.06 Tax Relief Period . . . . . . . 191

5.07 Conditions for Extension . . . . . . 192
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 5.08 Merits of Pioneer Company . . . . . 193
5.09 Revocation of Pioneer Certificate . . . . . 194
5.10 List of Pioneer Industries/Products . . . . 194
5.11 Review Questions . . . . . . 196

MODULE 6
6.00 CAPITAL GAINS TAX . . . . . . . . 210
6.01 Learning Outcomes . . . . . . . 210
6.02 Bases of Assessment . . . . . . 210
6.03 Exemptions and Reliefs . . . . . . 211
6.04 Computation of Capital Gain and Losses . . . . 220
6.05 Indexation Relief . . . . . . . 228
6.06 Capital Gains Tax as it Applies to Stocks, Shares and Quoted Securities: 228
6.07 Treatment of Capital Gain of Partnership and Companies Transaction. 230
6.08 Tax Treatment of Legatees and Artificial Transactions . . 231
6.09 Other Capital Gain Tax Matters . . . . . 232
6.10 Capital Gains Tax on Hire Purchase Transactions . . . 234
6.11 Revision Questions . . . . . . . 240

MODULE 7

7.0 VALUE ADDED TAX . . . . . . . . 242

7.01. Learning Outcomes . . . . . . . 242
7.02 Introduction . . . . . . . . 243
7.03 Principles Underlying the Operations of VAT . . . 243
7.04 Legislative Requirement and Procedure . . . . 243
7.05 Definitions, Objectives, and Administration in Nigeria . . 245
7.06 Accounting for VAT . . . . . . . 248
7.07 Vat-able Persons and Zero Rated Items . . . . 251
7.08 Review Question . . . . . . . 252

MODULE 8

8.0 TAXATION OF SPECIALIZED COMPANIES OR TRANSACTION . . 254

8.01 Learning Outcomes . . . . . . . 254
8.02 Introduction . . . . . . . . 254
8.03 Taxation of Air/Sea Transport . . . . . 255

8.04 Taxation of Insurance Company . . . . . 260

8.05 Taxation of Banks . . . . . . . 271
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 8.06 Taxation of unit Trust Scheme . . . . . 275
8.07 Taxation of Gambling Betting or Lottery Winning . . . 275
8.08 Review Question . . . . . . . 276

MODULE 9

9.0 PETROLEUM PROFIT TAX . . . . . . . 277

9.01 Learning Outcomes . . . . . . . 277
9.02 Introduction . . . . . . . . 278
9.03 Definition of Assessable Profits and Changeable Profit . . 278
9.04 Types of Operating Agreements in the Oil and Gas Industry . 287
9.05 Loss relief (Section 14) . . . . . . 290
9.06 Determination of Capital Allowance . . . . . 291
9.07 Memorandum of Understanding (MOU) . . . . 298
9.08 Assessment of Natural Gas and Incentives Use . . . 304
9.09 Tertiary Education Tax Computation . . . . 307
9.10 Review Questions . . . . . . . 308

MODULE 10
10.0 STAMP DUTIES . . . . . . . . 316
10.01 Learning Outcomes . . . . . . . 316
10.02 Administration of Stamp Duty in Nigeria . . . . 316
10.03 Stamping of Documents . . . . . . 318
10.04 Penalties for Late Stamping . . . . . . 321
10.05 Review Questions . . . . . . . 322

MODULE 11
11.0 INTERNATIONAL TAXATION . . . . . . 323
11.01 Learning Outcomes . . . . . . . 323
11.02 Introduction . . . . . . . 324
11.03 Subjects of Treaty Agreements . . . . . 329
11.04 Double Taxation Treatment . . . . . 365
11.05 Transfer Pricing . . . . . . . 380
11.06 Thin capitalization: . . . . . . . 407
11.07 Review Questions . . . . . . . 409

MODULE 12

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12.0 TAXATION OF MERGER AND ACQUISITION . . . . 423
12.01 Learning Outcomes . . . . . . . 423
12.02 Introduction . . . . . . . . 424
12.03 Definition and Meaning of Merger and Acquisition . . 424
12.04 Reason for Merger and Acquisition . . . . . 424
12.05 Tax Complication of Merger and Acquisition . . . 430
12.06 Review Questions . . . . . . . 437

MODULE 13
13. TAX AUDIT AND INVESTIGATION . . . . . . 439
13.01 Learning Outcomes . . . . . . . 439
13.02 Introduction . . . . . . . . 439
13.03 Tax Audit and Investigation . . . . . 439
13.04 Definition of Tax Audit . . . . . . 439
12.05 Objectives of Tax Audit . . . . . . 442
13.06 Types of Audit Exercise . . . . . . 453
13.07 Audit Programme . . . . . . . 455
13.08 Tax Investigations . . . . . . 456
13.09 Responsibilities of Criminal Investigation Unit . . . 458
13.10 Review Questions . . . . . . . 461

MODULE 14
14.0 TAX PRACTICE . . . . . . . . 462
14.01 Learning Outcomes . . . . . . . 462
14.02 Tax Audit and Investigations . . . . . . 462
14.03 Clients Documentation and Records . . . . . 466
14.04 Communication with Tax Authorities . . . . 468
14.05 Registration with Tax Authorities . . . . . 469
14.06 Self-Assessment for Individual . . . . . 470
14.07 Tax Avoidance and Tax Evasion . . . . . 473
14.08 Review Questions . . . . . . . 474

Recommended Further Readings . . . . . . . 475

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 MODULE 1

1.00 PURPOSE AND ADMINISTRATION OF TAXES

1.01 Learning outcome

On successful completion of this Module, Students should be able to:

i. Effectively discuss of the origin and essence of income tax in Nigeria;

ii. Examine the sources of tax legislations in Nigeria and their applicability;
iii. Evaluate the process for collection, recovery and payment of taxes;
iv. Deconstruct the process and organs for tax assessment, collection and appeal.

1.02 The Historical Development of Taxes

In pre-colonial Nigeria there are evidences of an elaborate system of taxation and payment of
tribute to traditional rulers. For instance in the North, evidence abound of: 1) the existence of
the capitation tax on cattle belonging to the Nomads; and 2) community taxes. In the south
(Oyo, Egba, Bini and others) there are also evidences of payment of tributes to Obas, Obi’s,
Igwe etc of taxes ranging between five shillings to ten shillings per head.

In colonial Northern Nigeria the first step to introducing tax was taken in 1904 when Lord
Luggard then High Commissioner for Northern Nigeria issued the land Revenue Proclamation
No 4 that was meant to secure a proportion of the taxes on land and produce levied by native
rulers. Two years later Revenue Proclamation of 1906 No.2 was issued with a view to
compounding all forms of taxation that were not authorized by it. It drew a distinction between
tributes and other specified traditional taxes; essentially it was a community (or village) tax.
Essentially from 1900 to 1914 the government of colonial Southern Nigeria derived its revenue
from duties imposed on imports and exports. The First World War brought about a sharp
decline in government revenue, and thus resulted in the introduction of direct taxation, from
which government retained half of the tax collected.
In 1927 it was decided that direct taxation should be introduced into Eastern Nigeria, and it
should be calculated at 21/2 percent of “gross total income”. In 1928 direct taxes were for the

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first time collected throughout South-Eastern provinces through Warrant Chiefs. After the
Native Revenue Ordinance of 1928 no other legislation was introduced with respect to direct
taxation. However, in 1940 the Income Tax Ordinance No. 3 and Direct Taxation Ordinance No.
4 were enacted. The period 1928 – 1940 was devoted essentially to the consolidation of
government position throughout the country on matters of taxation and establishment of fiscal
system on the division of tax revenue between the multifarious Native Administrations already
established and the Central Government.
Direct Taxation ordinance was enacted in 1940. It was enacted as a consolidating. Ordinance of
all previous tax ordinances from 1906– 1940. For the first time this ordinance brought the
whole of Nigeria under one system of income tax. Section 17 of the ordinance was amended in
1943 requiring all collections to be deposited into the Native Treasury after which the
Government share as determined by the Governor should go to the Government Treasury
before the residue could be transferred to the revenue of the Native Administration. In 1943
the Income Tax Ordinance was enacted. It was an admixture of poll tax and income tax that was
imposed upon the total income or assessable income of natives resident in the township of
Lagos and non-natives resident in Nigeria. During this period the Income Tax Ordinance 1943
enable the central government to receive the general revenue of the country whiles the Native
Authority of the respective areas and the regional government received revenue accruing from
Direct Taxation Ordinance.
In 1954 Nigeria became a federation of three regions, North, East and West. As an autonomous
region, the Eastern region passed the Finance law No 1 of 1956 by which people above 16 years
were to be assessed to tax. The Western Region followed suit by passing income tax law to
replace the Direct Income Tax ordinance in 1957 by which taxable adults could be assessed.
The Nigerian Income tax ordinance of 1943 remained in force in the federal territory of Lagos
until 1963 until when the personal income tax (Lagos) 1961 and the Personal Income Tax (Loss
Act PIT) 1961 were enacted by the Federal Government.
In 1961 the Federal Government enacted:
i. The Income Tax Management Act 1961;

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 ii. The Companies Income Tax, 1961; and
iii. The Personal Income Tax Act 1961
Between 1959 and 1961 five tax legislations were enacted in Nigeria based on the
recommendation of the Revenue and fiscal commission. These include
i. The Stamp Duties Act (SDA) 1959
ii. The Petroleum Profit Tax Act 1959
iii. The Companies Income Act 1961
iv. The Income Tax Management Act (ITMA), 1961
v. The Personal Income Tax (Lagos) (PITLA), 1961
Between 1961 to date most of the tax legislation have been amended the most recent
amendment being the Personal Income Tax Act 2011.

1.03 Tax Legislations

From 1959 to date Nigeria has enacted a host of tax laws. These taxes are imposed either by
the national sub national governments. The 1999 constitution of the Federal Republic of Nigeria
under the concurrent list in part II of the second schedule item D paragraph 8 provides the
national and sub national governments the powers to impose any tax or duty.
Nigerian tax laws are purely statutory. The tax system thus features a wide and mixed range of
statutes by which the various governments in the country seek to charge and collect revenue
for public expenditure. Of these, the most widely based are on income taxation. The Personal
Income Tax Act makes provisions for the country. Liability to personal income tax in Nigeria
does not depend on the domicile or nationality of the taxpayer. Profits arising from a trade,
business, profession or vocation, from any source inside or outside Nigeria, are chargeable here
if the taxpayer happens to be resident in Nigeria. Foreign residents are also taxable here if they
have income arising from a Nigerian source. Once a company is incorporated, it becomes a legal
entity and is treated under Nigerian law as an artificial person, separate and distinct from its
shareholders. Corporate bodies are charged to tax under the Companies Income Tax Act.
However, while Nigerian Companies are taxed on their profits, which is attributable to business

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operations carried on in Nigeria. In addition to the tax income accruing to companies, all
incorporated companies are required to pay 2% of their assessable profit into Education Tax
Fund. This is charged by virtue of the Education Tax Act.
Where a particular income or profit is chargeable to tax in Nigeria as well as in another country,
there is a possibility of the taxpayer getting taxation relief by way of tax credit under the
provisions of the income tax statutes. To this end, the Federal Government of Nigeria has
negotiated and signed income tax treaties with a few foreign governments. The statues also
feature a wide array of tax holidays and exemptions, which are intended to boost investment.
For instance, the Industrial Development (Income Tax Relief) Act makes provisions for the grant
of tax relief to pioneer companies. The pioneer status is granted mainly to companies in any
industry which in the opinion of the National Council of Ministers, is not being carried on in
Nigeria on a scale suitable to the economic requirements of the country. Also, a company which
has incurred expenditure in its qualifying building and plant equipment in an approved
manufacturing activity in an Export Processing Zone is granted 100% capital allowance in any
year of assessment. This makes the cost of capital acquisition entirely deductible in the year in
which the qualifying expenditure was incurred. Another example is in Part IV of the Minerals
and Mining Decree, (now Act) which gives various tax incentives to operators in the solid
minerals mining sector.
Exclusively, the Federal Government imposes both personal and company income taxes. The
same government also collects company’s tax, but it partly delegates the power to collect
personal income tax to State governments. In a normal case, personal income tax is thus
collected and expended by the state in which the taxpayer is deemed resident in the relevant
year of assessment. However, men of the Nigerian armed forces, officers of the foreign-service,
persons resident in the Federal Capital Territory and non-residents pay to the Federal
government. Nigeria ranks among the major oil producing countries of the world and much of
its public revenue is generated from the sale of crude oil and natural gas. All petroleum
resources belong to the Federal government, hence, companies engaged in petroleum
operations are charged to tax under special legislation, the Petroleum Profits Tax Act (PPTA).

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The effect of the Act is however varied by a Memorandum of Understanding (MOU) between
the oil producing companies and the Federal Government of Nigeria. Any profit, which is
charged to petroleum tax, is exempted from companies’ income tax.

Until 1967, there was no tax on capital or capital gains in Nigeria. In that year however, capital
gains taxation was introduced. The Capital Gains Tax Act has been retained ever since with only
a few amendments. The Act charges to tax any capital gain accruing to individuals and
corporate bodies whenever they dispose of assets. The Federal Government has the exclusive
authority to tax capital gains but the collection has been partially delegated to States. While
corporate bodies pay capital gains tax to the Federal Board of Inland Revenue, others pay to the
tax authorities in their States of residence. Inheritance tax, which was levied by virtue of the
Capital Transfer Tax Act, was scrapped in 1996.
Before 1993, Nigeria had a limited form of sales tax, but it has since adopted a very widely
based Value Added Tax. By virtue of the Value Added Tax Act of 1993, all purchasers of
chargeable goods and services are expected to pay 5% of the purchase price as tax. The value
Added Tax Act is a federal statute and the tax is administered by the Federal Inland Revenue
Service (an arm the Federal Board of Inland Revenue) on behalf of the Federal, State and Local
Governments. The proceeds are shared among the three tiers of government in accordance
with a formula determined from time to time by the Federal legislature.
Another major source of revenue for the Federal Government is customs duty, which is payable
by importers of specified goods. This tax is charged solely by the Federal Government and
collected through the Nigeria Customs Service. Excise duty was levied on a variety of locally
produced goods until 1988 when the tax was abolished. It was however partially reintroduced,
with effect from January 1, 1999. The applicable law for customs and excise is the Customs and
Excise Management Act.
The Stamp Duties Act imposes tax on a wide range of documents and transactions. Where one
of the parties is a corporate body, the tax is payable to the Federal Board of Inland Revenue.
Others pay to the State tax authorities.

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Apart from those outlined above, there are sundry levies and rates which local governments are
authorized to collect. Notable here is the tenement rate payable annually on buildings situated
with a particular local government area. This is levied by virtue of the Tenement Rate Law of
the various states. There is also a Development Levy on individuals to State governments. When
real property is transferred, the relevant State government imposes some charges before the
Governor grants his consent in accordance with the Land Use Act of 1978.
It can be seen from this short survey that the Nigerian tax system features a mixture of direct
and indirect taxes. All individuals, groups and corporate bodies that earn income, profits or
gains, are affected. Except for tenement rates payable on buildings, there is no tax on the
ownership of capital assets per se. capital gains tax is charged only when these assets are
disposed of at a profit. Virtually all the major taxes are within the exclusive legislative
jurisdiction of the Federal government, but the power to collect is often delegated to the
States. The usual pattern is that federal authorities collect taxes from corporate bodies while
states are allowed to collect from individuals and unincorporated groups. Even though local
government authorities do not have substantive legislative powers, they charge and collect
such rates and levies as may be authorized by a statute of the relevant State government.

Under the 1999 Constitution of the Federal Republic of Nigeria, the National Assembly had the
power to make laws for the peace, order and good government of the Federation or any part
thereof with respect to any matter included in the Exclusive Legislative List. This list contains
subjects like corporation, regulation and winding up of corporate bodies and the taxation of
incomes, profits and capital gains. The same Constitution further reserves to the federal
legislature the power to make laws with respect to any matter in the concurrent list to the
extent prescribed in the second column of that list.
Item 7 of that concurrent list is on collection of taxes. The federal legislature is allowed to
delegate the collection or administration of some taxes to the Government or other authority
of a State, Provided however that taxes on capital gains, incomes or profits of companies
cannot be do delegated.

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Item 9 of the concurrent list gives state legislatures the power to make provisions for the
collection of any tax fee or rate or for the administration of laws providing for such collection by
a local government. This clearly justifies the inference that states may impose, collect and
spend any tax, fee or rate which has not been expressly reserved for Federal Government
control. The assumption is that States could not have been required to delegate to local
government councils what they (the States) could not be themselves do. As noted by Bello JSC
(as he then was) while reading his lead judgement in Abruagba v. Attorney General (Ogun
State). “any tax” as used in the provision empowers the States to impose tax on all matters in
the concurrent list and residual matters”.
Apart from the income tax which they pay to the Federal Government, companies in Nigeria are
subjected to a wide array of taxes, levies and rates by States and Local Government.
Only the Federal government can charge companies to income tax, but other governments can
charge companies other taxes within the legislative jurisdiction of those governments. This is,
of course, in so far as the tax law does not in effect amount to “regulation” of corporate bodies,
which is an exclusive preserve of the federal legislature
It should be noted that, apart from the concurrent powers, the states ordinarily have further
jurisdiction over the so called residual matters, i.e., matters which are neither on the exclusive
legislative list nor on the concurrent legislative list. Although this was not expressly indicated in
the Constitution, the Supreme Court has held in the case of Attorney General (Ogun State) V.
Aberuagba that it was the necessary inference to be drawn from section 4(7) of the 1979
Constitution.

There is however one crucial limitation on state legislative powers. In spite of the
accommodation allowed the States under the concurrent legislative list, the Constitution
further provides that if any law enacted by a State is inconsistent with any law validly made by
the Federal Government, the latter shall prevail. The State law shall therefore be void to the
extent of the inconsistency. Can this mean that a State cannot collect tax from a person or
source of income on which the Federal Government has already imposed a tax? In the course of

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his judgment in the Aberuagba case, Bello JSC (as he then was) stated that the power of states
to impose any tax over concurrent matters can only be exercised “….subject to the rule of
inconsistency under Section 5(4) and the doctrine of covering the field.” If we accept the
applicability of that doctrine, it would mean that whenever the Federal Government enacts a
law on an issue on the concurrent list, that enactment forecloses the ability of the States to
make a law on the same issue. More particularly it would mean that once the federal
government has provided for the collection of taxes from companies.
Since 1959 to date Nigeria has enacted a host of tax laws. Essentially all taxes are imposed
either by Federal or State Government. Some of these enactments include:
1.04 Income Tax Management Act 1961
There were various tax systems operating in Northern, Western and Eastern Regions of the
country. The inconsistencies and apparent confusion resulted in the setting up of Raisman Fiscal
Commission of 1958 who recommended that there should be a uniform basic principle for
taxing incomes throughout Nigeria. It was this recommendation that was embodied in the
Nigerian (Constitution) Order in Council 1960, which resulted eventually in the enactment of
the Income Tax Management Act 1961 (ITMA 1961) ITMA 1961 was the precursor to CITAs
1961, 1979 and 1990 as well as the Personal Income Tax Decree (now Act) of 1993 and 2011

1.05 Income Tax Management (Uniform Taxation Provisions) Decree No. 7, 1975
amendment

In 1975 the Income Tax Management (Uniform Taxation Provisions) Decree No. 7 was
promulgated. This Decree unified reliefs and rates throughout the country with the key
advantage of resolving, to some extent, the proliferation of various tax laws in the different
States of the Federation.

1.06 Finance Miscellaneous (Taxation Provisions) 1985 Decree

There was Finance Miscellaneous (Taxation Provisions) Decree 1985 that introduced some
reforms into the tax provisions such as: increase in personal allowances, tax authorities were
empowered to request any bank for information about customers (individuals in this case), the
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basis of computing changed from reducing balance to straight line method, capital allowances
claimable was restricted to 75% for manufacturing business and 66 2/3% for other businesses.
No limit for agricultural businesses, capital allowance rates were reviewed upwards and
harmonized with that of companies to increase the benefits to tax payers, interest on loan for
agricultural and export purposes were to be treated as exempted from tax, (g) losses to be
limited to four years for businesses other than agriculture.

1.07 1987 Amendment

The amendment to the Nigerian tax laws in 1987 included:
Slight increase in personal allowances, review, again, of some capital allowances, rates, (c)
treatment of withholding taxes on rent, interest, dividends and royalties as “final tax” payable;
in other words, they are treated as “franked investment income”.
1.08 1990 Amendment
The following also happened: significant improvement in capital allowances’ rates, (b) removal
of limits on capital allowance claimable by manufacturing business.
1.09 1992 Amendment
The amendment includes increase in personal income tax reliefs/allowances, (b) increase in the
tax table rates.
1.10 1993 Act
In 1993, the Personal Income Tax Act was promulgated as Decree No. 104 which replaced ITMA
1961 as amended up to the point of abrogation. The Act provides for the taxation of every
individual or corporate sole or body of individuals (e.g. partnership) that are deemed to be
resident for that year in the relevant State and (ii) increase in the table of rates for the taxation
of individuals under PITA.
1.11 1998 Act
Taxes and Levies (Approved List for Collection) Act 1998 authorized Federal Government
through Federal Inland Revenue Service to collect personal income tax from:

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Members of the Armed Forces of the Federation; members of the Nigeria Police Force;
residents of the Federal Capital Territory, Abuja; and Staff of the Ministry of Foreign Affairs and
non-resident individuals. Under the same Act, in addition to personal income tax in respect of
PAYE, the State Governments are empowered to collect direct taxation (self-assessment).

1.12 Personal Income Tax Amendment Act of 2011

The Personal Income Tax (Amendment) Act, 2011 was made available to the public in January
2012 (although 24 June 2011 was the date of publication stated on the Gazette) .The PITAM
amends thirty-six sections of the Personal Income Tax Act, Cap P.8, Laws of the Federation of
Nigeria, 2004(PITA).It also modifies the First, Third and Sixth Schedules to the PITA. We have
highlighted below the key provisions and implications of the PITAM:

The date of commencement of the amendment is 14th June 2011, based on the Federal
Republic of Nigeria Official Gazette No.115, Vol.98. This date is the same as the date of assent
of the Act by the President. As a consequence, tax payers and employers may be required to re-
compute the personal income tax (PIT)/pay-as-you-earn (PAYE) tax due for the period June2011
to January 2012. We envisage that many tax payers will qualify for refund from relevant tax
authorities (RTAs) by reason no for their over payment to tax under the old PIT regime. Given
the difficulties currently associated with claiming tax refund in Nigeria, our view is that
PIT/PAYE tax over payments would likely be recovered as credit from subsequent remittances
to the RTAs.

1.13 PITA Sections 2 and 108: Tax imposition and Interpretation

The main amendment to Section 108 of the PITA is the redefinition of itinerant worker to
include “an individual irrespective of his status who works at any time in any stated year of
assessment (other than as a member of the armed forces) for wages, salaries or livelihood by
working more than one state for a minimum of twenty (20) days in at least three (3) months of
every assessment year”. Based on the amendment, employees of service companies who
migrate from state to state in providing services to clients may now qualify as itinerant workers.

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Similarly, entrepreneurs, company executives and other personnel who by virtue of their
responsibilities work in multiple locations in different states may qualify as itinerant workers.
The PITAM also amends section2 of the PITA by inserting a new subsection (1A), that provides
that “notwithstanding anything in the Principal Act, the relevant tax authority in a State shall
have powers to collect tax under this Act from itinerant workers”. Following from the above,
individuals who now qualify as itinerant workers may find themselves liable to tax in more than
one state. Consequently, such individuals or their employers would need to set up adequate
administrative processes to effectively track the duration of stay and income subject to tax in
the different states.

1.14 PITA Sections 3: Income chargeable and Personal relief

(a) Tax free allowances are no longer available: Section 3 of the PITA has been amended to
highlight the fact that both temporary and permanent employees are liable to PIT. However,
the more important implication of the amendment to this section is the effective deletion of
section 3(1) (b) (ii)-(xii), which provides employees with tax free allowances such as leave
allowance, housing allowance, etc. With the amendment, PITAM has withdrawn all tax free
allowances previously enjoyed by employees under the section, with the exception of
reimbursement of expenses incurred by an employee in the performance of his duties, and
from which the employee is not expected to derive any profit or gain.

1.15 Registration and Collection of Various Taxes, Assessments and Appeals

a. Annual Returns
b. Individuals
c. Identifying Assessable Person
Tax is not imposed in a vacuum; the entity to be taxed and source(s) of the income to be taxed
must be identified.

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An assessable entity is defined as a person whatever artificial or real who resides in any part of
the country in a particular year of assessment with express exemption of religious, charitable,
trade union, labor organizations and government boards, states and corporation.
There are personalities relevant to the process of levying and collecting tax. These persons will
be taxed under different statutes and in different ways and so it is necessary to identify them.
The first is an individual who is within the taxable age and with income, which may be salary,
rent, dividend or interest. He may have shares in companies through which he gets dividend.
He may have money lodged in the bank from which he gets interest or he may have properties
from which he earns rent.
The second person is the individual who is in business. This is the person that has gone to
legalize himself through incorporation. This individual son may take two forms. If he decides to
start a business on his own with no partners or shareholders, he is said to be a sole proprietor.
He bears all the costs and keeps all the profits after the Relevant Tax Authority has taken its cut
in taxes, of course. As a sole proprietor, he has unlimited liability. What this means is that he is
personally responsible for all the business debts. If he borrowed money for the business and
cannot repay the loan, he may be forced into personal bankruptcy.
On the other hand, instead of starting on his own, he may wish to pool his money or expertise
with friends or business associates; and another form of individual businessperson known as
Partnership has come into being. Usually there is a written partnership agreement, which set
out how management decisions are to be made and the rights and duties of partners to the
partnership. This includes partners’ entitlements like salary, interest on capital and share of
profits.
The partners pay personal income tax on their share of profits individually. Partners, like sole
proprietors, have the disadvantage of unlimited liability. If the business runs into financial
difficulties, each partner has unlimited liability for all the business debts, not just his or her
share. However, in practice larger businesses can be set up as limited partnerships, under this,
partners are classified as “General” or “Limited”.

18
General partners manage the business and have unlimited personal liability for the business
debts. Limited partners usually have a restricted role in management, but their liability is
confined to the money they contribute to the business. They can lose everything they put in,
but no more.
Many professional businesses are organized as partnerships. They include the large accounting,
legal, investment and management consulting firms.
Incomes of individual persons are taxed under Personal Income Tax Act 1993 ( as amended by
PITA 2011) with certain exemptions.

1.16 Residency Issues in Taxation

After determination of the tax liability of a person, the question of residency becomes very
important as this resolves the Relevant Tax Authority to which the tax computed is payable.
Resolving the issue of residency also affect the scope and type of relief and deductions that
may be allowed for the purpose of computing taxable income. For example the rent allowance
for a person resident in Lagos is different from person resident in Ago-Iwoye.
The Personal Income Tax Act (1993) considered the question of where a person is deemed to
be resident in a particular year of assessment along the following lines in its first schedule.

1.17 Persons in Employment on 1st January

The Act deems a person who is in a paid employment or trade at the commencement of a
particular year of assessment to be resident for the tax year in a place or principal office (if he
resides in more than one place) of residence in that year of assessment. A place of residence
means a place available for his domestic use in Nigeria on a relevant day. It does not include
any hotel, rest house or other temporary place of abode unless no permanent place is available
for his use on that day.
Principal place of residence in relation to an individual with two or more places of residence on
a relevant day not been both within any one state means:

19
 (a) For a pensioner, with no other source of income it is that place of those places that he
usually residues.
(b) For an individual who has a source of earned income other than a pension in Nigeria, his
principal place of residence is that place of those places, within a relevant day is
nearest to his usual place of work.
(c) For an individual who has a source or sources of unearned income in Nigeria, the
principal place of residence is that place or places in which he usually resides.

1. Persons taking up Employment within the Year

A person taking up an employment/trade during a particular year of assessment is deemed to
be resident for that year in a place where he has a place of residence or principal place of
residence if he resides in two or more places in an assessment year.
2. Persons on leave from Employment at 1st January
An individual who is on leave from a Nigerian employment on the first day of January in a year
of assessment shall be deemed to be resident for that year by reference to his place or principal
place of residence immediately before his leaves began.
3. An Individual who is in Foreign Employment on 1st January
An individual who holds a foreign employment on the first day of January or who first becomes
liable to tax in Nigeria for that year by reason of his entering that employment during the year
and who is not: (a) employed in the Nigeria Army, the Nigerian Navy, the Nigeria Air force, the
Nigeria Police Force except in civilian capacity. (b) an officer of the Nigeria Foreign Service (c)
resident outside Nigeria and at the same time derives income or profit in Nigeria: shall be
deemed to be resident for that year in the territory in which the principal office of his employer
is situated on that day or on the day foreign employment commences as may be the case.
Foreign employment means an employment the duties of which are wholly performed outside
Nigeria save during any temporary visit of the employee to Nigeria.

20
4. Armed Forces Personnel
Persons employ in the Armed Forces (in combatant capacities) are deemed to be resident in the
Federal Capital Territory for tax purpose in a year of assessment.
5. Pensioners
An individual whose only source of income arising in Nigeria on the first day of January in a year
of assessment was a pension and who had a place or principal place of residence shall be
deemed to be resident for that year in the territory in which that place or principal place of
residence was situated on that day.
6. Trustees, Executors, etc
The tax accruing on the estates managed by trustees and executors on a year of assessment is
deemed accrued to the relevant tax authority in charge of a place where the Trustee or
Executor has a place or principle or principal place of business (registered office) in the
assessment year.
7. Itinerant Worker
In the case of an itinerant worker, tax may be imposed for any year by any state, in which the in
itinerant worker is found mostly during the year.
8. Communities
In the case of a village or other indigenous communities, the place of residence is the territory
in which the community is to be found in any year of assessment.

Chargeability to Tax
Section 36 of CITA CAP 60 Law of the Federation, 1990 specifically states that a company shall
be chargeable to tax:
(a) In its own name; or
(b) In the name of any principal officer, attorney, factor, agent or representative of a
company in Nigeria in like manner and to like amounts as such company would be
chargeable; or In the name of a receiver or liquidator, or of any attorney, agent or
representative thereof in Nigeria, in like manner and to like amount as such

21
 company would have been chargeable if no receiver or liquidator has been
appointed.
Assessments
The Federal Inland Revenue Service (FIRS) or State Inland Revenue Service (SIRS) is mandated
by the various Acts to assess every company or person chargeable to tax as may be after the
expiration of the time allowed to such company or person for the filing of return for tax
purposes.
Types of Assessment
There are three main types of assessment. These are:
1. Original Assessment
2. Revised or Amended Assessment
3. Additional Assessment
4. Self-Assessment
Original Assessment
This is the first assessment raided on a tax-payer in a particular tax year. However, a taxpayer
may not agree with the tax authority on this assessment. The taxpayer can thus, make an
objection (by filing a notice of objection).
Revised or Amended Assessment
This is the assessment that is raised to replace an original assessment. This is possible after the
notice of objection raised by the taxpayer has been determined.
Additional Assessment
If the tax authority discovers or is of the opinion at any time that any person or company liable
to tax has not been assessed or has been assessed at a less amount than that which ought to
have been charged, the Board may, within the year of assessment or within six years after the
expiration thereof, assess such person or company such amount or additional amount, as ought
to have been charged. This type of assessment is known as Additional Assessment.

22
Forms of Assessment
1. Provisional Assessment. It is an estimate of tax payable based on the tax paid by the
taxpayer in the preceding year of assessment.
2. Best of Judgment (BOJ) Assessment. This usually occurs where the taxpayer has either
not filed returns or not even registered for tax purposes. The Board will then assess the
taxpayer based on their own judgment.
3. Self-Assessment. It was introduced in 1993. The taxpayer is expected to complete a
standard Self-Assessment Form. The following are incentives for filing of self-
Assessment
i. Non-payment of provisional tax
ii. Grant of instalmental payment, provided they accompany attach evidence of
payment of first installment in their returns.
iii. 1% incentive bonus is granted to all self-assessment filers.

Service of Notice of Assessment

The tax authority shall cause to be served on or sent by registered post to a person or each
company, or person in whose name a company is chargeable, a notice stating:
(a) The amount of total profits
(b) The tax payable, and
(c) The place at which such payment should be made.
When a taxpayer receives a notice of assessment, he either agrees with it or disagrees. Where
he goes, he is required to effect payment of the tax within 60 days from the date of receipt of
the assessment. However, where he is aggrieved, there are laid down procedures to be
followed for the matter to be resolved.
Corporate Bodies
As the individual or individual business person grow, he or they may become aware of the
benefits of another personality very important to the taxman called the company. For Nigeria, a

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“Nigerian Company” is defined in section 84 of CITA 1990 supra as, “any company incorporated
under the Companies and Allied Matters Act 1990 or any enactment replaced by that Act”.
A corporation sole or body of individuals other than a family or community shall be deemed to
be resident for a year of assessment in the territory in which its principal office in Nigeria is
situated on the first day of January in that year or if it has no office in Nigeria on that day, in a
territory in which any part or the whole of its income liable to tax in Nigeria arises for that year.
Any dispute as to the residency of a person in any assessment year shall be referred to the
Board for adjudication by the relevant tax authorities involved.
Unlike a proprietorship or partnership, Company is legally distinct from its owner. It has a
Constitution or Charter called Memorandum of Association, setting out its powers and status as
well as its relationship to the outsiders. The Articles of Association regulate the management of
the internal affairs of the company.
Company may be limited by shares or limited by guarantee. The first type is more suitable for
commercial purposes. There are two types of companies limited by shares, viz: Private
Companies and Public Companies. While a private company is particularly suitable for a small
family business, a public company is formed where there is a business requiring large capital,
which can only be, raised from the public through stock exchange.
Every company including a company granted exemption from incorporation shall at least once
in every year without notice or demand make and deliver to the Board a return together with
the following:
i. The audited account, tax and capital allowance computation and a true and correct
statement in writing containing the amount of profits from each and every source.
ii. A declaration which shall be signed by a Director or Secretary of the company that the
returns contain a true and correct statement of amount of its profit computed in
respect of all sources and that the particulars in such returns are true and complete.

24
Filling of Returns for New Companies
In the case of a newly incorporated company, the submission shall be within eighteen months
from the date of its incorporation or not later than six months after the end of its first
accounting period, whichever is earlier.
Filing of Returns for Existing Companies
For a company that has been in business for more than eighteen months, not more than six
months after the close of the company’s accounting year.

Filling of Tax Returns for Self-Assessment Filer

Self-assessment became mandatory for all companies with effect from 1st January, 1998. A tax
return for self-assessment tax filer comprises the following:
a. Duly completed self-assessment Income Tax Form (IR3C-4COY);
b. Audited financial statements together with the relevant schedules showing assets, trade
debtors, trade creditors etc.;
c. A declaration which shall signed by the Managing Director, a Directors, or Statutory
Secretary of the company indicating that the returns contain a true and correct
statement of the amount of its profits computed in respect of all sources and that the
particulars in such returns are true and complete;
d. Capital allowance computations;
e. Tax computations for the year of assessment;
f. Evidence of direct payment of the whole or part of the tax due into a blank designated
for the payment of tax. If there is no default in payment arrangement, the company is
granted a bonus of 1% of the tax payable.
Lateness in Filing or Failure to File Self-Assessment Returns
a. A penalty of N2, 500 is payable by every company in the first month that failure to file
tax returns occurs and thereafter N500 penalty attends to each month the failure
persists.
b. Denial of installment payment privileges.

25
 c. Forfeiture of 1% bonus for all self-assessment filers.
d. Payment of provisional tax for the year with accrued penalties and interest.
e. Payment of penalty and interest for the period of the default.
Objection to Assessment and Appeal Procedure
Where the taxpayer objects to the assessment made, he is expected to notify the Board in
writing to review and revise the assessment. The Notice of Objection should state precisely the
grounds of objection and must be made within 30 days from the date of service of notice.
Having examined the books and records together with oral interview the tax authority may
revise the assessment and give notice of revision to the company, or the Board may refuse to
revise the previous assessments, it can then issue a notice of refusal to amend. If there is no
compromise between the parties (Board and the company) the matter goes to the body of
appeal commissioners. The taxpayer is expected to file the Notice of Appeal to the Body within
30 days of the receipt of the Notice of Refusal to Amend.
The Notice of Appeal shall specify the following:
(a) Official number of assessment and the tax year
(b) Amount of tax charged by such assessment
(c) Amount of the total profits upon which tax was charged as appeared on the notice of
assessment.
1.18 Collection, Recovery and Payment of Tax
Every company shall pay provisional tax of an amount equal to the tax paid by such company in
the immediately preceding year of assessment in one lump sum or such number of monthly
installments (not being more than six) as may be approved by the Board not later than 3
months from the commencement of each year of assessment.
The tax charged by any assessment which is not or has not been the subject of an objection or
appeal by the company shall be payable within 2 months after service of notice upon the
company and must not be later than 14th December of the year of assessment in which the tax
was charged.

26
It is however, to be noted that the collection of tax in any case where the company has given
notice of an objection or appeal, shall remain in abeyance until such objection or appeal is
determined. After the determination of an appeal, the Board shall serve upon the company a
notice of the tax payable as so determined and that the tax shall be payable within one month
of the date of service of such notice upon the company.
It is pertinent to note that no claim for repayment of tax shall be allowed unless it was made in
writing within 6 years after the end of the year of assessment to which it relates. The Board
shall give a certificate of the amount of tax to be repaid.

Final and Conclusive Assessments

This occurs where:
(a) No valid objection or appeal has been lodged on assessment raised by the Board within
the specified statutory time limit.
(b) No further notice of appeal has been given against the decision of the Body of Appeal
Commissioners or the High Court or Court of Appeal.
(c) The amount of total income or profit or tax liability has been determined and agreed by
the taxpayer

1.19 Establishment of Tax Appeal Tribunals

1. (1) Pursuant to section 59 (1) of this Act, there shall be established a Tax Appeal Tribunal
(hereinafter-referred to as ―the tribunal‖) to exercise the jurisdiction, powers and authority
conferred on it by or under this Schedule.
(2) The Minister may by notice in the Federal Gazette specify the number of zones, matters and
places in relation to which the Tribunal may exercise jurisdiction.

2. Composition of the Tribunal

(1) A Tribunal shall consist of five members (hereinafter referred to as ―Tax Appeal
Commissioners) to be appointed by the Minister.
(2) A Chairman for each zone shall be a legal practitioner who has been so qualified to practice
for a period of not less than 15 years with cognate experience in tax legislation and tax matters.

27
(3) A Chairman shall preside at every sitting of the Tribunal and in his absence the members
shall appoint one of them to be the Chairman.
(4) The quorum at any sitting of the Tribunal shall be three members.

3. Qualifications for appointment as a Tax Appeal Commissioner

A person shall not be qualified for appointment as a Tax Appeal Commissioner unless he is
knowledgeable about the laws, regulations, norms, practices and operations of taxation in
Nigeria as well as persons that have shown capacity in the management of trade or business or
a retired public servant in tax administration.

4. Term of Office
A Tax Appeal Commissioner shall hold office for a term of three years, renewable for another
term of three years only and no more, from the date on which he assumes his office or until he
attains the age of 70 years whichever is earlier.

5. Resignation and Removal

(1) A Tax Appeal Commissioner may by notice in writing under his hand addressed to the
Minister resign his office:

Provided that the Tax Appeal Commissioner shall, unless he is permitted by the Minister to
relinquish his office sooner, continue to hold office until the expiry of three months from the
date of receipt of such notice or until a person duly appointed as his successor assumes his
office or until the expiry of his term of office, whichever is earlier.
(2) A Tax Appeal Commissioner may be removed from office by the Minister on the grounds of
gross misconduct or incapacity after due inquiry has been made and the Tax Appeal
Commissioner concerned has been informed of the reasons for his removal and given an
opportunity of being heard in respect of the reasons.

Salary, Allowances and Conditions of Service of Tax Appeal Commissioners

The salary and allowances payable to and the terms and conditions of service of the Tax Appeal
Commissioners shall be determined by the Revenue Mobilization Allocation and Fiscal
Commission and shall be prescribed in their Letters of Appointment:

Provided that neither the salary and allowances nor the other terms and conditions of service
of a Tax Appeal Commissioner shall be varied to his disadvantage after appointment.
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Filling Up of Vacancies
7. If for reason other than temporary absence, any vacancy occurs in the office of a Tax Appeal
Commissioner, then the Minister shall appoint another person in accordance with the
provisions of this Act to fill the vacancy.

Order Constituting a Tribunal to be Final

8. The question as to the validity of the appointment of any person as a Tax Appeal
Commissioner shall not be the cause of any litigation in any court or tribunal and no act or
proceedings before the Tribunal shall be called into question in any manner on the ground
merely of any defect in the constitution of the Tribunal.

9. Secretary to the Tribunal

(1) The Minister shall appoint for each place or zone where the Tribunal is to exercise
jurisdiction a Secretary who shall-

(a) Subject to the general control of the Tax Appeal Commissioners, be responsible for keeping
records of the proceedings of the Tribunal;

(b) Be the head of the secretariat and responsible for-

i. The day-to-day administration; and

ii. The direction and control of all other employees of the Tribunal

(2) The official address of the Secretary appointed for each zone shall be published in the
Federal Gazette.

Other Staff of the Tribunal, etc.

(1) The Minister shall appoint such other employees as he may deem necessary for the efficient
performance of the functions of the Tribunal and the remuneration of persons so employed
shall be determined by the National Salaries and Wages Commission.

(2) It is declared that employment in the Tribunal shall be subject to the provisions of the
Pension Reform Act and, accordingly, officers and employees of the Service shall be entitled to
pensions and other retirement benefits as are prescribed under the Pension Reform Act.

Jurisdiction of the Tribunal, etc.

29
(1) The Tribunal shall have power to adjudicate on disputes, and controversies arising from
the following tax laws (hereinafter referred to as ―the tax laws‖)-

i. Companies Income Tax Act, CAP. 60 LFN; 1990

ii. Personal Income Tax Act No. 104, 1993

iii. Petroleum Profits Tax Act CAP. 354 LFN; 1990

iv. Value Added Tax Act No. 102; 1993

v. Capital Gains Tax Act CAP. 42 LFN; 1990, and

vi. Any other law contained in or specified in the First Schedule to this Act or other laws
made or to be made from time to time by the National Assembly.

(2) The Tribunal shall apply such provisions of the tax laws referred to in subparagraph (1)
of this paragraph as may be applicable in the determination or resolution of any dispute
or controversy before it.

Criminal Prosecution
Where in the course of its adjudication, the Tribunal discovers evidence of possible criminality;
the Tribunal shall be obliged to pass such information to the appropriate criminal prosecuting
authorities, such as the office of the Attorney-General of the Federation or the Attorney
General of any state of the Federation or any relevant law enforcement agency.

Appeals from Decisions of the Service 249

(1) A person aggrieved by an assessment or demand notice made upon him by the Service
or aggrieved by any action or decision of the Service under the provisions of the tax laws
referred to in paragraph 11, may appeal against such decision or assessment or demand
notice within the period stipulated under this Schedule to the Tribunal.

(2) An appeal under this schedule shall be filed within a period of 30 days from the date on
which a copy of the order or decision which is being appealed against is made, or
deemed to have been made by the Service and it shall be in such form and be
accompanied by such fee as may be prescribed provided that the Tribunal may entertain
an appeal after the expiry of the said period of 30 days if it is satisfied that there was
sufficient cause for the delay.

(3) Where a notice of appeal is not given by the appellant as required under subparagraph
(1) of this paragraph within the period specified, the assessment or demand notices
30
 shall become final and conclusive and the Service may charge interests and penalties in
addition to recovering the outstanding tax liabilities which remain unpaid from any
person through proceedings at the Tribunal.

Appeals by the Service

Service aggrieved by the non-compliance by a person in respect of any provision of the tax laws;
it may appeal to the Tribunal where the person is resident giving notice in writing through the
Secretary to the appropriate zone of the Tribunal.

Procedure before Tax Appeal Tribunal

(1) As often as may be necessary, Tax Appeal Commissioners shall meet to hear appeals in the
jurisdiction or zone assigned to that Tribunal.

(2) Where a Tax Appeal Commissioner has a direct or indirect financial interest in any appeal
pending before the Tribunal or where the taxpayer is or was a client of that Tax Appeal
Commissioner in his professional capacity, he shall declare such interest to the other Tax
Appeal Commissioners and refrain from sitting in any meeting for the hearing of that appeal.

(3) The Secretary to the Tribunal shall give seven clear days’ notice to the Service and to the
appellant of the date and place fixed for the hearing of each Appeal except in respect of any
adjourned hearing for which the Tax Appeal Commissioners have fixed a date at their previous
hearing.

(4) All notices, documents, other than decisions of the Tribunal, may be signified under the
hand of the Secretary.

(5) All appeals before the Tax Appeal Commissioners shall be held in public.
(6) The onus of proving that the assessment complained of is excessive shall be on the
appellant.
(7) At the hearing of any appeal if the representative of the Service proves to the satisfaction of
the Tribunal hearing the appeal in the first instance that-
(a) the appellant has for the year of assessment concerned, failed to prepare and deliver to the
Service returns required to be furnished under the relevant provisions of the tax laws
mentioned in paragraph 11;

(b) The appeal is frivolous or vexatious or is an abuse of the appeal process; or

(c) It is expedient to require the appellant to pay an amount as security for prosecuting the
appeal, the Tribunal may adjourn the hearing of the appeal to any subsequent day and order
the appellant to deposit with the Service, before the day of the adjourned hearing, an amount,
on account of the tax charged by the assessment under appeal, equal to the tax charged upon
31
the appellant for the preceding year of assessment or one half of the tax charged by the
assessment under appeal, whichever is the lesser plus a sum equal to ten percent of the said
deposit, and if the appellant fails to comply with the order, the assessment against which he
has appealed shall be confirmed and the appellant shall have no further right of appeal with
respect to that assessment.
(8) The Tribunal may, after giving the parties an opportunity of being heard, confirm, reduce,
increase or annul the assessment or make any such order as it deems fit.

(9) Every decision of the Tribunal shall be recorded in writing by the Chairman and subject to
the provisions of paragraph 16, a certified copy of such decision shall be supplied to the
appellant or the Service by the Secretary, upon a request made within 30 days of such decision.

(10) Where upon the hearing of an appeal-

(a) No accounts, books or records relating to profits were produced by or on behalf of the
appellant;
(b) such accounts, books or records were so produced but rejected by the Tribunal on the
ground that it had been shown to its satisfaction that they were incomplete or
unsatisfactory;

(c) the appellant or his representative, at the hearing of the appeal, has neglected or
refused to comply with a notice delivered or sent to him by the Secretary to the
Tribunal, without showing any reasonable cause; or

(d) the appellant or any person employed, whether confidentially or otherwise, by the
appellant or his agent (other than his legal practitioner or accountant acting for him in
connection with his ability to tax) has refused to answer any question put to him by the
Tribunal, without showing any reasonable cause the Chairman of the Tribunal shall
record particulars of the same in his written decision.

Procedure following decision of the Tribunal

(1) Notice of the amount of the tax chargeable under the assessment as determined by the
Tribunal shall be served by the Service upon the taxpayer or upon the person in whose name
such taxpayer is chargeable.

(2) An award or judgment of the Tribunal shall be enforced as if it were a judgment of the
Federal High Court upon registration of a copy of such award or judgment with the Chief
Registrar of the Federal High Court by the party seeking to enforce the award or judgment.

32
(3) Notwithstanding that an appeal is pending, tax shall be paid in accordance with the decision
of the Tribunal within one month of notification of the amount of the tax payable in pursuance
of subparagraph (1) of this paragraph.

Appeal to the Federal High Court

17.
(1) Any person dissatisfied with a decision of the Tribunal constituted under this Schedule may
appeal against such decision on a point of law to the Federal High Court upon giving notice in
writing to the Secretary to the Tribunal within 30 days after the date on which such decision
was given.

(2) A notice of appeal filed pursuant to subparagraph (1) of this paragraph shall set out all the
grounds of law on which the appellant's case is based.

(3) If the Service is dissatisfied with the decision of the Tribunal, it may appeal against such
decision to the Federal High Court on points of law by giving notice in writing as specified in
subsection (1) of this section to the Secretary within 30 days after the date on which such
decision was given.

(4) Upon receipt of a notice of appeal under subparagraph (1) or (2) of this paragraph, the
Secretary to the Tribunal shall cause the notice to be given to the Chief Registrar of the Federal
High Court along with all the exhibits tendered at the hearing before the Tribunal.

(5) The Chief Judge of the Federal High Court may make rules providing for the procedure in
respect of appeals made under this Act and until such rules are made, the Federal High Court
rules relating to hearing of appeals shall apply to the hearing of an appeal under this Act.

Right to Legal Representation

(1) A complainant or appellant, as the case may be, may either appear in person or authorize
one or more legal practitioners or any of its officers to represent him or its case before the
Tribunal.

(2) Every individual or company in a case before the Tribunal shall be entitled to be represented
at the hearing of an appeal by a solicitor or chartered accountant or adviser provided that, if
the person appointed by the taxpayer to be representative in any matter before the Tribunal is
unable for good cause to attend hearing thereof, the Tribunal may adjourn the hearing for such
reasonable time as it deems fit, or admit the appeal to be made by some other person or by
way of a written address.

33
Application of Statute of Limitation
The provisions of any statute of limitation shall not apply to any appeal brought before the
Tribunal.

Powers and procedures of the Tribunal

(1) The Tribunal may make rules regulating its procedures.

(2) The Tribunal shall, for the purposes of discharging its functions under this Schedule,
have power to:
i. Summon and enforce the attendance of any person and examine him on oath;

ii. Require the discovery and production of documents;

iii. Receive evidence on affidavits;

iv. Call for the examination of witnesses or documents;

v. Review its decisions;

vi. Dismiss an application for default or deciding matters exparte;

vii. Set aside any order or dismissal of any application for default or any order
passed by it exparte; and

viii. Do anything which in the opinion of the Tribunal is incidental or ancillary to its
functions under this Schedule.

(3) Any proceeding before the Tribunal shall be deemed to be a judicial proceeding and the
Tribunal shall be deemed to be a civil court for all purposes.

Minister to make Rules and Regulations

21. The Minister may make rules prescribing the procedure to be followed in the conduct of
appeals before the Tribunal.

Costs
22. Each party to an appeal shall bear its own cost.

Further Appeals
23. An appeal against the decision of the Federal High Court at the instance of either party shall
lie to the Court of Appeal.

34
(1) A Tax Appeal Tribunal is established, as provided for in the fifth Schedule to this Act.

(2) The Tribunal shall have power to settle disputes arising from the operations of this Act and
under the First Schedule.

Relevant Tax Authorities

There are three (3) tax authorities representing the 3 tiers of government:
• Federal Government (FIRS) - Federal Inland Revenue Service
• State Government (SIRS) - State Internal Revenue Service
• Local Government - Revenue Committee

Federal Inland Revenue Service (FIRS)

Federal Inland Revenue Service (FIRS) is the federal tax authority and was created by the
Companies Income Tax Act (CITA) of 1979 and now under the FIRS Establishment Act, 2007. The
Board responsible for its management is Federal Inland Revenue Service Board (FIRSB).

Composition of the Board (FIRSB)

The Act stipulates the membership of the FIRSB as follows:
(1) There is established for the Service a board to be known as the Federal Inland Revenue
Service Board which shall have overall supervision of the Service as specified under this
Act.
(2) The Board shall consist of:
(a) The Executive Chairman of the Service who shall be experienced in taxation as Chairman
to be appointed by the President and subject to the confirmation of the Senate;
(b) Six members with relevant qualifications and expertise who shall be appointed by the
President to represent each of the six-geo-political zones;
(c) A representative of the Attorney-General of the Federation;
(d) The Governor of the Central Bank of Nigeria or his representative;
(e) A representative of the Minister of Finance not below the rank of a Director;
35
 (f) The Chairman of the Revenue Mobilisation, allocation and Fiscal Commission or his
representative who shall be any of the commissioners representing the 36 states of the
Federation;
(g) The Group Managing Director of the Nigerian National Petroleum Corporation or his
representative who shall not be below the rank of a Group Executive Director of the
Corporation or its equivalent;
(h) The Comptroller-General of the Nigerian Customs Service or his representative not
below the rank of Deputy Comptroller-General.
(i) The Registrar-General of the Corporate Affairs Commission or his representative not
below the rank of a Director; and
(j) The Chief Executive Officer of the National Planning Commission or his representative
not below the rank of a Director;
(3) The members of the Board, other than the Executive Chairman, shall be part-time
members.

Powers and Duties of the FIRSB

FIRSB has the powers to assess and collect taxes on behalf of Federal Government.
The Board shall
(a) Provide the general guidelines relating to the functions of the Service;
(b) Manage and superintend the policies of the Service on matters relating to the
administration of the revenue, assessment, collection and accounting system under this
Act or any enactment or law;
(c) Review and approve the strategic plans of the Service;
(d) Employ and determine the terms and conditions of service including disciplinary
measures of the employees of the Service;
(e) Stipulate remuneration, allowances, benefits and pension of staff and employees in
consultation with the National Salaries, Income and Wages Commission; and

36
 (f) Do such other things in its opinion that are necessary to ensure the efficient
performance of the functions of the Service under this Act.

Technical Committee of the Board

This is also a creation of the Companies Income Tax Act, 1979 as amended. It has the following
as members:
i. Executive chairman as who is also the chairman the service
ii. All directors and heads of department of the Federal Inland Revenue Service
iii. The legal adviser to the Board
iv. The Board Secretary.

The committee has power to co-opt additional member(s) as may be required in the discharge
of its duties. It has the following functions to carry out:
(i) To consider tax matters requiring professional and technical expertise and make
recommendations to the Board.
(ii) To advise the board on its powers and duties.
(iii) To carry out any other duty assigned to it by the Board.

The State Internal Revenue Service Board

The State Internal Revenue Service was established by the Personal Income Tax Decree of 1993
as the state tax authority. The operational arm of the board is the State Internal Revenue
Service Board. The PITD (1993) Section 85A (1) provides a uniform composition for the boards
in all the states of the federation.
The composition is as follows:
(a) The executive head of internal revenue service who shall be designated as the chairman
of the Board. He shall be a person experience in tax matters and be appointed by the
State government from within the State service.

37
 (b) Three person nominated by the commissioner of finance of the State on their personal
merits.
(c) All the directors and head of the State Internal Revenue Service.
(d) A director from the State Ministry of Finance.
(e) The legal adviser to the Board.
(f) The secretary to the Board who shall be an ex-officio member appointed by the Board
from within SIRSB.

Functions of the Board (SIRSB)

(a) Ensuring the effectiveness and optimum collection of all taxes and penalties due to the
government under the relevant laws.
(b) Doing all such things that may be deemed necessary and expedient for the assessment
and collection of the tax and shall account for all amounts so collected in a manner to be
prescribed by the commissioner.
(c) Making recommendations, where appropriate to the Joint Tax Board on tax policies, tax
reforms, tax legislation, tax treaties and exemption as may be required from time to
time.
(d) Generally controlling the management of the service on matters of policy subject to the
provisions of the law setting up the service.
(e) Appointing, promoting, transferring and imposing discipline on employees of the State
service.

Technical Committee of the SIRSB

The technical committee of the Board of the State Internal Revenue was also established by the
Personal Income Tax Decree (1993). It comprises of the following as members.
(i) The chairman of the State Board of Internal Revenue who is also the chairman of the
technical committee.
(ii) All the directors of the State Internal Revenue Service.

38
 (iii) The legal adviser to the State Board.
(iv) The secretary to the technical committee.

Functions of the State Technical Committee of SIRS

To advice the State Board on matters that require professional and technical expertise.
To carry out any other duty assigned to it by the State Board.

Joint Tax Board (JTB)

The Joint Tax Board was established, by Section 85 of PIT as amended. Its function includes
among other things, mediation between tax authorities of the States and Federation in case of
tax disputes. The compositions of the Board as provided by the Personal Income Tax Decree of
1993 are as follows:
i. The Chairman of the Federal Inland Revenue Service who is also the Chairman of the
Joint Tax Board
ii. One member from each State of the federation, being a person experienced in tax
matters nominated by the Commissioner of Finance
iii. The secretary to the board who shall be an officer experienced in tax matters, appointed
by the federal civil service commissioner, though not a member, but he is responsible
for keeping records of the board’s proceedings and performing other administrative
duties; and
iv. The legal adviser of the Federal Inland Revenue Service Board is to be in attendance at
the board’s meeting and is to be the legal adviser to the board.

The Power and Duties of the Joint Tax Board

The Personal Income Tax Decree of 1993 stipulates the powers and duties of the Joint Tax
Board as follows:

39
 i. To exercise the powers or duties conferred on it by express provision of this decree, and
any other powers, and duties arising under this decree which may be agreed by the
government of each territory to be exercised by the board.
ii. To exercise powers and perform duties conferred on it by any enactment of the Federal
Government imposing tax on the income and profit of companies or which may be
agreed by the minister or to be exercised or performed by it under the enactment in
place of the Federal Inland Revenue Service Board.
iii. To advice the federal government, requests, in respect of double taxation arrangement
concluded or under consideration with any other country, and in respect of rates of
capital allowances and other taxation matters having effect throughout Nigeria and in
respect of any proposed amendment to this decree.
iv. To use its best endeavours to promote uniformity both in the application of tax laws and
in the incidence of tax on individuals throughout Nigeria.
v. Impose its decision on matters of procedure and interpretation of this decree on any
state for purpose of conforming to agreed procedure or interpretation.
vi. Processing for approval, decisions on provident funds schemes which are to be
recognized as tax allowance for deductions.
vii. Resolving any dispute in determination of residence between taxpayers and a tax
authority.
viii. To exercise any other powers or duties arising under the decree that may be agreed to
by government of each State.
ix. From the above powers and duties, it could be seen that the JTB harmonizes tax
administration in the country.
State Joint Revenue Committee
This is established for each State of the federation. It shall comprise:
(a) The chairman of the State Internal Revenue Service as the chairman
(b) The chairman of the Local Government Revenue Committees.

40
 (c) A representative of the Bureau on Local Government Affairs not below the rank of a
director.
(d) A representative of the Revenue Mobilization Allocation and Fiscal Commission, as an
observer.
(e) The State Sector Commander of the Federal Road Safety Commission, as an observer.
(f) The legal adviser of the State Internal Revenue Service.
(g) The secretary of the committee who shall be a staff of the State Internal Revenue
Service.

Functions of the State Joint Revenue Committee

(i) Implementing decisions of the Joint Tax Board.
(ii) To advice the Joint Tax Board and the State and Local Government on revenue matters.
(iii) Harmonize tax administration in the state.
(iv) Enlighten members of the public generally on State and Local government revenue
matters.
(v) Carry out such other functions as may be assigned to it by the Joint Tax Board.

The Local Government Revenue Committee

The local government revenue committee is the local government tax authority. The committee
was established by the provision of Section 85 of Personal Income Tax Decree of 1993. The
committee is empowered to collect taxes at the local government level. The taxes to be
collected by the local government revenue committee are listed in appendix one of the decree.
The compositions of the governing body of the revenue committee are as follows:
(i) The chairman who is the supervisor of finance.
(ii) Three local government councillors.
(iii) Two persons to be nominated by the chairman of the local government. Those to be
nominated must be experienced in revenue matters.

41
Functions of the Revenue Committee
(i) It shall be responsible for the assessment and allocation of all taxes, fines and rates
under its jurisdiction and shall account for all amounts so collected in a manner to
be prescribed by the chairman of the local government.
(ii) It shall be autonomous of the local government treasury and be responsible for the day
to day administration of the department, which form its operational arm.
(iii) Advice the local government on tax related matters.

1.20 Review Questions

1. When can an assessment be said to be final and conclusive?

Solution

An Assessment Becomes Final and Conclusive

(i) When no valid objection has been lodged within time limit stated in the notice of
assessment.
(ii) Where a tax payer and the Board have agreed as to the amount of tax liability of the
tax payer after a valid objection has been made.
(iii) Where no valid appeal has been lodged against decision of the Tax Appeal Tribunals
or a judge.

2. An aggrieved taxable person may appeal against an excessive assessment to a relevant

tax authority:
(i) What is the time limit allowed for such appeal?
(ii) State six contents of such notice of appeal.

Solution
(i) An aggrieved person may appeal against the assessment on giving notice within thirty days
after the date of service of notice of the refusal of the relevant tax authority to amend the
assessment as desired.
(ii) The contents of notice of appeal to be given to relevant tax authority in writing are:
(a) The name and address of the applicant.
42
 (b) The official number and the date of the relevant notice of assessment.
(c) The amount of the assessable, total or chargeable income and of the tax charged as
shown by that notice and the year of assessment concerned.
(d) The precise grounds of appeal against the assessment.
(e) The address for service of any notice of other documents to be given to the
applicant.
(f) The date on which the applicant was served with notice of refusal by the relevant
tax authority to amend the assessment as desired.

3.
(a) State the benefits of the Self-Assessment System.
(b) Write short notes on:
(i) Final and conclusive Assessment.
(ii) Best of Judgment Assessment.
(iii) Time limit for paying tax.

Solution
(a) Benefits of the Self-Assessment System
These include:
▪ Returns can be filed by new corporate entities not later than 18 months from the
date of commencement or six months after the company’s financial year;
▪ Tax collection costs would be reduced;
▪ Concession may be granted on application for the tax liability to be paid
instalmentally;
▪ Exemption from payment of provisional tax;
▪ It accelerates the pace of tax collection with the attendant cash flow benefits to
government; and
▪ The long time-lag between the submission of returns and the service of the notices
of assessment would be eliminated.
(b) (i) Final and Conclusive Assessment
An assessment raised on a company is said to be final and conclusive where:
▪ No valid objection or appeal has been lodged against the amount of total profits
assessed on a company within the time statutorily allowed for that purpose, or
▪ The amount of total profits has been agreed by the tax payer after his objection has
been determined by Federal Inland Revenue Service or State Internal Revenue
Service; or

43
 ▪ The amount of total profits has been determined on appeal.
(ii) Best of Judgment Assessment
The Federal Inland Revenue Service will assess a company to tax based on its “Best of
Judgment” under the following situations:
▪ Where a company files its returns, audited accounts and tax computations, the tax
authority may refuse to accept same if found unsatisfactory and therefore proceed
to determine, based on its ‘Best of Judgment’, the company’s total profits and raise
an assessment accordingly;
▪ Where a company has failed to submit self-assessment returns, audited accounts,
etc.; and the Federal Inland Revenue Service is of the opinion that it is liable to tax, it
may proceed, based on its ‘Best of Judgement’ to determine the total profits of such
a company and raise an assessment accordingly.

(iii) Time Limit for Paying Tax

The time limit for the payment of income tax depends on whether or not the tax payable
has been determined by;
▪ an assessment raised by the Federal Inland Revenue Service on a company or the
relevant tax authority in respect of individuals,
▪ Self-assessment filed by the company.

44
 MODULE 2

2.00 GENERAL PRINCIPLES OF TAXATION

2.01 Learning Outcome

On successful completion of this Module, Students should be able to:

i. Appraise the meaning, types and the purpose of capital allowances and be able to apply
these to various qualifying capital expenditure;
ii. Determine and compute basis period and loss reliefs;
iii. Examine the basic principles for balancing charge and balancing allowance;
iv. Analyze the basis for dealing with changes in accounting date;
v. Prepare Capital allowances computations in accordance with the applicable provisions
of CITA/PITA.

2.02 Basis Period

Introduction

The principle guiding the determination of basis period of assessable profits for companies and
assessable income for individual business person is the same. Basis period of assessment is the
period, the profit of which is to be assessed in a year of assessment. It is the period of business
activity to be taken into account in determining the tax liability of a chargeable person in a
particular year of assessment.

Importance of Correct Determination of Basis Period

The importance of correct determination of basis period cannot be over emphasized because of
the following reasons:

(a) It aids the tax authority in making an all-inclusive assessment of tax payers’ profits
whereby a profit is not taxed twice while no portion of taxable profit is left
unassessed.

(b) It helps in the determination of the appropriate grant of capital allowances as well as
the carry forward of such capital allowances.

(c) In computation of loss relief, the correct identification of basis periods helps in
determining the set off as well as lapsing of losses.
45
Normal Basis Period of Assessment

A preceding year basis is mostly applicable where the basis period is normal. That is, the profit
that will be taxed in this year of assessment is the profit of the previous year.

The following features characterize normal basis period:

(a) It must be of 12 months duration.

(b) It must be the only accounting period ending in a preceding fiscal or tax year.

(c) It must also be commenced from a day immediately after the end of the previous year
that is, there is an element of continuity. There must be no gap or coincidence of
dates; one basis period must commence the day after the end of the previous one.

These conditions will apply to a person in continuous business.

At this juncture we must clearly define certain terms used in defining normal basis period.

The terms are:

Accounting Year or Accounting Period, Fiscal or Tax Year

Accounting Year: Accounting year is the period chosen and consistently followed by a business
to report on its financial situation. This is done through preparation of financial statements
covering the accounting year, which is usually twelve months. To avoid complications it is
advisable that a company choose an accounting year that tally with that of government fiscal
year. However, an individual businessperson is free to choose its accounting year.

Fiscal Year: This is the government accounting year. In Nigeria it presently runs from January –
December. It is also called tax year or year of assessment. The federal government changed its
fiscal year end from 31st March to 31st December with effect from 1980.

Abnormal Basis Period

The following are examples of situations where normal basis period will not apply:

(a) Where a business has just commenced operation

(b) Where a business has ceased operation

(c) Where there is a change in accounting date

Basis Period of a Company Just Commencing Business

46
There are commencement rules guiding assessment of a company that is starting business
newly. The normal basis period cannot apply because there will be no profits of preceding
accounting period from which assessment can derive.

In the ascertaining the assessable profit for any person commencing trade or business newly,
three years account must be submitted.

The first of which must be an account made up from the date of commencement of trade or
business to the end of the fiscal year.

The second of which must be a 12 months profit made up from the date of commencement.

For the third year, the assessable profits shall be the profit of the company for the accounting
year ending in the preceding year of assessment, that is, normal basis period. However in the
third year of assessment, if the accounting period that ended in the preceding year is less than
12 months, the Board will exercise discretion in adoption one of the following three methods in
arriving at the assessable profits.

(i) Adopt the profits of the second year, which is of 12 months duration

(ii) Adopt the 12 months that ended in the preceding 31st December.

(iii) Use the profits of the first year but grossed up to 12 months.

In this book we adopted the first method; which is also the method commonly preferred in
professional examinations. However in practice the Board may want to select the one that
result in the highest assessable profit.

Illustration

A company commenced business from 1st August 2002 and prepared accounts to 31st March
2003 and thereafter decide to retain 31st March as its accounting year-end. Determine the basis
period for the relevant tax years.

Tax Year Basis Period of Assessment

2002 1.8.02 – 31.12.02

2003 1.8.02 – 31.7.03

2004 1.8.02 – 31.7.03*

2005 (PYB 2004) 1.4.03 – 31.3.04

47
*In the 3rd year of assessment and in a case of company making up its account to any period
before the commencement period or any month before the commencement month. It is not
likely to get a normal 12 month basis period ending in the preceding tax year and as such the
same basis period as in the second year is used.

A/c made up to – 31/3

Commencement – 1/8

March is before August

Since the company commenced business in August 02, it could not, therefore, have profit to be
assessed for January, February, March, April, May, June, July.

Another situation where preceding year basis will not operate is where the first account
prepared for a period is in excess of 12 months. You will use again the basis period of the 2nd
year of assessment for the 3rd year of assessment.

Illustration 2

The recent financial results of a company adjusted for tax purposes are as follows:

8 months to 31st March, 2002 130,000

Year to 31st March, 2003 150,000

Year to 31st March, 2004 160,000

Year to 31st March, 2005 180,000

You are required to determine the relevant basis periods for assessment and the assessable
profits.

Tax Year Basis Period of Assessment Assessable Profit

2001 1st Year 1.8.01 – 31.12.01 5/8 x 130,000 = 81,250

2002 2 nd Year 1.8.01 – 31.7.01 8/8 x 130,000 +

4/12 x 150,000 = 180,000

48
2003 3rd Year 1.8.01 – 31.7.02 8/8 x 130,000 +

5/12 x 150,000 = 180,000

441,250

2004 4th Year (PVB) 1.4.02 – 31.3.2003 150,000

2005 5th Year (PVB) 1.4.03 – 31.3.2004 160,000

Accounting year and applicable profits

1.8.01 – 31.3.02, N130,000 (8 months)

1.4.02 – 31.3.03, N150,000 (12 months)

1.4.03 – 31.3.04, N160,000 (12 months)

1.4.04 – 31.3.05, N180,000 (12 months)

Illustration

Let us consider an example where the first account was made up to a period that is more than
12 months.

A company adjusted for tax profits are as follows: N

20 months to 31.5.02 600,000

Year to 31.5.03 800,000

Year to 31.5.04 900,000

Year to 31.5.05 1,000,000

Calculate the basis period of assessment and the assessable profit for the first five tax years.

Basis Period of Assessment Assessable Profit N

Tax Year 00 1.10.00 – 31.12.00 3/20 x 600,000 = 150,000

Tax Year 01 1.10.00 – 30.9.01 12/20 x 600,000 = 360,000

Tax Year 02 1.10.00 – 30.9.01 12/20 x 600,000 = 360,000

870,000
49
Tax Year 03 (PYB 02) 1.6.01 – 31.5.02 12/20 x 600,000 = 360,000

Tax Year 04 (PYB 03) 1.6.02 – 31.5.03 800,000

Illustration 4

We shall now consider where a company accounting year-end is after commencement month.

A company makes up its account to 31st October each year; the results for the following years
are as follows: N

3 months to 31.10.01 300,000 1.8.01 – 31.10.01

Year to 31.10.02 450,000 1.11.01 – 31.10.02

Year to 31.10.03 600,000 1.11.02 – 31.10.03

Year to 31.10.04 800,000 1.11.03 – 31.10.04

You are required to determine the basis period and assessable profit for the 3 years of
assessment.

Tax Year Basis Period of Assessable Profit N

2001 1.8.01 – 31.12.01 300,000 + 2/12 x 450,000 = 375,000

2002 1.8.01 – 31.7.02 300,000 + 9/12 x 450,000 = 637,500

2003 (PYB 2002) 1.11.01 – 31.10.02 = 450,000

Please note that PYB operates easily for the third year of assessment since the company makes
up its account to 31st October, which is after the commencing month of August.

Illustration

Where the first account made up is for some period more than 12 months, even if, the
company accounting year-end is after the commencement month; the rule that the result of
the second year of assessment will be used for the 3rd year of assessment will apply.

We shall use the immediate example in illustration to illustrate this point but with the
assumption that the first account was made up to 15 months. N

15 months to 31.10.2001 300,000

50
Year to 31.10.2002 450,000

Year to 31.10.2003 600,000

Year to 31.10.2004 800,000

You are required to determine the basis period and the assessable profit for the first four years
of assessment.

Tax Year Basis Period of Assessable Profit

2000 1.8.00 – 31.12.00 5/15 x 300,000 = 100,000

2001 1.8.00 – 31.7.01 12/15 x 300,000 = 240,000

2002 1.8.00 – 31.7.01 12/15 x 300,000 = 240,000

580,000

2003 (PYB 2002) 1.11.01 – 31.10.02 = 450,000

Change of Accounting Date

When there is a change of accounting date the Revenue has power to compute as it deems fit
the assessable profits for:

(i) The year of assessment in which the change occur; and

(ii) two years of assessment following the year of change.

The assessable profits will be computed on the basis of the old and the new accounting dates
for the three relevant years and the Revenue will decide on the alternative that produces
higher assessable profits. Note that the preceding year rule is strictly observed throughout the
computations.

Illustration

Format Construction Nigeria Ltd., is an incorporated company in Nigeria with affiliates

worldwide. It has been operating in Nigeria for many years and prepares its accounts to 31
December of every year. The controlling company for all the affiliates worldwide which has its
registered office in Sweden had also been preparing its accounts to 31 December of every year,
until 1993. When it decided at its board meeting that all affiliated companies worldwide must
51
submit copies of their 12 months audited accounts two months before 31 December of every
year, beginning from 1993.

There are two alternatives the Board of Directors of Format Construction Nigeria Ltd. is
considering:

To prepare accounts for the year ending within 1994, to end in:

a) June, 1994 or

b) September 1994

As a Tax Consultant, your advice is sought, so as to ascertain the financial year-end that would
minimize the assessable profits on which tax is payable for those periods. The following
information was provides: N

Net Profit per accounts for 12 months ended 31 Dec. 1992 200,000

Net Profit per accounts for 12 months ended 31 Dec. 1993 500,000

Net Profit per accounts for 12 months ended 31 Dec. 1994 600,000

Net Profit per accounts for 12 months ended 31 Dec. 1995 700,000

Other information in respect of the accounts for the year ended 31 st December are as follows:

1992 1993 1994 1995

N N N N

Depreciation Charged 20,000 50,000 55,000 70,000

Loss on Sales of Assets Included ( 5,000)

You are required to:

Advise with supporting computations on the new accounting year-end which the Nigerian
company should adopt.

Suggested Solution

Format construction Nigeria Limited

The profits presented shall be adjusted for tax purposes

52
 1992 1993 1994 1995

N N N N

Profit per A/Cs 200,000 500,000 600,000 700,000

Add back: Depreciation 20,000 50,000 55,000 70,000

Loss on sale of assets _____ _____ 5,000 ______

Adjusted profits 220,000 550,000 660,000 770,000

The year of change with the proposal is 1994 assessment year. The Revenue will compute as
they think fit the assessments for 1994 (the year of change). On the basis of June, as the new
accounting date:

Alternative 1: Old Accounting Date, 31/12 N

1994 1/1/93 to 31/12/93 550,000

1995 1/1/94 to 31/12/94 660,000

1994 1/1/95 to 31/12/95 770,000

Alternative 2: New Accounting Date, 30/6 N

1994 1/7/93 to 30/6/93 6/12x N220,000 + 6/12 x N550,000 385,000

1995 1/7/94 to 30/6/94 6/12x N550,000 + 6/12 x N660,000 605,000

1994 1/7/94 to 30/6/95 6/12x N660,000 + 6/12 x N770,000 715,000

Revenue compares the two, as follows:

Assessment Year Old 31/12 New 30/6

N N

1994 550,000 385,000

1995 660,000 605,000

1996 770,000 715,000

Total for the three years 1,980,000 1,705,000

53
Revenue chooses the alternative that produces the higher assessable profits, that is, the
assessments are: N

1994 550,000

1995 660,000

1996 770,000

On the basis of 30th September:

The alternative on the basis of the old accounting date of 31 December, will be as before.

The Alternative on the New Accounting Date, 30/9 N

1994 1/10/93 to 30/9/93 3/12x N220,000 + 9/12 x N550,000 467,500

1995 1/10/94 to 30/9/94 3/12x N550,000 + 9/12 x N660,000 632,500

1994 1/71094 to 30/9/95 3/12x N660,000 + 9/12 x N770,000 742,500

Revenue compares the two, thus:

Assessment Year Old 31/12 New 30/9

N N

1994 550,000 467,500

1995 660,000 632,500

1996 770,000 742,500

Total for the three years 1,980,000 1,842,500

Cessation of trade or business

Year of Cessation-profits for the period 1 January to the date of cessation.

Penultimate Year- The assessment year before the year of cessation is termed the penultimate
year. The assessment for this year which would have been based on the preceding year basis
would be re-computed on actual year basis. If the amount assessable on actual basis is greater

54
than that on preceding year basis, the Inland Revenue will opt to have the assessment for that
year revised to actual year basis.

It is to be noted that it is the Revenue that has this option at cessation. The taxpayer’s option is
available at commencement.

Where a company which has permanently ceased to carry on a trade or business subsequently
receives or pays any sum which would have been included in or deducted from the profits of
that trade or business if it had been received or paid prior to the date of cessation such sum is
treated as having been receive or paid on the date of cessation.

A company ceasing permanently to carry on a trade shall not be deemed to derive assessable of
profits from such trade for the year of assessment following that in which the cessation occurs.

2.03 Loss Relief

Relief for trading losses is a topic that can be examined in the context of almost any income tax
question. Consequently, the student must have a very sound grasp of the manner in which a tax
payer can utilize trading loses. The module begins by describing the methods of loss relief. Next
it proceeds with how to compute loss relief in the current year and carry forward. The module
also describes how to deal with opening year losses and the circumstances in which the tax
payer may obtain the benefits of double aggregation of the loss.

Methods of Loss Relief

When tax payers make profits, the Government through its agents Federal Board of Inland
Revenue and State Internal Revenue Board will compute and collect taxes on profits. It
therefore implies that whenever the tax payers incur losses, there ought to be a means of
compensating them. However one crude way of doing it is to expect the Government at both
levels to refund the amount of loss made by the tax payers. Where this is done, the business
may become lackadaisical about its profitability objective.

However, the tax authority found solace in the principle of loss relief. The principle states that
when a business unit incurs a loss in a particular accounting year or year of assessment, that
loss can be deducted in future accounting year or year of assessment when the profit is made
before the determination of tax liability.

Where a sole trader incurs a loss from his trade or business, relief is available against the profit
of subsequent year. In the treatment of losses incurred by an individual there are two methods
of relief’s available. They are:

55
 i. Carry forward loss relief; and

ii. Current year loss relief.

Current Year Loss Relief

i. It is available only to individuals i.e. only applicable under Personal Income Tax

ii. Losses are treated on actual year basic loss for the year ended 31/12/91 is treated as
loss for 1991 YOA.

iii. Current year loss can be relieved from all sources of income accrued to the individual.

iv. For this relief to be granted a claim in writing must be made by the tax payer to the tax
authority within twelve months after the year of assessment in which the loss was
incurred.

v. Any amount of current year loss that is not fully relieved under the current year
automatically becomes carry forward loss and when losses are carried forward they
can only be relieved from the same source from which the loss was incurred
originally.

It is important to note the application and the practice of law on loss relief:

i. Losses may only be carried forward for a maximum period of four years after which it
lapses.

ii. Losses to be set-off may not exceed the actual loss incurred by a trade or business. This
is important because where losses are used in aggregation; the aggregate loss will
usually exceed the actual loss incurred. The difference between the aggregate losses
and the actual loss is defined as a notional loss which is not available for relief.

Carry Forward Loss Relief

i. It is available to both individuals and corporate bodies.

ii. Losses can only be set off against the income from which the loss was incurred. This
means the losses cannot be set-off against any other source of income.

iii. The relief is done on preceding year basis.

iv. There is no need for a written application by the tax payer as it is automatically granted.

56
 v. Losses incurred by a property letting business can only be set-off under the carrying
forward system.

Illustration of Loss Relief Carried Forward

Omosede & Sons Enterprises gives you the following information in relation to its financial
position Year ended Profit (Loss) N

30/9/2012 (720,000)

30/9/2013 320,000

30/9/2014 420,000

Required: Show the procedure for his loss relief

Suggested Solution:

OMOSEDE & SONS ENTERPRISES

Procedure for showing Loss Relief

YOA BP N

2003 1/10/11 – 30/9/12 LOSS FTY (720,000)

URL c/f 720,000

2004 1/10/12 – 30/9/13 PROFIT 320,000

LOSS b/f (720,000)

Loss RTY 320,000 (320,000)

URL c/f 400,000

Total profit 0

2005 1/10/13 – 30/9/14

PROFIT 420,000

57
 LOSS b/f (400,000)

LOSS RTY 400,000 (400,000)

Total profit 20,000

KEY:

LOSS FTY - Loss for the years

URL C/F - Unrelieved loss carried forward

LOSS B/F - Loss Brought forward

LOSS RTY - Loss relieved in the year

Demonstration of Loss Relief (Lapsed Loss)

It must be borne in mind that prior to 1985 year of assessment, the tax payer relieved losses
suffered against future adjusted profit until the loss is fully relieved. With effect from 1985 year
of assessment till date with the exception of agricultural business which can relief losses
indefinitely carrying forward of loss against future profit has been restricted to four years.
Thereafter any outstanding residue shall become lapsed.

Illustration

The following information relates to Chief James Ovienmada Enterprises in Oyese Sopping Plaza
businessman is as follows

Year ended Date Detail Adjusted Profit (N)

Year ended 30/6/99 Loss (400,000)

Year ended 30/6/00 Adjusted Profit 100,000

Year ended 30/6/01 Adjusted Profit 40,000

Year ended 30/6/02 Adjusted Profit 20,000

Year ended 30/6/03 Adjusted Profit 20,000

Required: Demonstrate, using the above date the principle of lapsed loss.

58
Suggested Solution: Chief james Ovienmada Enterprises

Demonstration of Lapsed Loss.

YOA Basis Period Detail N N

2000 1/7/98 – 30/6/99 Loss (FTY) (400,000)

C/F 400,000

Total Profit

2001 1/7/99 – 30/6/00 Adjusted profit 100,000

Loss b/f (400,000)

Loss RTY 100,000 (100,000)

UR c/f (300,000)

Total profit 0

2002 1/7/00 – 30/6/01 Adjusted profit 40,000

Loss b/f (300,000)

Loss RTY 40,000 (40,000)

UR c/f (260,000)

Total profit 0

2003 1/7/01 – 30/6/02 Adjusted profit 20,000

Loss b/f (260,000)

Loss RTY 20,000 (20,000)

UR c/f (240,000)

Total profit 0

59
2004 1/7/02 – 30/6/03 Adjusted profit 20,000

Loss b/f (240,000)

Loss RTY 220,000 (20,000)

Lapsed 20,000

Total profit 0

Note:

The loss of N400,000 incurred in 2000 year of assessment has been relieved consistently against
adjusted profits for 2001, 2002, 2003, and 2004 years of assessment. After this, the residue of
N220,000 was written off as lapsed.

It must be noted that the aggregate loss deduction from any assessable profit in any year of
assessment shall not exceed the original loss incurred. Where the available loss exceeds the
original loss incurred, the amount relievable shall be restricted to the original loss incurred i.e.
the application of commencement rule may lead to a situation where the assessable loss is
more than the initial loss incurred.

2.04 Capital Allowance

Under the PITA and the CITA depreciation of fixed assets is not allowed in computing the
adjusted profits of any company in the accounting period under consideration. The reason for
this is that for an item to be deductible under the PITA and CITA it must be of revenue in
nature, rather than of capital nature. This notwithstanding a relief from taxation may be given
in respect of capital expenditure by means of a system of capital allowances which are set
against taxable profits. Consequently under the CITA and PITA a company that has incurred
capital expenditure on plant, machinery, fixtures, pipelines, storage tanks, research and
development etc. for the purpose of business or petroleum operations respectively is allowed
to claim capital allowances in line of depreciation. Capital allowance therefore under the CITA
and PITA is a form of standardized depreciation given under the income tax and petroleum tax
laws on certain qualifying capital expenditures

Capital allowances are granted at varying rates on the cost of the asset. To qualify for capital
allowances under the CITA and the PITA certain conditions must be met and they include:

60
 i. The capital allowance must be claimed by the company except where the revenue
authority is of the opinion that it is just reasonable to grant the allowance without a
claim.

ii. The claimant must be the owner of the asset that is the subject of the claim. This
notwithstanding, an asset acquired through a hire-purchase agreement or through
an ordinary contract of hire or lease can be the subject of lease.

iii. The capital expenditure incurred must be for the purpose of the trade or business

iv. The expenditure must be incurred in the basis period, meaning the period of the profits
on which any assessable income for that year of assessment falls to be computed,
that is the preceding year.

v. The claimant must incur qualifying capital expenditure that include buildings, industrial
buildings, mining, plant and machinery, furniture and fittings, public transportation,
housing estate, agricultural plant, research and development, ranching and
plantation, construction plant and manufacturing industrial plant.

There are basically four components of CA

i. Initial Allowance

ii. Annual Allowance

iii. Balancing Adjustment

iv. Investment Allowance

Initial Allowances

Initial allowance also known as first year allowance is the type of allowance that is claimed
when the qualifying capital expenditure is first put to use. It is granted in the first year of
acquisition on the cost of the purchase of the asset. It is applicable to both second hand and
new asset except for buildings.

The initial allowance to be granted should be such an amount as the tax authority may
determine to be just and reasonable irrespective of who has control of the asset (the seller or
the purchase). Such an amount should not exceed the amount of the initial allowance which
would have been allowable except for this provision plant and machinery for replacement of
old ones is granted one of 95% capital allowance in the first year. In addition block value is also
retained until the final disposal of the plant or machinery; provided that the aggregate capital
61
allowances granted in respect of any asset not exceed 95% of the total cost of the asset (new
section 6 (3) inserted in Act 1996 No. 32 effective from January 1996).

Annual Allowance

This type of allowance also known as written down allowance is claimed on a straight line basis
over the estimated tax life of the qualifying capital expenditure. The estimated tax life is
computed using the formula: 100___________

Annual allowance rate

It is granted annually and is computed on the balance of cost after the deduction of the amount
of initial allowance claimed on the asset. For example if you bought an assets of N100,000 and
assuring that the annual allowance rate is 25% and initial allowance is 50% the annual
allowance shall be N12,500 that is 25% of (N100,000 – N50,000)

When the basis period for any year of assessment is a period less than one year, the annual
allowance for the year of assessment shall be proportionately reduced.

Illustration

Isiuwa Limited commenced business as an auto repair business on October 1st, 2013 and its
accounting year ends September 30th of every year. During this period, it made the following
capital expenditure on plan and machinery

1/10/2013 N1,040,000

1/11/2013 N1,070,000

15/04/2014 N1,450,000

The annual allowance for the first year of assessment shall be as follows:

First year of assessment will be 2013 assessment year Basis period for capital allowances period

1/10/2013 to 31/12/2013 N

Total qualifying expenditure during that period 2,110,000

Less initial allowance of 50% 1,055,000

62
Balance of cost after initial allowance 1,055,000

Investment allowance due N

Plant and Machinery 211,000

Annual allowance

For a full year at 25% of 1,055,000 263,750

It is restricted to 2/12 x N263,752 as a result

Of the number of months in the basis period

being less than twelve 65,392

Residue expenditure carried forward in the second year of assessment 989,062

it is essential to note that animal allowance is an annual basis as a result it is proportionally

restricted to the number of months in the basis period if it is less than twelve months.

Balancing Adjustment

Balancing adjustment arises when a qualifying capital expenditure is disposed of or is deemed

to have been disposed of. This is obtained by comparing the sales proceeds on the disposal to
the tax written down value of an asset as at the time of the disposal. Essentially there are two
types of disposal in balancing adjustments:

i. Balancing Charge:

When an asset is disposed of and the written down value of the asset is lower than the net sale
proceeds of the asset, the difference is treated as a balancing charge. A balancing charge
cannot exceed the actual capital allowances granted on the asset before disposal.

ii. Balancing Allowance:

When an asset is disposed and the written down value of the asset is higher than the net sale
proceeds of the asset the difference is treated as a balancing allowance. It is deducted from the
assessable profit to arrive at the chargeable profit of the organization. It is treated as an
additional allowance to be used in reducing the profits to be subjected to taxation; and it is

63
treated in similar manner as both initial and annual allowances in that they can be carried
forward when utilized in any year.

Illustration

Izoduwa Limited, a furniture construction company in 2012 disposed of the under listed
qualifying expenditure:

i. Motor vehicle with tax written down value of N519,300 was disposed for N1,000,000.
The original value was N1,300,000.

ii. A set of office furniture and equipment was sold for N300,000. Its original cost was
N600,000 and tax written down value as at the time of disposal was N359,000

iii. A building purchased for N1,500,000 in 2011 was disposed, with a tax written down
value of N697,500 for N2,500,000.

Required:

Compute the balancing Adjustment

Solution:

Building Motor Vehicle Furniture

N N N

Sales Proceeds 2,500,000 1,000,000 300,000

Less:

Tax Written Down

Value (TWDV) 697,500 519,300 359,000

Balancing charge 1,802,500 480,700

Balancing Allowance 59,000

The balancing charge for building would be limited to N402,250 (N1,500,000 – N697,500) which
represent the maximum capital allowances already claimed on the qualifying capital allowance
as at the time of disposals. There will be no limit on the amount taxable for the motor vehicle
64
the amount N480,700 does not exceed capital allowance already claimed on the asset of
N780,700 (N2,500,000 – N519,300).

It must be noted that excess of the sale proceeds over the original cost of the asset is subject to
capital gains tax.

Balancing charge is regarded as an income and it is to be added to the adjusted profit of the
business during the year of assessment in which it arises. Balancing allowance on the other
hand is treated as a component capital allowance and is to be deducted from the assessable
profit to arrive at taxable profit.

Investment Allowance

This is an investment granted to companies that are incurred on qualifying capital expenditure
with respect to plant machinery and equipment for the purpose of the business. The allowance
is granted at 10% of the cost of asset as follows:

i. With effect from 1985 year of assessment 10% investment allowance is granted on plant
equipment used for agricultural business

ii. With effect from 1990 year of assessment 10% investment allowance on plant
equipment and machinery used for manufacturing business

iii. With effect from 1991 year of investment 10% investment allowance to plant and
equipment used for any other business.

Businesses that are located not less than 20km from normal facilities are entitled to “Rural
Investment Allowance. The conditions under which it can be claimed include:

i. Where there is no electricity 50% of the cost incurred in providing electricity.

ii. Where there is no water 30% of cost incurred.

iii. Where is no tarred road, 15% of the expenditure incurred.

iv. Where there is no telephone, 5% of the expenditure incurred.

v. Where there is no facility at all 100%

Features of investment allowance include the under listed:

65
 i. It is claimable only once in the life of an asset and it must be in the year the asset was
first put in use.

ii. It is claimable only on plant, machinery and equipment.

iii. Where rural allowance is fully absorbed in the year it was incurred, it cannot be carried
forward.

iv. Investment allowance is not to be taken into consideration in arising at the TWDV
carried forward.

Basis Period for Capital Allowance

The basis period for capital allowance for an ongoing business is the same as the basis period
for profit i.e. on proceeding year basis. The purpose for determining the basis period for capital
allowance is to enable us to know:

(i) The relevant period a particular capital expenditure was put into production and used
for the first time.

(ii) The year of assessment that should benefit from initial allowance on a qualifying capital
expenditure.

(iii) The number of months in a basis period so that annual allowance can be apportioned in
appropriate time proportions.

(iv) The procedure of calculating capital allowance during commencement and cessation of
trade or business

However, where a business has just commenced, changes its accounting year end or has
permanently ceased to trade, special rules will be applied in determining the basis period for
capital allowance.

Overlapping Basis Period

This arises when a determinable basis period is common to two or more years of assessment.
When this happens, we say there is the problem of overlapping. Overlapping basis period can
be partial or total. It is partial if only a given period lesser than the period in each of the two or
more relevant years of assessment is common and total if there is complete resemblance of
two basis periods as we may sometimes have when the repetitive role is applied. This is usually
applied where a business has just commenced.

66
Illustration

Given the following information relating to Amenaghawon Enterprises, assume that the
business started its operation June 1st 2004. You are required to compute the Basis Period for
capital allowances

Basis period for profit

YOA BP

2004 1/6/2004 – 31/12/2004

2005 1/6/2004 – 30/05/2005

2006 1/6/2004 – 30/05/2005

2007 1/6/2005 – 30/05/2006

Basis period for capital allowance

YOA BP

2004 1/6/2004 – 31/12/2004

2005 1/6/2005 – 30/05/2005

2006 –

2007 1/6/2005 – 30/05/2006

YOA- means Year of Assessment

BP- means Basis Period

Illustration

Oladunni Enterprises is a going concern business with the following date.

1/1/2004 – 31/12/2004

1/1/2005 – 31/12/2005

1/1/2006 – 30/06/2007

1/7/2007 – 30/06/2008

67
 1/7/2008 – 30/06/2009

1/7/2009 – 30/06/2010

YOA BP for profit

2005 1/1/2004 – 31/12/2004

2006 1/1/2005 – 31/12/2005

2007 1/7/2005 – 30/06/2006

2008 1/7/2006 – 30/06/2007

2009 1/7/2007 – 30/06/2008

YOA BP for capital allowance

2005 1/1/2004 – 31/12/2004

2006 1/1/2005 – 31/12/2005

2007 1/7/2005 – 30/06/2006

2008 1/7/2006 – 30/06/2007

2009 1/7/2007 – 30/06/2008

Illustration

Akpojaro Nig. Ltd commenced business on 1st October 2004 making up its accounts to 31st
March each year. On 31st July 2008. The company ceased trading.

You are required to show the basis period for capital allowance for all relevant period.

Suggest Solution:

YOA BP PROFIT (PYB)

2004 1/10/2004 – 31/12/2004

2005 1/10/2004 – 30/09/2005

2006 1/10/2004 – 30/09/2005

2007 1/04/2005 – 31/03/2006

68
 2008 1/01/2008 – 31/07/2008

On Actual Year of the preceding Year Basis of the Penultimate year:

YOA BP FOR PROFIT (PYB)

2004 1/10/2004 – 31/12/2004

2005 1/10/2004 – 30/09/2005

2006 1/10/2004 – 30/09/2005

2007 1/01/2007 – 31/12/2007

2008 1/01/2008 – 31/07/2008

YOA BP OF CAPITAL ALLOWANCE

2004 1/10/2004 – 31/12/2004

2005 1/01/2005 – 30/09/2005

2006 –

2007 1/10/2005 – 31/03/2006

2008 1/01/2008 – 31/07/2008

Restrictions of Capital Allowance

In accordance with the Finance Miscellaneous Taxation Provision Decree 1985, the amount of
capital allowance to be deducted from assessable profit in any year of assessment is:

i. 75% of such assessable profit in case of manufacturing business with effect from 1988. It
is no more limited to 75%; it is now treated like agro allied industry.

ii. 662/3% of such assessable profit in case of any other business.

iii. Any company in the Agro Allied Industry shall not be affected by the above restriction.

The restriction of capital allowance is applicable to all types of capital allowances i.e.

i. Initial capital allowance

ii. Annual capital allowance

69
 iii. Balancing allowance

iv. Investment allowance

v. And unabsorbed capital allowance b/f

Illustration

Ighomaro and SONS Limited has 99,000 as an assessable profit for the year ended 31st
December 2006. Capital allowance for the year is N120,000. You are required to determine the
capital allowance claimable and the adjusted profit for the year.

Suggested Solution

N N

Assessable Profit 99,000

Less capital allowance 120,000

Restriction 662/3% of 99,000 66,000

Capital allowance absorbed 66,000

Chargeable profit 33,000

Illustration

Mrs. Okosun commenced her business of manufacturing ceramics on 1st 2010. The following
are particulars of capital expenditure incurred by him during the period 1st September 2009 to
39th June, 2010 N

Factory Building 50,000

Plant and Machinery 100,000

Motor Vehicles 20,000

Other additional purchases are as follows:

70
 Date of Purchase Item Purchased Cost (N)

August 2010 Plant 20,000

January 2011 Lorry 15,000

June 2011 Building 70,000

December 2011 Cutting Machine 30,000

May 2012 Extension of factory 15,000

September 2012 Lorry 10,000

The accounts are made up to 30th June each year,

You are required to state clearly:

i. The relevant years of assessment.

ii. The basis period for the assessment years.

iii. The capital expenditure on which capital allowance are claimable for all relevant years
of assessment on the following basis:

a. Normal basis.

b. On the basis that a claim has been made for revision of the second and third
years of assessment

71
 Suggested Solution:

MRS. OKOSUN

SCHEDULE OF CLAIMABLE ALLOWANCE

Normal Basis

Year of Basis Period for profit Basis period for capital Qualifying capital Amount
Assessment allowance expenditure
N

1990 1/7/90 – 31/12/90 1/7/90 – 31/12/90 Factory Building Plant 50,000

& Machinery

100,000 + 20,000
120,00
Motor vehicles 20,000

Lorry 15,000
1991 1/7/90 – 30/06/91 1/7/91 – 30/06/91
Building 70,000

NII NII
1992 1/7/90 – 30/06/91 NII

Plant-cutting
1993 1/7/91 – 30/06/92 1/7/91 – 30/06/92
Machine 30,000

Extension of factory

Motor Vehicle 15,000

Lorry
1994 1/7/90 – 31/12/90
10,000

72
 Revised Basis

Year of Basis Period for capital Basis period for capital Qualifying capital Amount
Assessment allowance allowance expenditure
N

1990 1/7/90 – 31/12/90 1/7/90 – 31/12/90 Factory Building Plant 50,000

& Machinery

100,000 + 20,000
120,00
Motor vehicles 20,000

Lorry 15,000
1991 1/1/91 – 31/12/91 1/1/91 – 31/12/91
Building 70,000

Plant & Mach.

1/1/92 – 31/12/92
Cutting Mach. 30,000

Extension of Factory
1992 1/1/92 – 31/12/92 1/1/91 – 30/06/92
Motor Vehicle 15,000

-Lorry

10,000

Nil

Nil
1993 Nil Nil

Illustration
Baba Kile Nigeria Limited a resident company makes up accounts each year to 31st October. It
occupies a factory which it bought on 1st November 2004, the cost comprising:
N
Land 20,000
Preparation of site 10,000

73
Factory 110,000
Warehouse unit 30,000
170,000
On 1st November 2006 the company bought two additional factories:
i. A second-hand factory which costs it N180,000. The factory’s construction had cost the
original owner 60,000 on 1st of November 2000.
ii. A newly – constructed factory which cost N1,000,000 (including N260,000 for office
accommodation).
Required:
Compute the maximum industrial building allowance (IBA) which may be claimed by Baba Kile
Nigeria Limited for the relevant years of assessment up to 2008.

Suggested Solution:

BABA KILE NIGERIA LIMITED

Computation of Capital Allowances on Factory Building

Old New Second Hand Total
Rate 15/10 N N N N
2006 cost 150,000 740,000 60,000
I.A. (22,500) (111,000) - 133,500
A.A. (12,750) (62,900) (6,000) 81,650
215,150
2007 TWDV 114,750 566,100 54,000
A.A. (12,750) (62,900) (6,000) 81,650
2008 TWDV 102,000 503,200 48,000
A.A (12,750) (62,900) (6,000) 81,650
TWDV 89,250 440,300 42,000
Notes:
i. Capital allowance is not claimable on cost of land;
74
 ii. Where a building is acquired on second hand, capital allowance (annual allowance only)
will be claimed on the lower of original cost to the vendor and the actual purchase
price.
Calculation of Capital Allowance on Hire Purchase Assets
A company or an individual tax payer wanting to preserve liquid fund or that falls short of it
may desire to enter into hire purchase agreement. Such an agreement usually makes the
payment flexible which is done instalmentally. Since payment is not made at once but
piecemeal, such an arrangement will attract some interests on cost. Thus, usually the cost of
acquiring an asset on hire purchase will be higher than the cost of outright purchase by the
margin of the interest charged as per agreement.
Under hire purchase transaction an initial deposit will be made to be followed by subsequent
installments. The hire purchase interest element is an allowable expenditure in arriving at
adjusted profit. It is therefore not considered for capital allowance computation. It is normally
debited to-the Profit and Loss Account as an expense. Under a hire purchase transaction, the
hirer of the asset is treated as it owns the asset subject to the following modification:
i. The amount of expenditure to be capitalized is limited to the deposits and installments
actually paid for during the year of assessment,
ii. The installment payment will exclude hire purchase interest element. Therefore, for
each year of assessment capital allowance will be computed on the deposit and the
capital position of installment actually paid during the year.
Under hire purchase the life of a qualifying capital expenditure may be extended beyond
the expected life for tax purposes. Where this occurs, the problem can be solved by
ensuring that the expected life used in computing annual allowance is progressively
reduced as we approach the end the useful life of the asset.
Steps to Follow
i. Determine the interest element in the whole hire purchase transaction.
ii. Determine the interest element per installment. This is equal to total interest element
divided by the number of installments.

75
 iii. Determine the capital portion per installment. This is equal to amount payable by
installments less interest element per installment.
iv. Prepare a payment schedule taking into consideration the deposit paid and the capital
portion per installment
v. Determine the basis period for capital allowance
vi. Compute the capital allowance.
Mayor Offa Service Limited has been in business for years and makes up its accounts to 30 th
June each year. The company normally acquires new assets for use in its business on here
purchase.
On 1st July 2001, it acquired some Lorries on the following terms: Deposit of 1st July 2001, it
acquired some Lorries on the following terms. Deposit on purchase N250,000 followed by three
equal yearly payments of N270,000 each payable on 30th September of every year. The first
installment was due on 30th September, 2001.
The cash price of the Lorries when newly purchased was 945,000. The taw written down value
of the existing assets at the end of 2001 tax year was N490,000. The assets were acquired on
17th of August 1998.
You are required to compute the capital allowances for 2002, 2003, 2004, 2005 and 2006 years
of assessment, assuming that the installments were paid on their due dates and that the capital
allowances were claimable at 20% initial and 10% annual

76
Suggested Solution:
Okwokwo Services Limited

Computation of Capital Allowances

TWDV DEPOSIT
b/fwd&
1st Installment 2nd Installment 3rd
Installment
N N N
2002 TWDV b/fwd 490,000
A.A. (61,250)
2003 TWDV 428,750
Additional - 481,667
I.A. - (96,333)
A.A. (61,250) (38,533)
2004 TWDV 367,500 346,801
Additional - - 231,667
I.A. - - (46,333)
A.A. (61,250) (38,533) (20,593)
2005 TWDV 306,250 308,268 164,741
Additional - - - 231,666
I.A. - - - (46,333)
A.A. (61,250) (38,533) (20,593) (23,167)
2006 TWDV 245,000 269,735 144,148 162,166
A.A. (61,250) (38,533) (20,593) (23,167)
183,750 231,202 123,555 138,999
Notes:

77
 i. When an asset is acquired on hire purchase terms, only the capital element of the
installment paid in a basis period is entitled to capital allowances claim. The interest
element will be written off to the Profit and Loss Account.
ii. Where qualifying capital expenditure is acquired on hire purchase terms, the expected
life may be extended beyond the useful life. This problem may be solved by reducing
the estimated useful life as one approaches the end of the useful life if the asset, for
example, the useful used life in calculating the A.A. on additions in 2004 is 9 years.
iii. The rates of capital allowance to be used have been given. This explains why the change
in rates have been ignored
Okonkwo Services Limited
Hire Purchase Price
250,000 + (270,000 x 3)
250,000 + 810,000 = 1,060,000
Cash price = 945,000
Interest element N115,000
Interest per installment 115,000/3 38,333
Capital portion per installment = 270,000 – 38,333
231,667
Payment Schedule
1/7/01 Deposit N250,000
30/9/01 1st Installment N231,667
30/9/02 2nd Installment N231,667
YOA BASIS PERIOD QCE
2002 1/7/00 – 30/6/01 TWDV b/fwd
2003 1/7/01 – 30/6/02 Deposits & 1st Installment
2004 1/7/02 – 30/6/03 2nd Installment
2005 1/7/03 – 30/6/04 3rd Installment
2006 1/17/04 – 30/6/05

78
Illustration
Ekunwe Nigeria Limited is a company engaged in manufacturing goods for export and makes up
its accounts to 30th November. All plants and equipment of the company are normally acquired
on hire purchase terms.
On 1st December 2002 it acquired several plants and equipment on the following terms. Deposit
of N750,000 followed by six and a half yearly installments of N120,000 each payable on. 1st
December and 1st June of each year; the first installment being due on 1st June 2003. The
interest element per installment is 15% of each half yearly installment. You are required to
compute the capital allowances as for all relevant years up to 2008 tax year. Given the capital
allowance rate to be initial 25% and annual to be 10%.

Suggested Solution Ekunwe Nigeria Limited

Computation of Capital Allowances

Deposit & 2nd& 3rd 4th& 5th 6th Total
Instalment Instalment Instalment Instalment Allowance
N N N
Rates 25/20
2000 Cost 852,000
I.A. (213,000) 213,000
A.A. (63,900) 63,900
Investment Allow. - 85,200
2001 TWDV 575,100 362,100
Additional - 204,000
I.A. - (51,000) 51,000
A.A. (63,900) (17,000) 80,900
Investment Allow. - - 20,400
2002 TWDV 511,200 136,000 152,300
Additional - - 204,000
79
 I.A. - - (51,000) 51,000
A.A. (63,900) 17,000 (19,125) 100,025
Investment Allow. - - - 20,400
2003 TWDV 447,300 119,000 133,875 171,425
Addition - - - 102,000
Initial - - (25,500) 25,500
Annual (63,900) (17,000) (19,125) (10,929) 110,954
Investment - - - - 10,200
2004 TWDV 383,400 102,00 114,750 65,571 146,654
A.A. (63,900) (17,000) (19,125) (10,929) 110,954
TWDV 319,,500 85,000 95,625 54,642
Workings
Ekunwe Nigeria Limited
Purchase of Plants and Equipment on Hire Purchase Terms N
Amount per instalment 120,000
Interest per installment (15% of 120,000) 18,000
Capital portion per installment (N120,000 – N18,000) = 102,000
Deposit N750,000
Payment Schedule
Deposit 1/12/02 N750,000
1st Instalment 1/6/03 N102,000
2nd Instalment 1/12/03 N102,000
3rd Installment 1/6/04 N102,000
4th Installment 1/12/04 N102,000
5th Installment 1/6/05 N102,000
6th Installment 1/12/03 N102,000

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Basis Period for Capital Allowance
YOA Basis Period Instalmental Deposit
2004 1/12/02 – 30/11/03 Deposit 1st Installment
2005 1/12/03 – 30/11/04 2nd& 3rd Installment
2006 1/12/04 – 30/11/05 4th& 5th Installment
2007 1/12/05 – 30/11/06 6th Installment
2008 1/12/06 – 30/11/07

Disposed of
(i) A building, structure or works of a permanent nature is disposed of if any of the
following events occur:
(ii) the relevant interest is sold; or
(iii) that interest, being an interest depending on the duration of a concession,
comes to an end on the coming to an end of that concession; or
(iv) that interest, being a leasehold interest, comes to an end otherwise than on the
company entitled thereto acquiring the interest which is reversionary thereon;
or
(v) the building, structure or works of a permanent nature are demolished or
destroyed or without being demolished or destroyed, cease altogether to be
used for the purposes of petroleum operations carried on by the owner thereof.
(vi) Plant, machinery or fixtures are disposed of if they are sold, discarded or cease
altogether to be used for the purposes of petroleum operations carried on by
the owner thereof.
(vii) Assets in respect of which qualifying drilling expenditure is incurred are disposed
of if they are sold or if they cease to be used for the purposes of petroleum
operations of the company incurring the expenditure either on such company
ceasing to carry on all such operations or on such company receiving insurance
or compensation moneys thereof

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 Value of an Asset
The value of an asset at the date of its disposal:
(a) Is the net proceeds of the sale thereof or of the relevant interest therein, or
(b) If it was disposed of without being sold, the amount which, in the opinion of the Board,
such asset or the relevant interest therein, as the case may be, would have fetched if
sold in the open market at that date, less the amount of any expenses which the
owner might reasonably be expected to incur if the asset were sold, or
(c) If an asset is disposed of in such circumstances that insurance or compensation monies
are received by the owner thereof, the asset or the relevant interest therein, as the
case may be, shall be treated as having been sold and as though the net proceeds of
the insurance or compensation monies were the net proceeds of the sale thereof
(d) Owner and Meaning of Relevant Interest
Where an asset consists of building, structure or works the owner thereof shall be taken to be
the owner of the relevant interest in such building, structure or works.
The “relevant interest” means, in relation to any expenditure incurred on the construction of a
building, structure or works, the interest in such building, structure or works to which the
company which incurred such expenditure was entitled when it incurred the expenditure.
Where a company incurs qualifying building expenditure or qualifying drilling expenditure on
the construction of a building, structure or works, the company is entitled to two or more
interest therein, and one of those interests is an interest which is reversionary on all the others,
that interest shall be the relevant interest.
Sale of Building
Where qualifying expenditure has been incurred on the construction of a building, structure or
works and thereafter the relevant interest therein is sold, the following rules shall apply:
i. Where the building, etc. has been used by the original owner before sale, the second-
hand purchaser is deemed, for all the purposes of capital allowances except the
granting of petroleum investment allowance, to have incurred qualifying capital

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 expenditure equal to the price paid by it for the building or to the original cost of
construction, whichever is lower.
ii. Where the building has not been used by the original owner before sale, the second-
hand purchaser is deemed, for all the purposes of capital allowances, to have
incurred qualifying capital expenditure equal to the original cost of construction. In
effect, the original cost of construction is taken to be the amount of the purchase
price on such sale.
iii. Where any such relevant interest is sold more than once before the building, etc. is
used, the provisions of sub-paragraph (b) shall have effect only in relation to the last
of those sales.
Disposal without Change of Ownership
Where an asset has been disposed of in such circumstances that the owner still remains the
owner after the disposal, then, for the purposes of determining an annual or balancing
allowance or balancing charge in respect of the use of the asset after the date of such disposal:
(a) The qualifying expenditure incurred by the owner on such asset before the date of
disposal shall be left out of account;
(b) The owner is deemed to have bought the asset immediately after the disposal at a price
equal to the residue of the qualifying expenditure (i.e. the written down value of the
asset) at the date of the disposal plus the amount of any balancing charge or minus
the amount of any balancing allowance arising from the disposal.

Tax Distortion under Inflationary Conditions

A lot has been discussed in the accountancy profession with regards to Inflation Accounting.
In view of rising prices, the surplus of sale proceed over costs when an item is disposed is not
necessarily profit. Part of such is indeed due to the effect of inflation. This will be more
pronounced when capital assets are involved. Since capital assets would be retained for a
couple of years before disposal, the cumulative effect of the gains due to inflation would be
significant. This is properly recognized in the United Kingdom where the gains due to inflation is
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first removed by what is termed indexation allowance and it is the net gain (that is after
removing the gains due to inflation) that is subjected to capital gains tax.
In a period of rising prices as exists in Nigeria, part of the profit made by a trading concern will
be due to the effect of inflation. To the extent that the profit is due to the effect of inflation, it
will usually be used for trading stocks replacement purposes. It is not a profit that can be
distributed and such should also (should the tax laws permit) not be subject to tax. If such is not
ploughed back into the business and no alternative arrangement is made by the company, the
operating capacity of the business will be gradually eroded to the extent that the business will
be unable to continue trading.
The true profit of a trading concern, for example, can only be arrived at after appropriate
provision has been made for trading stock replacements. This will be such that, at least, the
same volume of operation can be maintained in the following year as for the current year.

Illustration
XYZ limited company started trading in year 1 with 50, 000 units of stock at N60 per unit. By the
end of the year all the stocks have been sold. Due to inflation the unit price of the trading
stocks by the end of the year has increased by 20% to N72 per unit.
Were the company to maintain the same volume in year 2 as in year 1, a total amount of
N3,600,000 (50,000 units at N72 per unit) would be required to replace the stocks that
generated the sales figure of N5 million. Under the correct principle of Inflation Accounting
according to the proponents of inflation accounting, the cost of sales to be charged to the
trading profit and loss account in Year 1 should be the replacement cost of the stocks sold. A
second trading profit and loss account under Inflation Accounting could be prepared below
showing the operating result of the company.

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Suggested Solution XYZ Limited Year 1
Trading, Profit and Loss Account
(a) Historical Costs N N
Sales (50,000 units) 5,000,000
Less Cost of sales (60% of sales) 3,000,000
Gross Profit 2,000,000
Deduct expenses:
Rent and rates 300,000
Travelling 600,000
Printing, postages and stationary 100,000
Telephone and courier 200,000
Others 300,000 (1,500,000)
Net Profit 500,000
Income Tax at 30% (assuming
Accounting profit same as tax profit and 150,000
Ignoring commencement rules)
(b) Inflation Accounting Costs N N
Sales (50,000 units) 5,000,000
Less Cost of sales (72% of sales) 3,600,000
Gross Profit 1,400,000
Deduct expenses:
Rent and rates 300,000
Travelling 600,000
Printing, postages and stationary 100,000
Telephone and courier 200,000
Others 300,000 (1,500,000)
Net loss (100,000)
Income Tax at 30% (assuming Accounting profit same as tax profit and NIL

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 Ignoring commencement rules)
To maintain the same operating capability of 50,000 units in year 2 as in year 1 would require
N3,600,000 purchases (50,000 units at N72 per unit). For simplicity, it is assumed that the unit
prices of the expense items would remain the same. In practice, these would also be affected
by inflation and ought to have been reviewed upwards for the effect of inflation.
Taxation Impact
With the accounts prepared under the historical cost convention, income tax of N150,000
would be payable whereas with the accounts prepared under the inflation accounting principle,
the company has incurred a trading loss of N100,000 and its income tax liability will be NIL.
The distortion is that this company is required to pay a tax of N150,000 whereas in view of the
inflation spiral, its tax liability should have been NIL.

2.05 Accounting for Taxes

Taxes are amounts levied by government on businesses and individuals to finance its
expenditures, to regulate the economy, to distribute wealth and for a number of other reasons.

Taxable income is the income determined using Internal Revenue Code rules and regulations. It
is the amount of income on which the entity will actually pay income tax in the
current accounting period. Deferred taxes arise as a result of temporary difference between
income tax expense and income tax payable.

Accounting used in issuing financial statements is not the same as the accounting used for tax
purposes. While Accounting for tax purposes is governed by tax law; Accounting for financial
statement purposes is governed by GAAP.

There are different ways in which governments collect and calculate taxes. Direct taxes are
taxes that are paid by businesses which also ultimately bear them. They are normally based on
the business’s net income. Indirect taxes are taxes which are initially paid by businesses but
ultimately transferred to the end users of the taxed product. They are normally based on
revenue.

Examples of direct taxes include:

(i) Corporation income tax

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 (ii) Employer portion of the social security contributions

Examples of indirect taxes include:

i. Sales tax

ii. Value added tax

iii. Import tax

The main difference between direct tax and indirect tax from the perspective of a business that
pays it is that a direct tax results in expense and liability while an indirect tax results in a liability
but not an expense.

Direct tax and indirect tax have different accounting implications for a business.

Accounting for direct taxes

Income taxes are levied on a business by applying a percentage to the business’s net income
calculated in accordance with the accounting rules given in the relevant tax laws. It results in an
amount which is recorded as the business’ expense and liability when it becomes due.

2.06 Review Questions

1. Ana, Inc. is a manufacturer of water sports equipment. It sold 990 speed boats in financial
year 2014 for #50 million in total. The company’s total expenses for the period amounted to
#28 million. Since tax accounting rules are different than the financial accounting rules, net
income for the income tax purpose is different than the financial accounting net income. The
company’s tax accountant determines that the company’s revenue for the period under tax
accounting rules equals #48 million while its allowable expenses are #23 million. Calculate the
income tax the company shall pay if the relevant tax rate is 30% and journalize the transaction.

Solution

Revenue under tax accounting rules #48,000,000

Less: expenses under tax accounting rules #23,000,000

Net income under tax accounting rules i.e. taxable income #25,000,000

Income tax @ 30% ($25 million * 0.30) #7,500,000

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This #7.5 million is the company’s expense for the period which results in a company’s
obligation to the government. The transaction is recognized in the company’s books as follows:

Income Tax #7.5 M

Income Tax Payable #7.5 M

Accounting for indirect taxes

Indirect taxes are taxes that are not based on net income. They are normally based on revenue.

In case of indirect taxes on revenue, for example a tax on goods and services, a business is
required to collect an amount from its customers on each unit it sells to them and deposit it
with the government.

2. XYZ, Inc. provides cleaning services to, ABC Inc. Under the relevant tax laws, XYZ is required
to collect a sales tax on services from ABC, Inc. at the rate of 15%. During the financial year
2014, ABC, Inc. provided services worth #3 million to XYZ, Inc. Explain how will ABC, Inc.
account for the transaction.

Solution

Sales tax XYZ, Inc. is required to collect from ABC, Inc. = 15% * #3 million = #0.45 million

XYZ, Inc. shall invoice ABC, Inc. for an amount which shall be the sum of the sale price and the
sales tax, i.e. #3.45 million (#3 million + #0.45 million). XYZ, Inc. shall deposit the sales tax of
#0.45 million collected from ABC, Inc. with the government.

XYZ, Inc. shall pass the following journal entry:

Accounts receivable/cash #3.45 M

Sales #3 M

Sales tax payable #0.45 M

When XYZ, Inc. deposits the #0.45 million with government, its liability related to the sales tax
shall extinguish:

Sales Tax Payable #0.45 M

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 Cash #0.45 M

From the perspective of ABC, Inc. the sales tax it has paid to XYZ, Inc. becomes its expense and
shall form part of the cost of cleaning services. ABC, Inc. shall record the transaction as follows:

Cleaning Expense #3.45 M

Accounts Payable/Cash #3.45 M

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 MODULE 3

3.00 PERSONAL INCOME TAX

3.01 Learning outcome

On successful completion of this Module, Students should be able to:

i. Evaluate Personal Income Tax administration and how to deal with the tax authorities in
connection with it;
ii. Compute adjusted profits of Individuals in Trade, Partnership, Trusts, etc;
iii. Examine the principles of allowable and non-allowable deduction as applicable to
personal income tax in Nigeria;
iv. Compute capital allowances for Individuals and corporate entities in Nigeria;
v. Prepare personal Income tax computations in accordance with the provision of PITA.

3.02 Income Chargeable to Tax

The history of taxation could be traced to the history of human creation, as taxation is a divine
order. In Islam, Muslims have been enjoined to remit a portion of their reserved wealth
annually for spiritual cleansing, which is called zakat. The remittance is made as specified in
Quran (9:60) to the needy and this serves as a means of income redistribution. In Christendom,
Christians are also required to remit one-tenth of their income for the purpose of income
redistribution and portion remitted is called tithe. In Nigeria, the history of personal income
taxation can be traced to the pre-colonial era. At that time, there were emirates, kingdoms and
chiefdoms which were ruled by emirs, Ezes, Obas and Attas etc. The system finances its
activities through proceeds of taxes levied on subject of the various emirates. Taxes that were
paid in these emirates include: zakat, kudin kasa, and jangali. Zakat is a form of tax paid by all
eligible Muslims while kudin kasa is an agricultural tax, and jangali is cattle tax. In Southern
Nigeria, taxes were also paid in the kingdoms and chiefdoms. The taxes were paid in form of
tributes, tolls and levies. These taxes were used to maintain the kingdoms and chiefdoms.
When the British people came, they capitalized on the administrative system in the North and
introduced the indirect rule where they ruled the people through the emirs. The then high
commissioner for Northern Nigeria harmonized all the traditional taxes under the native
revenue proclamation No. 4 of 1904 and the native revenue proclamation No. 2 of 1906. The
tax rates were fixed by the government while assessment and collection were done by the local
authorities. The tax revenue was divided equally by the government and local authorities.

Taxation was introduced in the western part of the country (excluding Asaba division and Warri
province) in 1918 by the enactment of the Native Revenue Ordinance. In 1927, the Native
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Revenue (amendment) Ordinance was enacted and consequently taxation was introduced in
the eastern province, Warri province and Asaba division. However, the introduction of taxation
in some parts of this province was met with some resistance. There were some disturbances in
Warri and Ogoja provinces. The famous Aba riot of 1929 is a case in point.

There were various ordinances that were enacted which include the Non-Native (Protectorate)
Ordinance of 1931 and that of 1937. These two ordinances were for non-native. That of 1937
replaced the one of 1931. There were also the Native Direct Taxation (Colony) Ordinance of
1937 and the Colony Taxation Ordinance of 1937. The former was repealed for Nigerians
residing in the colony provinces and the later applied to Lagos. These Ordinances were replaced
by the Direct Taxation Ordinance No. 4 of 1940 and the Income Tax Ordinance No.3 of 1940.
The Direct Taxation Ordinance applied to all Nigerians excluding those residing in Lagos. The
Income Tax Ordinance was for expatriates and Nigerians residing in Lagos. Other laws were
enacted in 1943 i.e. Income Tax Ordinance of 1943 and Direct Taxation (Amendment) of 1943.
These laws repealed those of 1940.

In 1952, Nigeria became a federation with regional governments. Consequently, the

assessment and collection of taxes were done by regional governments but this was in respect
of taxes paid by Africans. In 1962, the regional governments were allowed to assess and collect
taxes from Non-Africans. The eastern region was the first region that enacted the law that
replaced the Direct Taxation Ordinance. The region passed a law known as the Finance Law No.
1 of 1956 which introduced the Pay-As-You-Earn (PAYE) System. There was also the Eastern
Region Finance Law of 1962 which repealed that of 1956. The Law (Eastern Region Finance Law
of 1962) was adopted by the eastern States with amendments. The next region was the
western region, that enacted the Income Tax Law in 1957 and this repealed the Direct Taxation
Ordinance of 1943. Another law came into effect in the western region in 1961. The law
introduced the Pay-As-You-Earn System and it also applied to non-Africans. The law was later
adopted by the western States but with amendments. The Northern Region joined the other
regions in 1962 by enacting the Northern Nigeria Personal Tax Law. The Federal Capital
Territory was not left out as the federal parliament, in 1961, enacted a law known as Personal
Income Tax (Lagos) Act which applied to the territory. This Act repealed the Income Tax
Ordinance of 1943.

In 1970, Lagos State posed an edict which adopted the Federal Government Personal Income
Tax (Lagos) Law Amendment Edict of 1968. This edict of 1968 which was made to apply to the
whole States had only been applied in the city of Lagos.

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An attempt was made to harmonize all the taxes in the federation by enacting the Income Tax
Management Act of 1961 which addressed certain issues such as the determination of
residence, chargeable income, and taxation of partnership and so on, but it did not fix a
uniform tax rate, allowances and relief for the country. The establishment of the Joint Tax
Board by the Income Tax Management Act of 1961 was another attempt to harmonize all the
taxes in the country but unfortunately the Board could not do so.

On 17th February 1975, the Federal Military Government took a bold step towards the
harmonization of the tax rates, allowances and reliefs throughout the country by promulgating
the Income Tax Management (Uniform Taxation Provisions) Decree No. 7 of 1975 which
amended the Income Tax Management Act of 1961 and the Income Tax (Armed Forces and
other Persons) (Special Provisions) Decree No. 51 of 1972. This Decree No. 7 of 1975 provided
for a uniform taxation in respect of Personal Income Tax. It unified all rates, reliefs and
allowances throughout the country. The Income Tax Management Act of 1961 was amended
several times until it was repealed by the Personal Income Tax Decree of 1993. This Decree also
repealed the Income Tax (Armed Forces and other Persons) (Special Provisions) Decree No.51
of 1972. The Personal Income Tax Decree of 1993 is still in force with the following
amendments Decree 30, 31 and 32 of 1996; Decree 18 and 19 of 1998; Decree 30 of 1999 and
PIT Amendment Act No. 20 of 2011.

Personal income refers to income of individuals, communities, families etc. arising from
employment, business, trade, vocation, profession etc. Personal income is subject to tax based
on the provision of Personal Income Tax Act (PITA) 1993 as amended to date. Personal income
tax in Nigeria covers areas such as:

(a) Taxation of Sole Trader

(b) Taxation of Employees (PAYE)

(c) Taxation of Partnership

Taxation of Settlements, Trusts and Estates.

The various sources of income on which tax is payable are as follows:

i. Gains or profit of any trade, business, profession or vocation, these incomes are usually
assessable to tax on preceding year basis.

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 ii. Remuneration of an employment, including sums paid to the employee, such as salaries,
wages, allowances and other benefits in kind. They are usually assessable to tax on
Actual Year Basis (AYB).

iii. Gains or profits including premium arising from the grant of the right of use or
exploration of assets such as Royalties, Rent, Patent, Premium etc. These incomes are
usually assessable to tax on Preceding Year Basis (PYB).

iv. Income from investment. Such as dividends and interest. These incomes are assessable
to tax on Preceding Year Basis (PYB).

v. Income from previous employment by way of pension. This is treated like employment
income and assessable to tax on Actual Year Basis (AYB)

vi. Any other income not included above such as lottery winnings, gambling, betting etc.
provided the income has not been derived through criminal means.

3.03 Determination of Residence and Relevant Tax Authority

The residence of a tax payer is a key factor in determining the relevant tax authority that his tax
will be paid to. The first schedule of the personal income tax decree describes ‘a place of
residence’ in relation to an individual as “a place available for his domestic use in Nigeria (on a
relevant day) and does not include any hotel, rest-house or other place for which he is
temporarily lodging unless not one permanent place is available for use on that day”.

Principal Place of Residence

A Principal Place of residence is determined where an individual has more than one place of
residence on a relevant day. Principal place of residence in relation to an individual with two or
more places of residence on a relevant day, not being both within any one territory, means;

(a) In the case of individual whose only earned income is pension in Nigeria, that place or
those places in which he usually resides.

(b) In the case of an individual who has a source of earned income other than a pension in
Nigeria, that place which is nearest to his usual place of work. Earned income in relation
to an individual means income derived by him from a trade, business, profession,
vocation or employment carried on or exercised by him and a pension derived by him in
respect of any previous employment.

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 (c) In the case of an individual, who has a source or sources of unearned income in Nigeria,
that place or those places in which he usually resides.

The PITD (1993) stipulates conditions of residence in Nigeria as follows:

1. Foreign Employment: This means any employment, where the duties of which are
wholly performed outside Nigeria, apart from any temporary visit of the employee to
Nigeria. An individual who holds a foreign employment on the first day of a year of
assessment (or who first becomes liable to income tax in Nigeria for that year by reason
of his entering such employment during that year), is deemed to be resident in that year
in the territory in which the main or principal office of his employer is situated.

2. Nigerian Employment: This means any employment, other than foreign employment,
where the duties are wholly or partly performed in Nigeria. An individual who holds a
Nigerian employment (or who first becomes liable to income tax in Nigeria for that year
by reason of his entering such employment during that year) is deemed to be resident in
the territory in which he has a place or principal place of resident on that day. Where an
individual is on leave from a Nigerian employment on the first day of a year of
assessment he is deemed to be resident for that year by reference to his place or
principal place of resident immediately before his leave began.

3. Other Employment: An employee whose remuneration is subject to income tax in

Nigeria but whose residence cannot be determined under Nigerian employment is
deemed to hold a foreign employment. If however, his residence cannot be determined
under foreign employment, then he is deemed to be resident in the Federal Capital
Territory.

4. Trades, Business, Profession or Vocation: Where an individual has no place or principal

place of residence in Nigeria, he is deemed to be resident in the state where his income
is derived. If he derives his income from more than one State then he is deemed to be
resident in the Federal Capital Territory.

Basic Terms

i. Earned Income: PITA defines earned income in relation to an individual, as “income derived
by him from trade, business, profession, vocation or employment carried on or exercised by
him and the pension derived by him in respect of a previous employment.

ii. Unearned Income: Unearned income is defined in PITA as the income derived from sources
other than trade, profession, business, vocation, employment or any reward for services
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 rendered. Examples of unearned income are dividends, interests, rent and so on. These
types of income are usually derived from investment and property.

iii. Year of Assessment (YOA): This is otherwise called the tax year which is the government
financial year. Prior to 1980 tax year, the period starts from 1st April and ends 31st March.
After 1980 tax year to date, the year of assessment runs from 1 st January to 31st December
of each year.

iv. Accounting Period: This is the period for which a tax payer has declared his state of
business in the preceding year or otherwise.

v. Basis Period: This is the period where a tax payer is assessed to tax, for any year of
assessment under consideration.

vi. Preceding Year Basis (PYB) of Assessment: This is a basis where the income of the
accounting period ending in the preceding year of assessment is, being assessed to tax.

vii. Actual Year Basis (AYB) of Assessment: This is the basis where the income of the actual
year of assessment or tax year under consideration is being assessed to tax in the same
year.

3.04 Reliefs and Allowances Available to an Individual

The following reliefs and allowances may be claimed by an individual under the provisions of
the Personal Income Tax Act, 1993 as amended up to 13th June, 2011.

Personal Allowance

This is an allowance granted to any tax payer that has a source of income. From 1992-1997 at
N3000 + 15% of earned income with effect from 1998 - 2011, it is at N5,000 plus 20% of earned
income. This can be claimed by all tax payers.

Children Allowance

This allowance is granted to tax payers who during the preceding year maintained a natural off-
spring or an adopted child. It is to be claimed at N2,500 per annum per child up to a maximum
of four children. For the claim to be successful, the following conditions must be met:

- The child must not exceed the age of sixteen.

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 - The child must be unemployed.

- Where the child exceeds the age of sixteen years, he must either be an apprentice to
a trade or he must be attending a full-time education.

- The child needs not belong to the tax payer.

Successful rates

1992-1994 YOA N500 per annum per child subject to maximum of four children

1995-YOA N1000 per annum per child subject to maximum of four children

1996-1997 YOA N1,500 per annum per child subject to maximum of four children

1998-2011 YOA N2,500 per annum per child subject to maximum of four children

Dependent Relative Allowance

This is granted to tax payer in respect of dependents maintained by him. Dependents are aged
parents of the tax payer or the spouse. It also includes close relatives who are incapacitated by
age, infirmity or contracted by a disease. Up to 1994 YOA it is N600 per annum per tax payer;
1995 to 1997 YOA it isN1000 per annum per taxpayer. With effect from 1998-2011 YOA, it is to
be claimed at N2,000 per annum per dependent relative for a maximum of two dependents.
For the claim to be successful, the dependent’s annual income should not exceed N2000 per
annum.

Life Assurance Policy Allowance

This is claimed on a life policy taken on the tax payer’s life or the life of his spouse.

The amount of the allowance was:

Up to 1994 Tax Year maximum of N2,000

1994-1995 Tax Year maximum of N5,000

The relief to be granted shall be the lowest of:

- The actual premium paid plus any pension fund contribution

- 10% of capital sum assured, or

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 - 20% of statutory total income.

Disabled Persons Allowance

This is available to a disabled person who uses special equipment or engages the services of an
attendant in the course of paid employment. The rate allowed is the higher of 20% of the
earned income or N3,000 per annum. The taxpayer must use special equipment with the
service of an attendant.

Note: This is not an alternative to personal allowance, but an addition.

Investment in Research & Development Company

Where an individual invests in the equity of a Research and Development Company he is

entitled to allowance which shall be the lower of:

- The actual value of investment, or

- 25% of the total income

Where the allowance claimed in any year is less than the actual investment, the balance shall
be carried forward indefinitely until the investment is recouped against income.

Donation to Research and Development Company Allowance

Where an individual makes a donation to a research and development company, he will be

entitled to an allowance which shall be the lower of

- The actual donation made, or

- 10% of the chargeable income.

Where the allowance claimed is lower than the actual donation, and the balance is lost because
it cannot be carried forward.

Subject to 14th June, 2011 amendment, Section 33 (Personal Relief) is amended to provide for
Consolidated Relief and Allowance. It provides that “there shall be allowed a consolidated relief
allowance of N200,000:00 subject to a minimum of 1 percent of gross income whichever is
higher plus 20 percent of the gross income and the balance shall be taxable in accordance with
the Income Tax Table in the Sixth Schedule to this Act."

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3.05 Table of Personal Income Tax Rate

From 1998 to 2000 From 2001 to 2011 From 2011 to date

First N20,000 at 5% First N30,000 at 5% First N300,000 at 7%

Next N20,000 at 10% Next N30,000 at 10% Next N300,000 at 11%

Next N40,000 at 15% Next N50,000 at 15% Next N500,000 at 15%

Next N40,000 at 20% Next N50,000 at 20% Next N500,000 at 19%

Above N120,000 at 25% Above N160,000 at 25% Next N1,600,000 at 21%

Above N3, 200,000 at 24%

3.06 Taxation of Sole Traders

A sole trader is assessed to tax on preceding year basis. A sole trader is an entrepreneur i.e. the
owner of a business. For tax purposes, a sole trader includes an architect who runs a studio, a
trader in the market and a lawyer who runs a firm etc. In the process of enhancing the tax
liability of a sole trader, the financial statements (accounts) presented to tax authority must be
critically examined in order to ascertain whether or not the expenses deducted or income is
admitted for tax purpose (allowable or disallowable).

In determining whether or not an expense is to be admitted for tax purpose, it must be wholly,
reasonably, exclusively and necessarily incurred for the purpose of the business. An income
must also be admissible for tax purpose. Taxable income previously omitted by the sole trader
must be included for tax purpose.

Wholly: This suggests that an expense to be deducted must have been incurred solely for the
purpose of the business.

Reasonably: This means that the expense must be reasonable, relative to the totality of the
financial statement; the expenses must not be outrageous.

Exclusively: This is very similar to the concept of ‘Wholly’ it only suggests further that the
expense must be exclusive for the business.

Necessarily: This means that the expense must be necessary for the purpose of generating
income for the business.

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However, there are some expenses that are allowed for tax purpose, while some are
disallowed.

Allowable Expenses

1. Any interest on a loan obtained for the purpose of the business.

2. Bad debt written off in the course of a trade or business.

3. Specific provision for doubtful debts.

4. Rent and premium in respect of land and building occupied for the purpose of the
business.

5. Contribution to an approved pension fund by Joint Tax Board.

6. Legal expense.

i. Renewal of short term lease.

ii. Retainer fee.

iii. Cost of protecting or defending the business.

iv. General legal advisory services.

7. Rent of accommodation for the staff provided it does not exceed the annual basic salary
of the staff.

8. Repair expenses on fixed assets and renewal of implementation or part.

9. Donations to institution or organization listed in the CITA’ 79 provided:

i. The donation was made out of profit.

ii. It must not be of valuable consideration.

iii. It must not be of a capital nature.

iv. It must not be more than 10% of total profit before the donation.

10. Any other expense that is wholly, reasonably, exclusively and necessarily incurred for
the purpose of the business.

11. Subscriptions to organizations related to the business.

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 12. Accountancy fees & auditors remuneration.

Disallowable Expenses

1. Depreciation of fixed assets.

2. Any private or personal expenses

3. Expenditure of a capital nature.

4. General provision for doubtful debt.

5. Fines and penalties.

6. Income tax provision.

7. Any withdrawal of capital.

8. Donation to unapproved bodies.

9. Any contribution to unapproved pension fund.

10. Any sum reserved out of profit or appropriations.

11. Any sum recoverable under an insurance scheme.

12. Legal expenses:

i. Cost of acquiring a new lease, either long or short term lease.

ii. Cost of renewing a long term lease.

iii. Cost of defending a tax appeal.

iv. Cost of defending traffic offense.

1.3 Cost of tax appeals.

14. Capital withdrawn or repaid.

15. Loss on disposal of asset.

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Format for Computing Tax Liability of Sole trader

N N

Net profit/loss xx

Add disallowable expense xx

Taxable income omitted xx xx

Deduct-Non-taxable income included xx

Allowable expenses not recorded xx (xx)

Adjusted profit xxx

Add balancing charge xx

Loss b/f xx

Loss for the year xx (xx)

Relieved loss (xx)

Loss c/f xx .

Assessable profit xxx

Capital allowance b/f xx

Capital allowance for the year xx

Relieved capital allowance (xx) (xx)

Capital allowance c/f xx

Taxable profit xx

Earned Income: N N

Taxable business profit x

Other earned income x

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Total earned income xx

Unearned Income:

Dividend x

Interest x

Rent x xx

Total Income xxx

Deduct:

Personal Allowance x

Children Allowance x

Dependent Relative Allowance x

Life Assurance Allowance x

Donation to R&D Allowance x xx

Chargeable profit xxx

Apply the table of personal income tax rates.

The new law calls for adjustment of reliefs and allowances to consolidated relief and allowance
as per PIT Section 33 of 2011 amendment. “There shall allow a consolidation relief allowance of
N200,000.00 subject to a minimum of 1% of gross income whichever is higher plus 20% of gross
income and the balance shall be taxable in accordance with the Income table in the sixth
schedule to this Act”.

3.07 Taxation of Employees

Employees are generally assessed to tax on the basis of Pay As You Earn (PAYE). The tax payable
by an employee is determined on Actual Year Basis (AYB) through the process of Pay As You
Earn (PAYE).

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PAYE Scheme

This is a method of collecting tax due on employment income. The employer is required to
deduct tax on all employment income, such as salaries and wages, bonuses, allowances and
other benefits in kind. The employer is an unpaid agent of the tax authority. Failure to deduct
tax by the employer will attract penalty at 10% and interest at the ruling commercial rate.

Procedure for Operating PAYE

At the beginning of the year, every employee is expected to complete Form A i.e. form for the
return of income and claim for allowance and reliefs. The forms will then be examined by a
responsible official of the company. To ensure that the information contain therein are correct.
The forms are then forwarded to the related tax authority, which also examine the forms and
use them in computing the reliefs and allowances due to each employee. The reliefs are then
entered in a tax deduction card. The figures on the cards would have been arrived at by dividing
the total allowances due to such employee by twelve. The deduction cards together with notice
of total amount payable and related allowances are then forwarded to the employer, to be
used in computing the tax due from each employee each month of the year.

The total tax deducted less total of all refunds must be remitted to the relevant tax authority,
through a designated bank within two weeks after the end of the month. Failing to do so, will
attract penalty and interest at the appropriate rate as stated above. This process by 2011
amendment demands for consolidated reliefs and allowances.

Employees Leaving

Where an employee leaves an employment before the end of the tax year, the employer is
expected to complete the employee tax deduction card up to the date of leaving and terminal
remuneration paid must be stated on the card. The card would be marked “self”, while the date
of leaving will be noted thereon and held to the end of the tax year. The employer will be
required to complete a transfer certificate which will be forwarded to the revenue authority
immediately and a copy will be handed over to the employee to be presented to the new
employer if any.

Where an employee dies:

Transfer certificate will be prepared in respect of the employees and copies forwarded to
revenue authority.

New Employee

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Where an employee is newly engaged, he will be required to present the transfer certificate
from his previous employer if any. Where he has no previous employment, a tax deduction card
will have to be obtained for the employee.

End of Year Procedure

At the end of the year, every employer is required to file a return to the tax office in the
prescribed manner using the employer’s annual declaration form (Form H) which discloses
information on the name of the employee, gross pay, and tax deducted and tax remitted. The
Form H together with the remittance card (Form G) and all tax deduction cards used during the
year, must be submitted to the relevant tax authority within 30 days after the end of the year.
After the returns have been filed, the employer can then apply for tax clearance certificate
using form 2 Information relating to last 3 years is disclosed on the amount of income and tax
paid.

Employer’s Liability

Any employer who fails to operate the PAYE’s scheme in the prescribed manner by deducting
tax from employees pay, shall be liable to make restitution, and might be charged penalty for:

1. Failure to deduct tax from employees pay.

2. Failure to remit tax deducted.

3. Failure to disclose the correct number of employees and their pay.

Sources of Employment Income

The following are the sources of employment income and the treatment for tax purpose:

(i) Basic salaries.

(ii) Housing allowance.

(iii) Transport allowance.

(iv) Utility allowance.

(v) Entertainment allowance.

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 (vi) Leave allowance.

(vii) Meal allowance.

In recent development, they are all presented as consolidated salaries.

Basic Salary

This is fully subjected to tax for the period the employee is in service for a particular tax year.
When an employee is not in employment for the full year, basic salary will be pro-rated to
reflect such period. Salaries are subjected to tax when due and not necessarily when received.

Housing Allowance

This would be exempted from tax if the amount received does not exceed N150,000 per
annum. Where the amount received by way of housing allowance is more than N150,000, the
surplus will be subjected to tax in the hands of the employee. This applies up to 2011 YOA.

Transport Allowance

This is exempted from tax if the amount received does not exceed N20,000 per annum, where
the amount received is in excess of N20,000, the difference is subjected to tax in the hands of
the employee up to 2011 YOA.

Utility Allowance

This is exempted from tax provided the amount received by an employee does not exceed
N10,000 per annum if the amount received is in excess of N10,000 per annum, the differences
is subjected to tax up to 2011 YOA.

Entertainment Allowance

An employee who is paid entertainment allowance that does not exceed N6,000 per annum is
exempted from tax on this income. Where the amount received exceeds N6,000 per annum
however the difference is subjected to tax.

Leave Allowance

Leave allowance received by an employee will be exempted from tax if the amount received
does not exceed 10% of the basic salary. Any amount received in excess of this would be
charged to tax in his hands.
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Meal Allowance

This is exempted from tax if the amount received does not exceed N5,000 per month. Where
the amount received is in excess of N5,000, the excess will be subjected to tax.

Bonus& Commission

Where an employee is paid bonuses and/or commission this would be fully charged to tax in his
hands. It must be noted however that tax will arise when the bonus or commission is received.

Overtime Allowance

This is fully chargeable to tax. This is because the overtime is treated as part of the salary or
wage.

Benefit-in-Kind

These are expenses incurred by the employer for the benefit of the employees. There are two
categories of such benefits:

(i) Use of assets owned by the employer: Where an employer provides an employee with
any assets for use in his employment, the employee will be deemed to be in receipt of
additional income per annum equal to 5% of the cost of the asset if known or 5% of the
market value at the date of acquisition.

(ii) Use of asset where an employer provides an employee with any asset for which the
employer pays a hire or rental charge. The employee will be deemed to be in receipt of
additional income equal to the annual amount expended by the employer in providing
such benefits, such as: motor car, house etc.

The entire reliefs and allowances granted to tax payers and processes were before 14th June,
2011.

Format for Computing Tax Payable by an Employee

N N

Earned Income: x

Basic Salary x

Housing Allowance x

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Pension Income x

Leave Allowance x

Total Employment Income xx

Other earned income x xx

Unearned Income:

Dividend x

Interest x

Rent x xx

Statutory Total Income xxx

Less: General charges (xx)

Net statutory Income xxx

Deduct:

Personal Allowance x

Children Allowance x

Dependent Relative Allowance x

Assurance Policy Allowance x

Donation R & D Allowance x

Investment in R & D Allowance x (xx)

Chargeable income xx

Apply the table of Personal Income Tax rate.

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2011 Amendment

N N

Total (Gross) Income xx

Consolidated Relief and Allowance

(N200,000 or 1% of Gross Income)

Whichever is higher +

20% of Gross Income (xx)

Less Non-Taxable Income:

Pension contribution x

NHIS x

NHF x

Gratuity x (xx)

Taxable Income xx

First N300,000 @ 7%

Next N300,000 @11%

Next N500,000 @15%

Next N500,000 @19%

Next N1,600,000 @21%

Over N3,200,000 @24%

3.08 Partnership Assessment

A Partnership is a relationship that subsists between two or more persons in business, with a
view to making profit. A partnership as an entity is not liable to tax. It is the partners who make
up the partnership that are assessable to tax on the income of the partnership. The partners

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will be treated like any individual in business. Income derived by partners from the partnership
business is assessable to tax on preceding year basis. The profit of a partnership will be
adjusted according to the provision of Personal Income Tax Decree (PITA) 104 of 1993.

Partners Income Subject to Tax

PITA, 1993 stipulates that the income of a partner from the partnership shall constitute the
following:

(i) Salary or remuneration paid to partners.

(ii) Interest on capital.

(iii) Interest on loan.

(iv) Cost of passage to or from Nigeria for leave or revenue incurred by the partnership or a
partner.

(v) Other personal expenses incurred on a partner.

(vi) Share of partnership profit in the agreed profit sharing ratio.

For an on-going partnership, the divisible income of the partnership will be arrived at by
deducting capital allowance from assessable profit.

Changes in the Composition of a Partnership

Admission of a Partner:

Where a new partner is admitted, technically the old partnership would have come to an end
and a new one commences, however, because a partnership is not a taxable entity, it is the
new partner who is deemed to have commenced new trade. The provision for the
commencement of a new business will be applied on the income of an incoming partner. The
old partners will be assessed on preceding year basis.

Retirement of a Partner:

Where a partner retires, the retiring partner is deemed to have ceased a trade and the rules for
cessation of a trade would be applied on the income of the retiring partners. The old partners’
income will be applied as follows.

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 (i) Split the profit of the accounting period. i.e. period before retirement or admission and
period after retirement or admission.

(ii) Share the profit for each of the relevant periods among the partners who were in
business during the period.

(iii) Aggregate the income of all partners from each of the relevant period.

(iv) Apply the relevant basis of assessment i.e.

a. For retiring partner, cessation rule.

b. For new or incoming partner, commencement rule.

c. For continuing partners, preceding year basis.

Commencement or Cessation for a Partner

Where a partner joins a new partnership from another partnership who are in the same type of
business as the old partnership, the rule for the commencement and cessation of a trade would
not be applied on the partner.

Capital Allowance

The relevant tax authority in respect of the partners is the tax authority of the territory where
the principal office or place of business of the partnership is located on the first day in that year
of assessment. Where a partner is liable to tax to another authority; that relevant tax authority
shall supply that other authority with information on the income derived by that partner from
the partnership.

Conversion of a Partnership Business to a Limited Liability Company

Where a partnership business is converted to a limited company, the following are the tax
implications:

(i) In respect of assessable profit, the partnership business is deemed to have come to an
end and the rules for the cessation of a trade would be applied on the income of each of the
partners. The limited liability would be deemed to have commenced a new trade and the rules
for the commencement of a new business would be applied on the income of the limited
liability company.

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(ii) In respect of capital allowance, the qualifying capital expenditure of the partnership will
be deemed to be transferred to the company, at their Tax Written Down Value (TWDV),
especially where such transfer has not been made at arm’s length. Where the transfer is made
at arm’s length, the asset would be deemed to have been transferred at arm’s length value.
However, in both situations, the limited liability company will not be entitled to initial
allowance claim on the assets only annual allowance will be granted. Note that balancing
charge, balancing allowance and capital gains may result on such transfers.

Procedure for Computing Chargeable Income of Partners

1. Identify the net profit or loss of the partnership.

2. Add non-allowable expenses and taxable income not previously reported.

3. Deduct non-taxable income and allowable expenses not previously deducted.

4. The addition of steps 1 to 3 results in adjusted profit or loss.

5. Deduct all private expenditure and transfer to each partner including salaries, interest on
capital and leave passages.

6. Whatever is left is then shared in the agreed profit and loss sharing ratio.

7. Sum up the amount due to each partner.

8. Deduct losses attributable to each partner from the partners’ income.

9. Share the capital allowance of the partnership in the agreed profit or loss sharing ratio.

10. Deduct the capital allowance from the partners’ income.

11. Add any other income(s) earned by each partner to his partnership income.

12. Deduct all personal relief available to each partner.

13. Compute tax liability.

Format I: Income Derived by a Partner from Partnership

A B C TOTAL

Divisible Income xx
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Share of profit (PSR) x x (xx)

Salaries x x x Nil

Cost of passage x x x

Interest on capital x x x

Other expenses on partners x x x

Total income to partners xx xx xx

Less Reliefs:

Consolidated Relief and Allow (x) (x) (x)

Capital allowance (x) (x) (x)

Dependent relative allowance (x) (x) (x)

Taxable Income xx xx xx

Apply Tax Table of rates

This format assumes that expenses incurred on partners, such as salaries and wages; interest
on capital; cost of passage etc. have been charged to profit and loss in arriving at the net profit
and not disallowed in determining the adjusted profit.

Format II

A B C TOTAL

Divisible Income: xx

Interest on capital x x x (x)

Cost of passage x x x (x)

Salaries x x x (x)

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Share of Profit x x x (x)

Income from Partnership xx xx xx Nil

This format assumes that expenses incurred on partners such as interest on capital, cost of
passages, salaries etc. were not charged in to the P&L account and where they have been
charged to P&L account, they must have been disallowed in arriving at the adjusted profit.

3.09 Taxation of Settlement, Trust and Estate

A “Settlement” is an agreement by which a sum of money is set aside to make provision for
another person e.g. (a marriage settlement).

A “Trust” is the conveyance of property to one or more persons with the confidence that it
would be applied for the benefit of others or for a specific purpose. This arrangement is usually
made out in writing establishing a document known as trust deed. Trust deed is a specified
terms of arrangement which normally include items like, remuneration of the trustee, fixed
charges to be paid by the trust, provisions for discretionary payment and percentage due to the
beneficiaries. A trust may be created by will, by deed, or occasionally by an order of the court.

An ‘Estate’ is the aggregate of assets possessed by a person including his goods, money and
property of all kinds at death, his estate passes into the possession of his personal
representative, i.e. executor or administrator whose duties are to meet the necessary funeral
expenses, obliging to any will, legally proved and to realize the estate and pay debts. They deal
with the residue of the estate as directed by the will, if any, or if none, according to the rules of
intestacy.

Types of Person that may benefit from Income of an Estate

1. Legatee: A legatee is a person receiving specific bequest e.g. (investment) from the
estate, i.e. a person to whom a legacy is bequeathed.

2. Residual Legatee: This is a person entitled both to income and capital (or part of it) at
the end of the administration period. He holds an absolute interest and is known as a
‘residuary legatee’ or ‘residuary devisee’.

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 3. Annuitant: This is a person receiving an annuity which may be charged on the income of
the estate or on a particular asset.

4. Beneficiary: This is a person that is entitled to income and capital (or part of it). He
holds a limited interest at the end of a specified period usually at the death of such a
beneficiary, the capital passes to some other persons, the ‘remaining’.

(i) Total Income: Total income is the aggregate of all sources of income cleared by the
settlement trust or estate in any year of assessment.

(ii) Computed Income: Computed income of an estate, trust or settlement is the difference
between the total income and allowable expenses.

(iii) Allowable Expenses: This include authorized payments like the fee payable to the
trustee, legacy annuity, but excluding the amount payable to the beneficiaries.

(iv) Discretionary Payment: This is the payment that is usually made at the discretion of the
trustee or executor. It is fixed and payable annually. Any amount received as
discretionary payment by a beneficiary is chargeable to tax in his hand.

(v) Distributions to Beneficiaries: After the deduction of discretionary payments from

computed income, distributions are made to beneficiaries from the balance thereof;
such payment is termed distribution to beneficiaries. Amount distributed to a
beneficiary is chargeable to tax in his hand.

(vi) Loss Treatment: Any loss incurred by the settlement, trust or estate is available for relief
against the profit of subsequent years of assessment. However where a loss is transferred to
the settlement, trust or estate such a loss is not available for relief.

(vii) Capital Allowance: For assets transferred to the settlement, trust or estate, it is
assumed to be transferred at the tax written down value.

(viii) Initial Allowance: It is not to be claimed on transferred assets. Annual allowance

claimable shall be based on the un-expired life of the transferred assets.

(ix) If any of the assets transferred is later disposed, any balancing adjustment to be
determined should be computed with reference to the total allowance previously granted to
both the transferor and the settlement trust or Estate.

Tax Payable by Trustee

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After the distribution of a portion of the remainder of computed income to the beneficiaries,
any undistributed balance is deemed to be the trustee’s income, consequently, the income is
being charged to tax in the hands of the trustee.

Procedure for computing chargeable income of a beneficiary

(i) Identify all the sources of income of the settlement, trust and estate.

(ii) Sum up the income to obtain the total income.

(iii) Identify all the allowable expenses.

(iv) Determine the computed income by deducting the allowable expenses from the
computed income.

(v) Deduct discretionary payment to beneficiaries from step (iv) above.

(vi) Allocate amount distributed to each beneficiary based on the trust deed.

(vii) The chargeable income of each beneficiary from the settlement, trust or estate is
the sum total of individual’s discretionary payment and distributions.

Format for Determining Chargeable Income

N N

Income

Interest x

Rent x

Dividend x

Trading Profit x

Sundry Income x

Total income xx

Deduct Expenses

Trustee Remuneration x
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Trustee Annuity x

Specific Legatee x

Residual Legatee x

Administration Expenses x

Authorized Payment x (xx)

Computed Income xxx

Less:

Discretionary Payment

A x

B x (xx)

Remainder of computed Income xx

Distribution to beneficiaries

A x

B x (xx)

Trustee Income Taxable xx

Income of beneficiaries

A B

N N

Discretionary Payment x x

Distribution x x

xx xx

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3.10 SPECIFIC EXPENDITURE AND THEIR TREATMENTS

S/N ITEM OF EXPENDITURE TREATMENT REMARK

1. Preliminary expense Disallowed Capital in nature

2. Formation expense Disallowed Capital in nature

3. Legal expense:

- Court Disallowed Capital in nature

- Incorporation Disallowed Capital in nature

- Traffic offence Disallowed Not WREN

- Retainership

(service of professional) Allowed Revenue items

- Feasibility study Disallowed Capital in nature

- Lease See Note 1 See Note 1

- Increase in Share Capital Disallowed Capital in nature

- Stamp Duties See Note 2 See Note 2

- Debts recovery Allowed Revenue Item

- Penalty/fine Disallowed Not WREN

4. Defending title to property Disallowed Not WREN

5. Improvement Disallowed Capital Item

6. Demarcation Disallowed Capital Item

7. Partitioning Disallowed Capital Item

8. Enhancement Disallowed Capital Item

9. Construction Disallowed Capital Item

10. Repair and maintenance Allowed Revenue item

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11. Removal {Shifting base} See Note 3 See Note 3

12. Salaries/wages Allowed Revenue item

13. Donations/subscription Allowed Subject to Approve List

14. Bad debt Allowed See Note 5

15. Telephone/Telex/Telegraph Allowed Revenue Item

16. Custom and excise duty Allowed Revenue Item

17. Superannuation fund

scheme See Allowed See Note 6

e.g. NPF {NSITF} Pension scheme

ITF {Industrial Training Fund}

18. Traveling Expenses Allowed See Note 7

Rent and Rates

19. Entertainment Allowed Revenue Item

20. Allowed See Note 8

21. Allowed WREN

{if it is necessary
for the business}
Advertising
Allowable
Public Relation
Allowable
22. Depreciation {Amortization} See 9
Disallowed
23. Profit or loss on sale of Fixed assets See 10
Profit not
24. Capital Item
Chargeable
25. Capital Item
Loss not
Profit or loss on Revaluation

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 allowed

Profit or loss on Investment {Same as in 25

above}
26.
{Same as in 25
Profit or loss on Intern company
above}
balance
27.
{Same as in 25
Profit or loss on Remittances (Forex
above}
transaction)
28. Profit

Chargeable;
Audit/Accounting fees
29. Loss Allowed. Revenue Item
Management/Technical fees
Allowable
Professional fees
Allowable
Director fees
30. Allowable Revenue Item
Medical fees
31. Allowable See Note 11
Bank charges
32. Allowable Revenue item
Interest charges
33. Allowable See Note 12
Research and Development (R & D)
34. Allowable Revenue Item
Electricity fees
35. Allowable Revenue Item
Newspaper/Journals
36. Revenue Item
Taxes
37. Allowable By statute
Allowable

38. Disallowed Revenue Item

39. See Note 13

40. See Note 14

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Note

1. Lease: Lease is of two types and short lease. Any legal expenses on either long or short
lease will be disallowed. Retainership of a long lease will also be disallowed, but
retainership on a short lease will be allowed.

2. Stamp duties: stamp duties on increase in share capital area always disallowed. Other
stamp duties are allowed.

3. Removal/alterations: It should be allowed if it is of revenue in nature and disallowed if

of capital in nature.

4. Donations/subscriptions: for donations to be allowed for tax purposes, the following

conditions must prevail.

- The donation must have been made to one of the bodies under schedule 5 of CITA
or as approved by the SBIR

- The donation must not be of capital in nature

- The donation must not be made out of loss

- The donation must not exceed 10% of the profit before the deduction of such
donation.

For subscription to be allowed for tax purposes it must be necessary for the purpose of the
trade or business e.g. subscription of manufacturing companies to manufacturing associations,
accounting firms to ICAN etc.

5. Bad and doubtful debts: General provisions for bad debts are always disallowed. Bad
debts recovered are always chargeable to tax. More so, if a company is in the business
of money lending, loans to staff written off will be allowed for tax purposes.

6. Superannuation fund scheme: NPF and pension scheme are allowed subject to the limit
set or approved by the JTB

7. ITF: This will be allowed if approved by the JTB

8. Rent and Rates: This will be allowed for tax purposes, subject to the restrictions of the
Act.

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 9. Advertising: Advertising of consumables in nature will be allowed for tax purposes.
Examples are advert in newspapers, journals, radio, TV. But advertising of a capital in
nature will be disallowed e.g. Advert on neon Sign Post and Sign Boards which could
stay for a long time based on maintenance.

10. Public Relation: Expenditure on public relations will be allowed if they are promotional
in nature (mostly cost on it is kept on a reasonable level as it is mostly disallowed).

11. Management/Technical Fees: This will allowed if approved by the minister of finance.

12. Directors fees: Directors fees are generally allowed, but where it involves holding
company, N3,000 will only be allowed for 2 directors. But if no holding company is involved it
will be allowed.

13. Newspaper/Journals: They will only be allowed if they are necessary for the business for
conventional papers (such as Punch, Concord, Tribune etc.) and specific Journals which relate to
the business (e.g. for a company in a medical industry, a health journal) is allowed.

14. Taxes: are disallowed in whatever form

3.11 Review Questions

Question I

Mr. Kolo is a staff of NEXIM Bank Plc with a consolidated monthly salary of N784,261. In
addition, he receives N396,000 per month for his accommodation.

He receives additional income on the following:

Year Source

Trading Dividend Rent

N N N

2010 9,308,652 900,000 1,500,000

2011 6,500,000 705,000 1,500,000

2012 12,800,000 840,000 1,500,000

Note: All dividend and rent are reported gross.

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Required: Determine Mr. Kolo’s tax liability for 2012 year of assessment.

Solution I

Mr. Kolo

Determination of Tax Liability for 2012 Year of Assessment

N N

Earned Income:

Salaries (784,261 x 12) 9,411,132

Accommodation (396,000 x 12) 4,752,000

Trading 6,500,000 20,663,132

Unearned Income:

Dividend 705,000

Rent 1,500,000 2,205,000

Gross Income (GI) 22,868,132

Relief & Allowances:

Consolidated Relief

(200,000 or 1% of GI) + 20% of GI

whichever is higher

228,681 + 4,573,626 (4,802,307)

Chargeable Income 18,065,825

Less Frank Investment (705,000)

Taxable Income 17,360,825

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Tax liability

1st 300,000 @ 7% = 21,000.00

Next 300,000 @ 11% = 33,000.00

Next 500,000@ 15% = 75,000.00

Next 500,000@19% = 95,000.00

Next 1,600,000 @21% = 336,000.00

Next 14,160,825 @24% = 3,398,597.90

N3,958,597.90

Less Advance Tax credit(Rent) 150,000.00

Tax Payable N3,808,597.90

Questions II

Mr. Okoronko was retired from the public service of the federal government on 31st March
2006. He then secured employment with a public limited liability company based in Lagos,
effective 1st April 2006 as managing director. The following information has been provided by
Mr. Okoro.

(a) Salary-from old employment is N20,000 per month, new employment N300,000 per
annum.

(b) Pension income effective 1/4/06 N60,000 p.a.

(c) Transport allowance new employment N24,000 p.a .

(d) Rent allowance by new employer N100,000 p.a .

(e) Entertainment allowance is N2,000 per month.

(f) Dividends received (Gross) N

a. Paid 3/3/05 9,625

b. Paid 7/8/05 8,415

123
 c. Paid 26/2/06 4,800

d. Paid 20/8/06 6,000

e. Paid 2/12/06 7,200

(g) Rent collected (gross) 1/7/05-30/6/06 N84,040

(h) Expenses on property N

- Water rate 1,500

- General rate 2,750

- Repairs 2,500

- Insurance 4,800

- Interest on Loan 650

(i) Mr Okoro is married and has five children aged between 4 years and 18 years. All except
one, named Kuta-aged 18 are still in school. Kuta is however unemployed.

(j) Capital allowance on building has been agreed with the Revenue at N16,000.

(k) Mr. Okoro has a life assurance policy on Kuta-with sum assured of N200,000 and annual
premium of N20,000.

(l) His widowed mother lives with him and he spends N18,000 per annum maintaining her.
Although she has an investment income of N12,000 per annum of her own.

(m) Other expenses-Donation to disabled persons N5,000.

(n) His new employer also provided him with a car (costing N350,000) for his exclusive use.

You are required to compute the income tax payable by Mr. Okoro for 2006 year of assessment.

Solution II

Mr. Okoronko

Computation of Income Tax Liability for 2006 Year of Assessment

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 Notes N N

Earned Income

Employment Income salary 1 285,000

- Pension 2 45,000

- Transport Allowance 3 6,750

- Entertainment 5 13,500

- Benefit-in-Kind 8 13,125 363,375

Unearned Income-Rent 6 27,920

- Dividend 7 18,040 45,960

- Statutory Total Income 409,335

Deduct Relief: Personal Allowance (20% of EI+5,000) 77,675

- Children Allowance 10,000

- Dependent Relative Allowance -

- Life Assurance Policy Allowance 20,000 107,675

301,660

Frank Investment (Dividend) 18,040

Taxable Income 293,620

Tax Payable: N

1st 30,000 at 5% = 1,500

Next 30,000 at 10% = 3,000

Next 50,000 at 15% = 7,500

Next 50,000 at 20% = 10,000

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 133,620 at 25% = 33,405

Chargeable Tax 55,405

Tax Credit (Rent) (8,404)

Tax Payable 47,001

Working Notes:

1. Salaries

1/1/06-31/03/06 = 20,000 x 3 = 60,000

1/4/06-31/12/06 = 9/12 x 300,000 = 225,000

285,000

2. Pension

1/4/06-31/12/06 = 9/12 x 60,000 =45,000

Pension becomes taxable with effect from April 1, 2006

3. Transport Allowance

1/4/06-31/12/06 = 9/12 x (24,000-15,000) = 6,750

Transport allowance is exempted from tax provided it does not exceed N20,000 p.a. from 2001
year of assessment. Any amount in excess of this is charged to tax.

4. Rent Allowance

The rent allowance not exceeding N150,000 per annum is exempted from tax.

5. Entertainment Allowance

1/4/06-31/12/06 = 9/12 = [(2,000 x 12) - 6,000] = 13,500

6. Rental income (1/7/05-30/6/06) N N

Amount collected 84,040

Less: Water rate 1,500

General rate 2,750

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Repairs 2,500

Insurance 4,800

Interest on loan 650 12,200

Net Income 71,840

Capital allowance (16,000)

Chargeable Income 55,840

For 2006 year of assessment = 6/12 x 55,840 = 27,920

7. Dividend income:

Since dividend income is charged on the preceding year basis. Only dividend received in 2005
are relevant for the 2006 year of assessment.

Received on 3/3/05 9,625

Received on 7/8/05 8,415

18,040

8. Benefit–in-Kind

Car = 9/12 x 5% x 350,000 = 13,125

9. He is not entitled to dependent relative allowance because the dependent

earns a total income that exceeds N600 per annum.

10. Life assurance policy allowance is claimed as follows:

The lowest of: N

(a) Annual premium = 20,000

(b) 10% of capital sum assured 20,000

(c) 20% of statutory total Income 66,867

11. The donation to the disabled society is not an allowable deduction.

127
 MODULE 4

4.00 COMPANIES INCOME TAX

4.01 Learning outcome

On successful completion of this Module, Students should be able to:

i. Examine how Companies Income tax is administered and how to deal with the tax
authorities in connection with the tax liability;
ii. Evaluate the nature and classification of cost (Allowable or Disallowable) in CITA;
iii. Compute the adjusted profits of companies;
iv. Compute capital allowances for companies for tax purposes;
v. Prepare companies profit for tax computations in accordance with CITA.

4.02 Chargeable Persons

A company is chargeable to tax

(i) In its own name; or

(ii) In the name of any principal officer, attorney, factor, agent or representative of the company in
Nigeria; or

(iii) In the name of a receiver or liquidator.

The principal officer or manager of a company shall be held responsible for any tax matter that
has to do with his company. This is quite important since every company though a legal person
can only act through its management or other responsible staff.

The FIRS in Nigeria has power under the law to appoint any person by notice in writing as agent
of any company and the person declared as agent will be required to pay any tax liability of a
company for which he is declared as an agent from any money that may be due from him to the
company. Such appointed agent cannot refuse or else, the debt shall be recoverable from his
own resources. In this regard, any person can be required by the Board to supply details of any
funds held by him on behalf of any company. Where a person is appointed as an agent for the
payment of tax he is indemnified against any action by any person in respect of such an amount
and in the case of a company being wound-up the liquidator of the company cannot distribute
any assets of the company to the shareholders unless he has made provision for all tax liabilities

128
of the company including all the taxes the company may have deducted at source and not yet
remitted to the tax authorities, this will depend on the provision of liquidation rules.

For instance, a debtor to a company can be asked to give details of his indebtedness to the FIRS
after he had been given notice in writing of his appointment as an agent for tax collection from
the creditor company.

He would be obliged to supply the details. A demand for the payment of that sum can then be
made on him and from that moment, he becomes a tax debtor to the FIRS for that sum in his
personal capacity.

4.03 Chargeable Tax

Section 8 of the Companies Income Tax Act provides that tax shall, for each year of assessment,
be payable at the rate specified in Section 29 (1) of the Act upon the profits of any company.

- Accruing in, derived from, brought into or received in Nigeria in respect of:

(i) Any annual profit or gains from any other source whatsoever.

(ii) Rent or any premium arising from a right granted to any other person for the use or
occupation of any property. Where rent is paid for a Period covering more than one
accounting period, the rent shall be treated as accruing proportionately from day to day
over the period during which it relates, provided that where the rent is for a period
exceeding five years, then it shall be apportioned over a period of five years only.

(iii) Any trade or business for whatever period of time such trade or business may have been
carried on.

(iv) Dividends, interest, royalties, discount, charges or annuities.

(v) Any amount of profits or gains from the acquisition and disposal of short term money
instruments.

(vi) Any amount deemed to be the income or profit with respect to any benefit arising from
a pension or provident fund under the Personal Income Tax Act.

(vii) Fees, dues, allowances when paid for services rendered.

129
For the purpose of determining chargeable profit, interest is deemed to be derived from Nigeria
if:

a. There is a liability for payment of the interest by a Nigerian company regardless of

where or in what form the payment is made or

b. The interest accrues to a foreign company or person from a Nigerian company

regardless of whichever way the interest may have accrued.

Dividend for the Purpose of Determining Chargeable Profit

a. In relation to a company not being in the process of being wound up or liquidated, any
profits distributed whether such profits are of a capital nature or not including an
amount equal to the normal value of bonus shares, debentures or securities awarded to
the shareholders and

b. In relation to a company that is being wound up or liquidated, any profit distributed

whether in money worth or otherwise other than those of a capital nature earned
before or during the winding-up or liquidation process.

Company Profit Exempted from Tax

Subject to the provision of Section 19 of CITA, the following profits are exempted from tax:

▪ The profits of any company being a statutory or registered friendly society, in so far as such
profits are not derived from a trade or business carried on by the society.

▪ The profits of any company being a co-operative society registered under any enactment or
law relating to cooperative societies not being profit, from any trade or business carried on
with its members or from any shares owned or other interest by some other persons or
authority.

▪ The profit of any company engaged in ecclesiastical, charitable or educational activities of a

public character in so far as such profit are not derived from a trade or business carried on
by such company

▪ The profit of any company formed for the purpose of promoting sporting activities where
such profits are wholly expendable for such purpose subject to the conditions which the
Board may prescribe.

▪ The profits of any company being a trade union registered under the Trade Union Act in so
far as such profits are not derived from a trade or business carried on by such trade union.
130
▪ Dividends derived by a company from another company incorporated in Nigeria provided
that:

a. The equity participation of the recipient company, if the company paying the
dividend is paid for wholly in foreign currency or by assets brought or imported into
Nigeria between 1st January 1987 to 31st December 1992 and

b. The company receiving the dividend is the beneficial owner of not less than 10% of
the equity share capital of the company paying the dividend.

The dividend tax free period shall commence from the year of assessment following that in
which the capital was brought into Nigeria for the purpose of the trade or business and
continue for a period of five years. For a company engaged in agricultural trade or business. For
any other company, the tax free dividend period will be for three years.

▪ The profit of anybody corporate being a purchasing authority established by an

enactment and empowered to acquire any commodity for export in Nigeria from the
purchase and sale of that commodity.

▪ The profits of any company engaged in petroleum operations in so far as the profits are
derived from petroleum operations, they are liable to tax under the Petroleum Profit
Tax Act.

▪ The profits of any company being a body corporate established by or under any Local
Government Law or Edit in force in any State in Nigeria.

▪ The profit of any company or any corporation established by the law of a state for the
purpose of fostering the economic development of that state not being profits derived
from any trade or business carried on by that company or from shares or interest
possessed by that company in a trade or business carried on by some other person or
authority.

▪ Dividend, interest, rent, or royalty derived by a company from outside Nigeria and
brought into Nigeria through Government approved channels.

▪ Interest earned on deposit accounts of a foreign non-resident company provided that

the deposits into the account are transfers wholly in foreign currencies to Nigeria on or
after 1st January 1990 through Government approved channels.

▪ Dividend received from small companies in the manufacturing sector in the first five
years of their operation.
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 ▪ Dividend received from investments in wholly export oriented businesses.

▪ Any other company or profits exempted from tax by the order of the National Council of
Ministers.

▪ The profit of a company granted pioneer or by extension from its pioneer operations
during the pioneer period or any extension thereof.

4.04 Allowable Expenses

By Section 20 of CITA, the chargeable profit of a company liable to income tax shall be
determined after deducting all expenses of the period by that company wholly, exclusively,
necessarily and reasonably incurred in the production of those profits, including.

▪ Any sum payable by way of interest on any money borrowed and employed as capital in
acquiring the profits.

▪ Rent for the period and premiums, the liability of which was incurred during the period in
respect of land or building occupied for the purpose of acquiring the profit subject to the
case of residential accommodation occupied by employees of the company to a maximum
of:

a. N56,000 per annum for each building and N28,000 per annum for each flat in Lagos area
and the Federal Capital Territory of Abuja and

b. N40,000 per annum for each building and N10,000 per annum for each flat in any other
part of Nigeria.

The allowance deductible in respect of rent on staff accommodation is limited to the lower of
the actual amount paid or the annual basic salary of the employee occupying the
accommodation subject of course to the above limits specified in the Act.

▪ Any expenses incurred for the repair of premises, plant, machinery or fixtures employed in
acquiring the profit or for the renewal, repair or alteration of any implement, utensil or
articles so employed.

▪ Bad debts incurred in the course of the trade or business proved to have become bad
during the period for which the profits are being ascertained and doubtful debts to the
extent that they are reasonably estimated to the satisfaction of the Board to have become
bad during the said period notwithstanding that such bad or doubtful debts were due and
payable before the commencement of the said period provided that:
132
 a. Where in any period a deduction under this paragraph is to be made in respect to any
particular debts and a deduction in any previous period been allowed in respect of the
same debt, the appropriate deduction shall be made in the deduction to be made for
the period in question.

b. All sums recovered during the said period on account of previously written off or
allowed in respect of bad or doubtful debts shall be deemed to be profit of the trade or
business of that period.

c. It is proved to the satisfaction of the Board that the debts in respect of which a
deduction is claimed either were included as a receipt of the trade or business in the
profit of the year within which they were incurred.

Any contribution to a pension, provident or other retirement benefits funds, society or scheme
approved by the Joint Tax Board under the powers conferred upon it by the PITA as amended
and subject to any conditions imposed by the Board or any contribution other than a penalty
made under the provisions of any enactment establishing a national provident fund or other
retirement benefits scheme for employees throughout Nigeria.

Any expenses or part thereof of a trade or business.

a. The liability of which was incurred during that period wholly, exclusively, necessarily and
reasonably for the purpose of such trade or business and which is not specifically
referable to any period or periods.

b. The liability for which was incurred in any previous period wholly, exclusively,
necessarily and reasonably for the purpose of such trade or business and which is
specially referable to the period of which the profits are being ascertained.

c. The expenses proved to the satisfaction of the Board to have been incurred by the
company on research and development for the period including the amount of levy paid
by it to the national Science and Technology Fund.

Any other deduction as may be prescribed by the Minister by any rule.

4.05 Disallowable Expenses

The following deductions are specially disallowed by Section 23 of the Act:

▪ Any expenses of any description incurred outside Nigeria for and on behalf of any company
except of a nature and to the extent that the Board may consider allowable.
133
▪ Any payment to a savings, widows and orphans, pensions, provident or other retirement
benefit fund society or scheme except as permitted by paragraph (g) of Section 23 of the
Act.

▪ Capital repaid or withdrawn or any expenditure of a capital nature.

▪ Any sum recoverable under an insurance or contract of indemnity.

▪ Any amount received out of profits except specific provision for doubtful debts or approved
donations.

▪ Taxes on income or profits levied in Nigeria or elsewhere other than tax levied outside
Nigeria on profits which are chargeable to tax in Nigeria where relief for the double taxation
of those profits may not be given under any other provision of CITA.

▪ The depreciation of any asset.

▪ Expenses of any description incurred within or outside Nigeria for the purpose of earning
management fees unless prior approval of the agreement given rise to the fees has been
obtained from the minister.

4.06 Deductible Donations

The provisions relating to donations made by a company are contained in Section 21 and the
Fifth Schedule of the Act. For any donation to be allowed as a deductible expense the following
conditions must be fulfilled.

▪ The donation must not be an expenditure of a capital nature.

▪ The donation must be made out of profit. Hence, a donation will not be allowed if it will
have the effect of changing an ascertained profit into a loss or increasing the magnitude of
an ascertained loss.

▪ The donation shall not include any outgoing expenses that are allowable deductions under
Section 20 of the Act.

▪ The donation must not exceed 10% of the total profit of the company before deducting the
donation.

▪ The donation must be made to either.

a. Public funds.

134
 b. Statutory bodies and institutions or

c. Ecclesiastical, charitable, benevolent, educational and scientific Organisations

established in Nigeria which are specified in the Fifth Schedule to the Act.

List of Approved Bodies for Donations

▪ Any hospital owned by the government of the Federation or of a state or any University
Teaching Hospital or any hospital which is carried on by the individual members of the
society or association.

▪ The institute of Medical Laboratory Technology.

▪ The Boys Brigade of Nigeria.

▪ Any educational institution affiliated under any law with any university in Nigeria, or
established under any law in Nigeria and any other educational institution recognized by
any government in Nigeria.

▪ The Boys Scouts of Nigeria.

▪ The Nigeria Council for Medical Research.

▪ The Christian Council of Nigeria.

▪ The Nigerian Institute for Oil Palm Research.

▪ The Cocoa Research Institute of Nigeria.

▪ The National Library.

▪ The Nigerian Red Cross.

▪ The Nigerian Institute of International Affairs.

▪ The Girls Guides of Nigeria.

▪ The Nigerian Museum.

▪ A public institution or public fund established for the comfort of recreation or welfare of
members of the Armed Forces.

▪ The National Youth Council of Nigeria.

135
▪ A public fund established and maintained exclusively for providing money for the
acquisition, construction, maintenance or equipment of a building used or to be used as a
school or college by the Government of the Federation or a state or by public authority or
by a society or association which is carried on otherwise than for the purpose of profit or
gain to the individual members of the society or association.

▪ The National Sports Council or State Association.

▪ A public established and maintained for providing money for the construction and
maintenance of a public memorial relating to the Civil War in Nigeria.

▪ Rotary International Polio Plus.

▪ The Nigerian Society for the Deaf and Dumb.

▪ National Science and Technology Fund.

▪ The Society for the Blind.

▪ Education Cooperation Society.

▪ The Nigerian National Advisory Council for the Blind.

▪ Paterson Zochonis Nigeria Technical Education Trust Fund.

▪ The National Association for the Blind in Nigeria.

▪ Afprint Foundation Limited.

▪ Training Centers and Residential Schools for the Blind.

▪ The Kewalram Chanrai Foundation Limited.

▪ The National Braille Library of Nigeria.

▪ The Nigerian Accounting Standards Board.

▪ The Nigerian Youth Trust.

▪ The Nigerian Conservation Federation.

▪ Van Leer Nigerian Educational Trust.

▪ Islamic Education Trust.

136
▪ The Institute of Chartered Accountants of Nigeria Building Fund

▪ Any public fund established or approved by the Government of the Federation or

established by any of the State Governments in aid of or for the relief of drought or any
other natural disaster in any part of the Federation.

4.07 Offences and Penalties

Most of the offenses in income tax are basic ones. They are identical with the offenses
discussed under the personal income tax. The penalties imposed for tax offenses change from
time to time. It is therefore advisable to get acquainted with the changes as they occur. The
following are some of the offenses and penalties which are for the time being applicable to
companies in Nigeria

i. Failure to furnish returns within the stipulated period is punishable on conviction to a

fine of N2,500 plus N500 for each month the failure continues.

ii. Where a director, a manager, a secretary, or any servant or agent of a company.

Is found to have connived or encouraged a company in its default to submit returns, such an
officer shall have committed an offence punishable on conviction to a fine of N2,000 or
imprisonment of six months or both.

iii. False Statement & Returns: Any person other than a company who, for the purpose, of
obtaining any deduction, knowingly makes any false statement or false representation
or aid, abets, assists, counsel, incites or induces any other person to make or deliver or
unlawfully refuses or neglect to pay tax shall be guilty of an offence and shall be liable
on conviction to a fine of N1000 or to imprisonment not exceeding 5 years or both.

iv. Offenses by Authorized and Unauthorized persons: Any person who

a. Being a person appointed for the administration of CITA

i. Demand from any company an amount in excess of the due tax; or

ii. Withhold tax money for his own use; or

iii. Renders a false return of tax money collected by him; or

iv. Uses his position to defraud any person or embezzles any money;

137
 b. Not being authorized under CITA to do so, collects or attempt to collect the tax
under the Act shall be guilty of an offence and be liable on conviction to a fine of
N600 or to imprisonment for three years or to both such fine and imprisonment.

It is very important to note that the institution of proceedings in respect of any of those
offences, or the imposition of penalties, fines and imprisonment does not relieved the company
from liability to pay any tax to which it may become liable.

4.08 Ascertainment of Total Profits

As provided for in Section 27 CITA, the total profit of a company for any year of assessment
shall be the amount of its total assessable profits from all sources for that year together with
any additions to be made in respect of any balancing charge less any deductions to be made or
allowed in respect of any losses and capital allowances. Hence the total profit of a company for
any year of assessment is ascertained as follows:

N N

Assessable Profit x

Add Balancing Charge x

xx

Less: Losses b/forward x

Capital allowance x

Balancing allowance x (x)

Total Profit xx

Where a company has incurred losses in business, the Board shall allow the loss to be deducted
from total assessable profit for any year of assessment following that during which the loss was
incurred subject to the following conditions:

(i) In no circumstance shall the aggregate deduction from assessable profit or income in
respect of any such loss exceed the amount of the loss.

(ii) A deduction for any particular year of assessment shall not exceed the amount, if any, of
the assessable profit, included in the total profits for that year of assessment, from the
138
 trade or business in which the loss was incurred and shall be made as far as possible
from the amount of such assessable profits of the next year of assessment and so on.

(iii) The period for carrying forward any loss is limited to four years after which any
unrelieved loss shall lapse up to 2006 year of assessment. From 2007 YOA the relief is
indefinite.

Illustration

Kolokolo Limited has been in business for many years and reported the following results from
its various sources:

Trading Hotel Rent

N N N

2013 350,750 (96,742) 45,780

2014 392,480 34,900 49,020

2015 458,920 24,450 52,412

2016 574,820 28,490 56,460

2017 579,200 18,490 57,808

You are required to compute the total profit of the company for the relevant years of
assessment.

Solution

Kolokolo Limited

Computation of Total Profit

2014: N N

Trading 350,750

Hotel -

Rent 45,780

139
Total Income 396,530

Loss for the year 96,742

Loss carried forward 96,742

Assessable Profit 396,530

2015:

Trading 392,480

Hotel 34,900

Rent 49,020

Total income 476,400

Unrelieved loss b/f 96,742

Loss relieved 34,900 (34,900)

Unrelieved loss c/f 61,842

Assessable profit 441,500

2016:

Trading 458,920

Hotel 24,450

Rent 52,412

Total Income 535,782

Unrelieved loss b/f 61,842

Loss relieved 24,450 (24,450)

Unrelieved loss c/f 37,392

Assessable profit 511,332

140
2017:

Trading 574,820

Hotel 28,490

Rent 56,460

Total income 659,770

Unrelieved loss b/f 37,392

Loss relieved (28,490) (28,490)

Unrelieved loss c/f 8,902

Assessable profit 631,280

2018:

Trading 579,200

Hotel 18,490

Rent 57,808

Total Income 655,498

Unrelieved loss b/f 8,902

Loss relieved (8,902) (8,902)

Assessable profit 646,596

Illustration

PAN Limited which is in business as wholesale distributor, also has a laundry dry cleaning
business. Its results for the accounting year ended 30th September, 2013 are as follows:

Adjusted profit: Trade 527,500

Laundry 56,740
141
Capital Allowance 79,280

Balancing charge 4,000

Balancing Allowance 9,000

Loss brought forward (laundry) (96,482)

You are required to compute the total profit of the company for the 2014 year of assessment.

Solution

PAN Limited

Computation of Total Profit for 2014

Adjusted profit: Trade 527,500

Laundry 56,740

584,240

Add Balancing Charge 4,000

Assessable profit 588,240

Less loss brought forward 96,482

Loss relieved (56,740) (56,740)

Unrelieved loss c/f 39,742

Assessable profit 531,500

Less capital Allowance 79,280

Balancing Allowance 9,000

Capital Allowance for the year 88,280

Capital allowance relieved (88,280) (88,280)

142
 Chargeable Profit 443,220

Note: Despite the available profit of N588,240 that can absorb, the total loss brought forward
of N96,482 it is only restricted to a relieve of N56,740 which is the available profit from the
source for which the loss was incurred.

Payment of Minimum Tax by Companies

Where in any year of assessment, the ascertainment of the total assessable profit of a company
from all sources results in a loss or where a company’s ascertained total profits results in no tax
payable or tax payable which is less than the minimum tax, there shall be levied and paid by the
company the minimum tax as prescribed by Section 28A(2) of CITA.

For a company which has been in business for at least four calendar years with a turnover of
less than N500,000 the minimum tax shall be the highest of either:

0.5 percent of gross profit or

0.5 percent of net assets or

0.25 percent of paid-up capital or

0.25 percent of the turnover.

Where the turnover is in excess of N500,000, for the purpose of computing the minimum tax,
the excess of the turnover over the N500,000 will be calculated by applying 0.125% and adding
same to the highest.

The minimum tax as prescribed in the above cited section. These do not apply to a company
which:

a. Has been in business for four calendar years or less.

b. Has at least 25% imported equity capital.

The capital allowance claimable by a company to which the minimum tax is applicable shall be
computed and deducted as far as possible from the assessable profit and as far as cannot be
deducted shall be carried forward to future years.

Illustration

Joko Nigeria Limited, a company engaged in the manufacture of biscuits, has the following
results for the year ended 31st December, 2016.
143
 N

Turnover 5,215,079

Less Cost of Sales (4,247,397)

Gross profit 967,682

Less Expenses 2,116,874

Net loss for the year (1,149,192)

Extract from the company’s balance sheet are as follows:

Paid-up Capital 2,000,000

Net Assets 1,735,042

You are required to compute the minimum tax payable by the company for the 2007
assessment year.

Solution

Joko Nigeria Limited

Computation of Minimum Tax Payable for 2017 Year of Assessment

Minimum Turnover 5,215,079

N500,000 at 0.25% 1,250

Gross profit for 2006 N967,682

N967682 at 0.5% 4,838

Net Assets N1,735,042

N1,735,042 at 0.5% 8,675

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Paid up capital N2,000,000

N2,000,000 at 0.25% 5,000

Excess of turnover 500,000

5,125,079 – 500,000 = 4,715,079

4,715,079 at 0.125% 5,894

The highest of the above 8,675

Plus tax on turnover in

Excess of N500,000 5,894

Minimum tax payable 14,569

Illustration

Star Limited has been in business for many years. The following notes relate to the company for
the year ended 31st December, 2017.

(i) Unabsorbed Capital Allowance b/fwd 404,900

(ii) Capital allowance for the year 375,400

(iii) Depreciation charged for the year 427,500

(iv) Unrelieved loss brought forward 89,700

The accounts for 2016 were as follows:

Star Limited

Statement of Financial Position as at 31st December, 2016

N N

Fixed Assets 2,458,000

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Current Assets 6,849,000

Less current liabilities (4,382,999)

Net Current Assets 2,467,000

Total Net Asset Employed 4,925,000

Financed by:

Share Capital 1,000,000

Capital Reserve 1,345,000

General Reserve 985,000

Long-term Loans 1,584,000

Total Funds Employed 4,925,000

Star Limited

Profit or Loss Account for the Year Ended

31st December 2016

Turnover 7,504,000

Cost of Sales (3,108,000)

Gross Profit 4,396,000

Less Expenses (3,848,000)

Net Profit 548,000

You are required to compute the company’s tax liability for the 2017 year of assessment taking
into consideration the requirement of CITA relating to minimum tax payable. The applicable
rate of company tax is 30%.

146
Solution

Star Limited

Income Tax Computation for 2017 Year of Assessment

N N

Profit per account

Add Depreciation 548,000

Adjusted profit 427,500

975,500

Unrelieved loss b/f (89,700)

Assessable profit 885,800

Less Capital Allowance:

Capital Allowance b/f 404,900

For the year 375,400

780,300

Amount relieved (590,533) (590,533)

Capital Allowance c/f 189,767

Chargeable profit 295,267

Tax liability at 30% 88,580

Minimum Tax payable 33,380

Computation of Minimum Tax liability

(a) Gross Profit for 2016 N4,396,000 N

N 4,396,000 at 0.5% 21,980

147
 (b) Net Assets for 2016, N4,925,000

N4,925,000 at 0.5% 24,625

(c) Paid up capital as at 31/12/16 N1,000,000

N1,000,000 at 0.25% 2,500

(d) Turnover N500,000

N500,000 at 0.25% 1,250

Turnover in excess of N500,000

7,504,000 -500,000

=7,004,000 at 0.125% 8,755

Minimum Tax liability = 24,625 + 8,755= N33,380

From the above computation the highest is N24,625 i.e. Tax based on net assets. The minimum
tax payable by the company is N24,625 + N8,755= N33,380. This is less than the computed tax
liability of N88,580. Hence the tax payable by the company for the year will be N88,580.

The Export Processing Allowance

A company that incurs qualifying expenditure in respect of building or plant and equipment in
an approved manufacturing activity in an export processing zone shall be granted a 100%
capital allowance in any year of assessment. A company granted the export processing zone
allowance does not qualify for an investment allowance.

Pre-Operational Levy

A company that has not commenced business, six months after the date of incorporation, for
each year that it obtains a tax clearance certificate shall be liable to a pre-operational levy of;

a. N20,000 for the first year and

b. N25,000 for every subsequent years, before a tax clearance certificate is issued.

Tax Clearance Certificate

148
Whenever the Board is satisfied that tax assessment on a company has been fully paid or that
no tax is due from the company, it shall issue a tax clearance certificate which should state in
respect of the three preceding years of assessment:

a. The total profit or chargeable profit of the company.

b. Tax payable thereon.

c. The outstanding tax or a statement that no tax is outstanding.

The Board is required to issue the tax clearance certificate on demand within two weeks or give
reasons for failure to issue the certificate. Section 80 of CITA provides for any ministry,
department, government agency or any commercial bank with whom a company may have
dealings to demand for the certificate of tax clearance. The transactions in respect of which a
company may be required to present a tax clearance certificate include:

▪ Application for any government loan.

▪ Registration of motor vehicle.

▪ Application for firearms license.

▪ Application for foreign exchange.

▪ Application for certificate of occupancy.

▪ Application for award of government contracts.

▪ Application for trade license.

▪ Application for the approval of building plans

▪ Application for the transfer of real property.

▪ Application for export license.

▪ Application for plot of land.

▪ Application for buying agent’s license.

▪ Application for pools and gaming license.

▪ Application for registration of contractors.

149
 ▪ Application for distributorship.

▪ Stamping of guarantor’s form for Nigerian passport.

▪ Application for the registration of Limited Liability Company or registration for business
name.

▪ Application for allocation of market stalls.

▪ Stamping of the statement of the amount of normal share capital.

▪ Stamping of statement of the amount of loan capital.

Illustration

Leg Trading Company Limited has the following results for the accounting year ended 31st
December, 2016.

N N

Gross Trading Profit 5,429

Sundry Income 249

Less Expenses:

Salaries & Wages 1,479

Electricity and Power 98

Depreciation 374

Rent and Rates 280

Repairs & Maintenance 480

Fuel and Oil 260

Interest & Bank Charges 330

Bad and doubtful debts 96

Legal and Professional Fees 296

Sundry Losses 424

150
Company Pensions Contributions 146

Audit Fees 200

Donations & Subscriptions 150

Directors’ Emoluments 186

Miscellaneous Expenses 128 (4896)

Net profit N782

The following additional information is also made available:

i. Bad and doubtful debts comprise:

5% provision 36

Debts under litigation 49

Write-offs 58

Bad debts recovered (47)

96

ii. Sundry losses include:

Goods lost not insured 108

Finance director’s misappropriation 297

Cashier’s embezzlement 19

424

iii. Sundry income include:

Dividend received from quoted companies 186

Profit on disposal of fixed assets 63

249

iv. Legal and professional fees include:

151
Debt collected commission 39

Renewal of lease 96

Mortgage registration fees 53

Legal retainership 108

296

v. Miscellaneous expenses are:

Penalty for late payment of PAYE deduction 12

Road Safety Commission fine on delivery

Van driver’s traffic offence 2

Loss on exchange for import remittances 96

Office beverages 18

128

vi. Donations and subscriptions are:

Taraba State Building Materials Traders Association 25

People’s club of Nigeria 40

Church Building Fund 85

150

vii. Salaries and wages include:

Payment in lieu of notice to a former director 125

Gratuity to retired staff 186

Salaries and allowances for the year 1,168

viii. Capital allowance for the year agreed 1,479

152
With the Revenue 204

Balancing charge on disposal of fixed assets 36

You are required to compute:

a. The adjusted profit of the company for the year ended 31st December 2016 and

b. The company’s income tax liability for the 2017 year of assessment. The applicable
company income tax rate is 30%. Rate of withholding tax is 15%.

Solution

Leg Trading Company Limited

Income Tax Assessment for 2017 Computation of Adjusted Profit

N N

Profit per amount 782

Add provision for doubtful debts 36

Embezzlement and Misappropriation 316

Mortgage registration fee 52

Fines and penalty 14

Donations 125

Gratuities 186

Depreciation 374 1,104

1,886

Less: Profit on disposal of fixed Assets 63

Dividend from Quoted companies 186 (249)

153
 Adjusted profit for the year 1,637

Hand Trading Company Limited

Income Tax Assessment for 2017

Computation of Income Tax Liability

Adjusted profit for 2017 1,637

Add Balancing charge 36

Assessable profit 1,673

Less Capital Allowance (204)

Chargeable profit 1,469

Tax payable at 30% thereon 440

Education tax 2% of Assessable profit 33

Notes:

(i) Uninsured losses of cash or goods are allowable deductions while loses as a result of
staff misappropriation or embezzlement are not allowed, regardless of the status of the
staff involve.

(ii) Mortgage registration fee is not an allowable expense but the lease renewal fee will be
allowed.

(iii) All fines and penalties are not allowable; losses on exchange of remittances are
allowable deductions while losses on foreign currency conversion for balance sheet
purpose are not allowable.

(iv) Subscriptions to trade association are allowable but donations to religious organisation
are not allowable unless they are included in the list of bodies approved for donations.

(v) Payment in lieu of notice is allowable, while gratuity payment will not be allowed.

154
Where Companies are in a Partnership

Where two or more companies enter into a joint venture agreement or partnership then:

a. The joint venture or partnership is not chargeable to tax.

b. The profit chargeable to tax in the hand of each of the partners is the share of profit of the
partnerships.

c. Capital allowance on the assets of the partnership shall be shared in the agreed profit or
loss sharing ratio.

d. Where any of the companies involved in the partnership has another line of business, the
loss generated from the business will not be available to set-off the profit generated from
the partnership.

Illustration VI

Dada Limited makes up its accounts to 31st August every year. It entered into a partnership with
Tolu Plc, which makes up its accounts to 31st October every year. The partnership makes up its
accounts to 31st December every year and the two companies agreed to share profits and
losses in the ratio 2:1

You are required to compute the assessable profit for the relevant tax years:

Year ended 31st December 2006 N6,300

Year ended 31st December 2007 N5,700

Year ended 31st December 2008 N3,900

Solution VI

Dada Limited

Computation of Assessable Profits for the Relevant Tax Years

Year Basis Period Assessable profit

155
2008 1/9/06-31/08/07 4,200 (2/3 x 6300)

2009 1/9/07-31/08/08 3,800 (2/3x 5700)

2010 1/9/08-31/08/09 2,600 (2/3 x 3900)

Tolu Plc

Computation of Assessable profit for the relevant tax year

Year Basis Period Assessable profit

2008 1/11/06-31/10/07 2100 (1/3 x 6300)

2009 1/11/07-31/10/08 1900 (1/3 x 5700)

2010 1/11/08-31/10/09 1300(1/3 x 3900)

The computation looks quite simple but care must be taken to understand that the basis period
for assessable profit is not for the partnership business is made to the accounting period of the
individual partners. Consequently, the partnership income is like an investment income which
must be recognized in the period it is received.

Where a Company is Sold or Transferred

Where a company is sold or transferred to another company either for the purpose of better
organization or transfer of management and provided that the Board is of the opinion that both
companies belong to the same holding company.

There will be no application of either the commencement or cessation rules

All the qualifying capital expenditure transferred are deemed to have been made at their tax
written down value. The balancing adjustment may be computed.

In the computation of capital allowance, no initial allowance will be computed while the annual
allowance would be based on the unexpired tax life of the qualifying capital expenditure.

Any unutilized capital allowance transferred are deemed to have been transferred prior to the
sale.

Any unrelieved losses transferred are also deemed to have been relieved prior to the transfer
or sale.
156
Where a Company is reconstituted

For a recognized company;

a. There will be no application of either the commencement or cessation rules

b. All the qualifying capital expenditure transferred are deemed to have been made at
their written down value. The balancing adjustment may be computed.

c. In the computation of capital allowance no initial allowance will be granted while the
annual allowance would be based on the unexpired tax life of the qualifying capital
expenditure.

d. Any unutilized capital allowance transferred is deemed to have been transferred prior to
the sale.

e. Any unrelieved losses transferred are deemed to have been incurred on the first day of
the reconstitution. Such a loss is then available for relief against the taxable profit of the
year of reconstruction and the three subsequent tax years.

Where a Company Merges with another Company

Where a company merges or amalgamates with another company to form a new company;

a. The commencement rule is applicable to the newly formed company as it is deemed to

have commenced a new business.

b. The cessation rule is applied on the companies that are merging as they are deemed to
have folded up.

c. The qualifying capital expenditure transferred are deemed to have been made at their
agreed values. This will result in the computation of balancing adjustment.

d. No initial allowance will be claimed on the transferred assets. Annual allowance to be

claimed must be based on the unexpired tax life of the qualifying capital expenditure.

Illustration

Oluwa Limited merged with Dada Limited in December 2017, as at the time of the merger, the
following information was provided in respect of the two companies.

157
Oluwa Limited

Year ended 31st December Assessable profit

2015 N180,000

2016 N200,000

2017 N250,000

Dada Limited

Year ended 31st December Assessable profit

2015 N182,000

2016 N258,000

2017 N400,000

As a consequence of the merger a new company Tolu Limited was formed with effect from 1st
January, 2008. The following results were presented by the newly formed company.

Year ended 31st December 2018 N450,000

Year ended 31st December 2019 N700,000

Year ended 31st December 2020 N672,000

You are to determine the basis of assessing the merged companies and the newly formed
company.

Solution

Oluwa Limited

Basis Period for Determination of Assessable Profit for the Relevant Years

Original Revised

Tax year Basis Period Assessable Basis Period Assessable

Profit Profit

158
 N N

2016 1/1/15-31/12/15 180,000 1/1/16-31/12/16 200,000

2017 1/1/16-31/12/16 200,000 1/1/17-31/12/17 250,000

Conclusion: Oluwa Limited will be assessed on the basis of the revised assessable profit
because it will result in a higher tax liability.

Dada Limited

Basis Period for Determination of Assessable Profit for the Relevant Years

Original Revised

Tax year Basis Period Assessable Basis Period Assessable

Profit Profit

N N

2006 1/1/05-31/12/05 182,000 1/1/06-31/12/06 258,000

2007 1/1/06-31/12/06 400,000 1/1/07-31/12/07 400,000

Conclusion: Dada Limited will be assessed on the basis of the revised assessment because it will
result in a higher tax liability.

Tolu Limited

Basis Period for Determination of Assessable Profit for the Relevant Years

Normal Election

Tax year Basis Period Assessable Basis Period Assessable

Profit Profit

N N

159
2008 1/1/08-31/12/08 450,000

2009 1/1/08-31/12/08 450,000 1/1/09-31/12/09 700,000

2010 1/1/09-31/12/09 700,000 1/1/10-31/12/10 672,000

1,150,000 1,372,000

Conclusion: Tolu will be assessed in the second and third year on the normal basis, because it
will exercise its rights of election. This will minimize its tax liability.

Comments:

(i) Both merged companies are deemed to have ceased business and the basis of
assessment is premised on the cessation rule.

(ii) The newly formed company is deemed to have commenced a new business. The
assessment is based on the commencement rule.

Taxation on Dividend

Where a company either

a. Does not have a taxable profit or

b. The dividend declared and distributed to the shareholders exceeds tax payable, the
dividend declared shall be treated as the taxable profit of the company and subjected to tax
in the hands of the company accordingly.

This is the position where a company has generated enough capital allowance to match the
assessable profit. It could also be that the company has recorded a loss, and consequently, the
company declares dividend to the shareholders. Any such dividend paid automatically becomes
the taxable profit chargeable to tax at the ruling corporate income tax rate.

Waiver or Refund of Liability

Where an allowable deduction under the provision of CITA in respect of any liability is
subsequently waived or released and an expense is refunded, the amount of the liability or

160
expense is treated as a taxable profit of the company from the date of the waiver, release or
refund.

Treatment of Losses

Where loss is incurred by a company, except for the provisions of minimum tax, no tax will be
due. Such a loss may be carried forward for relief against future profits of the company. It must
be noted that losses incurred may only be carried forward for a maximum period of four tax
years up to 2007 year of assessment. The only exception to this rule then is where the business
is an agricultural trade or business. For an agricultural trade or business, losses may be carried
forward indefinitely. In the treatment of losses for a company, it must be emphasized that
losses are relieved on the carry forward basis.

Under the Carry Forward Loss Relief System

a. Relief of losses is automatically granted i.e. no formal application is required

b. Loss may only be relieved from the profit generated from the same source of income i.e.
the loss from source ‘A’ may not be relieved against profit from source ‘B’.

c. This form of relief is applicable to both individuals and companies

d. Losses incurred by a property letting business may only be relieved under this system.

Losses used in Aggregation

In the application of the commencement rule, a date may be used more than once. The
implication is that where the first account is prepared for a period that is not less than twelve
months and the first accounts shows a loss; losses would have to be used in aggregation. The
implication is that aggregated losses will exceed that actual loss incurred by the business.
Where this occurs, the provision of the law is that the amount of loss to be relieved should not
exceed that actual loss incurred.

The difference between the actual loss incurred and the aggregated losses is the nominal loss
which is not available for relief.

Terminal Loss

If after the cessation of business, there are still some unrelieved losses, they can no longer be
carried forward. They are thus deemed to be terminal loss which becomes permanently lost.
161
Illustration

Taiye Venture has been having problems with the tax authorities recently for which your firm
has been retained to help them sort out the problem. A close look at the tax computation for
the year showed the following details:

Computation of tax Liability for 2016 Year of Assessment

N N

Net profit reported 246,500

Add excess rent 400,000

Depreciation 248,500

Donation 49,500

Loss on sale of fixed assets 15,300 713,500

Adjusted profit 960,000

Capital allowance (199,500)

Taxable profit 760,500

Tax at 30% N228,150

On further enquiry, you got the following additional information

(a) Rent paid for the accommodation of staff 680,000

Deduct rent of N56,000 for five staff (280,000)

Amount disallowed 400,000

The rent paid per building was N136,000 per annum for all the members of staff. Top senior
staff are on the following basic salaries. Two of them were on N120,000 p.a. and the other
three were on N130,000 p.a.

(b) A schedule of donation disallowed included

162
 1. Troops Comfort Fund.

2. Nigerian Shooting Association.

3. Ibadan Progressive Union.

(c) Accumulated losses brought into 2016 tax year but which was treated as lapsed was
N678,365 broken down as follows

Tax year Loss

2009 100,000

2010 150,300

2011 193,000

2012 235,065

678,365

(d) The tax written down value of assets as at the end of 2015 tax year were as follows:

Motor vehicles (2) Residual year = 3) 300,000

Furniture & Fittings (15) (Residual year = 2) 198,000

Plant (2) Residual year = 2) 200,000

A claim of N199,500 was made on this basis during 2016 tax year.

(e) Franked Investment income of N60,000 is included in net profit

You are required to do a recomputation of the tax liability of Taiye Venture Limited.

Solution VIII

Taiye Venture

Recomputation of Tax Liability for 2016 Tax Year

163
 N N

Net profit 246,500

Add rent (680-630) 50,000

Donation 14,700

Deprecation 248,500

Loss on sale of fixed assets 15,300

328,500

575,000

Less franked investment income (60,000)

Adjusted profit 515,000

Less Losses brought forward 678,365

Relieved (235,065) (235,065)

Unrelieved loss lapsed 443,300

Assessable profit 279,935

Less Capital Allowance 299,000

Relieved 2/3 x 279,935) (186,623) (186,623)

Capital Allowance c/f 112,377

Taxable profit 93,312

Tax at 30% 27,994

Education tax 5599

Total tax due 33,593

Note: Capital Allowance = 300,000 = 100,000

164
 3

Furniture = 198,000 = 99,000

Plant = 200,000 = 100,000

2 299,000

Illustration

Abiola Merchant Bank Ltd with its registered office in Lagos commenced business operations on
1st April, 2008 and decides to prepare its accounts to 30th November of every year. The audited
accounts of the bank for the first twenty one months showed the following results.

1/4/08-30/11/08 1/12/08-30/11/09

N N

Interest income:

Money at call and short notice 14,000 814,000

Treasury bill 155,000 245,000

Gains on disposal of Govt. securities - 14,000

Bankers’ acceptance 667,000 1,194,000

Trust Receipt 45,000 210,000

Income on Agric Loan (see notes 3) 142,000 152,000

Income on loan for export (see note 2) 141,000 242,000

Others 154,000 686,000

Other income:

Foreign exchange 450,000 860,000

Profit on sales of fixed Assets - 21,000

165
Commission received 15,000 35,000

Rental income on lease 151,000 255,000

Discounts 259,000 459,000

2,193,000 5,907,000

Less interest expenses 410,000 540,000

Salaries and wages 530,000 550,000

Rent 319,000 410,000

Depreciation 199,000 850,000

Repairs and maintenance 210,000 310,000

Provision for doubtful debts (specific) 152,000 165,000

Other expenses (all allowable) 710,000 950,000

2,530,00 3,775,000

Net profits/Loss (337,000) 2,132,000

The following additional information is relevant :

1. Qualifying capital expenditure are listed below

Nature of expenditure Amount Date of Acquisition

Motor vehicles-Cars 115,000 July, 2008

Motor vehicles-Buses 250,000 November, 2008

Furniture and Fittings 114,000 August, 2008

Office Equipment 94,000 September, 2008

Buildings 200,000 February, 2009

166
Two motor cars purchased for N45,000 in July were sold for N55,000 in November,

2009.

2. Schedules of interest on export Loan

Period 1st April, 2008 to 30th November, 2008

Period of repayment Grace Amount of

with Moratorium Period Interest

5 to 10 years 1 ½ years 50,000

2 to 5 years 1 year 45,000

1 to 2 years ½ year 46,000

141,000

1st December, 2008 to 30th November, 2009

Period of repayment Grace Amount

With Moratorium Period Interest

5 to 10 years 1 ½ years 80,000

2 to 5 years 1 year 120,000

1 to 2 years ½ year 42,000

242,000

You are required to compute the total tax liability of the bank for the first three years of
Assessments.

Note: Assume capital rate of:

Initial Allowance Annual Allowance

Motor vehicles 50% 25%

167
Furniture and fittings 25% 20%

Office building 15% 10%

Office equipment 25% 20%

Ignore investment allowance and tax payer’s right of election.

Solution

Abiola Merchant Bank Limited

Computation of Adjusted profit for the period ended

14/08-30/11/08 1/12/08-30/11/09

N N

Net profit/loss (337,000) 2,132,000

Add back depreciation 199,000 850,000

138,000 2,982,000

Less gains on disposal

of government securities - (14,000)

Profit on sale of fixed assets - (21,000)

Exempted Income on export loans (53,000) (104,000)

Exempted income on agric loan (42,000) (152,000)

Adjusted profit (233,000) 2,691,000

Abiola Merchant Bank Limited

Income Computation for the relevant tax year

N N

168
2008 Tax years Basis period (1/4/08-31/12/08)

Assessable loss c/f 8750

Capital Allowance 292,119

Total profit Nil

2009 Tax year Basis Period (1/4/08-31/3/09)

Assessable profit 664,000

Add balancing charge 16,313

680,313

Capital allowance b/f 292,119

For the year 123,483

Relieved 415,602

(415,602) 415,602

Nil

Total profit 264,711

Tax liability at 30% 79,413

Education tax 2% x 664,000 13,280

Total tax liability 92,693

2010 Tax year on preceding year basis (1/12/08-30/11/09)

Assessable profit 2,691,000

Less capital Allowance 93,483

Total profit 2,597,517

Tax liability at 30% 779,255

169
 Education tax (2% x 2,691,000) 53,820

Total tax liability 833,075

Workings

Abiola Merchant Bank Limited

Computation of Capital Allowance

Motor Office Furniture Total

Vehicles Equipment & Capital
Fittings Allow.

Rates 50/25% 25/20% 15/10%

N N N Total

2008 Tax year

cost 365,000 208,000

Initial allowance (182,500) (52,000) 234,500

Annual Allowance

9 Months (34,219) (23,400) 57,619

TWDV 148,281 132,600 292,119

2009 TWDV b/f 148,281 132,600

Disposal (18,281) -

additions - - 200,000

Initial Allow. - - (30,000) 30,000

Annual Allow. (43,333) (33,150) (17,000) 93,483

TWDV 86,667 99,450 153,000 123,483

210 TWDV b/f 86,667 99,450 153,000

170
 Annual Allow (43,333) (33,150) (17,000) ______

43,334 63,300 136,000 93,483

Notes:

1. Computation of annual allowance

2008 tax year: Motor Vehicles

A.A = 365,000 - 182,500 x 9/12 x 25/100 = 34,219

Furniture, fittings & equipment

AA= 208,000 - 52,000 x 9/12 x 20/100 = 23,400

2009 tax year

Motor Vehicles

A.A = 148,281 - 18,281 = 43,333

4-1

Furniture, fittings & equipment

A.A = 132,600 = 33,150

5-1

Building

A.A = 200,000 - 30,000 = 17,000

10

171
2. Computation of tax written down value

Motor vehicles N

2008 Tax year cost 45,000

Annual Allowance (9 months) (22,500)

2009 Tax written down value 4,219

Sales proceeds 18,281

Balancing charge 55,000

36,719

Restricted to total capital allowance granted 26,719

Capital gains 10,000

3. Basis period for assessable profit

Year Basis period Assessable Profit

2008 1/4/08-31/12/08 (8,750)

2009 1/4/08-31/3/09 664,000

2010 1/12/08-30/11/09 2,691,000

2008 tax year 1/4/08-30/11/08 (233,000)

1/12/08-31/12/08

1/12 x 1,290,000 224,250

(8,750)

2009 tax year 1/4/08-30/11/08

172
 1/1/08-31/03/09 (233,000)

4/12 x 1,269,000 897,000

664,000

4.09 Education Tax Fund

Composition

The Education Tax Fund Trustees is established under Section 4(1) of ETA 2004 and its members
include:

a. A chairman.

b. Eight other members.

c. A representative each of the Federal Ministries of Finance and Education who shall not
be below the rank of a Permanent Secretary; and

d. The Executive Secretary who shall be the Secretary to the Board of Trustees.

The members are drawn from the six geo-political zones of the Federation and are appointed
by the President on the recommendation of the Minister of Education. The members should be
persons with considerable experience from both the public and private sectors to represent the
business, financial and education sectors. Each member (excluding ex-officio member) is to
hold office for four years in the first instance and may be reappointed for another four years
and no more. The members are entitled to remuneration/allowances as the President may,
from time to time determine.

Meeting

The Board is to meet not less than four times in a year at such times, places and on such days as
the chairman may appoint. The chairman will also summon a meeting if he is required to do so
by notice given to him by not less than three other members. The meeting shall be held within
fourteen days from the date on which the notice is given. Any person co-opted into the Board
shall not be entitled to vote at any meeting of the Board and shall not count towards a quorum.
A quorum is formed with any five members of the Board.

The Executive Secretary

173
The executive Secretary, who is the chief executive and accounting officer of the Fund, is
appointed by the President on the recommendation of the Minister of Education. He should be
a person with good knowledge in administrative matters and have appropriate qualifications
and experiences to perform the functions of that office. He is to hold office for five years in the
first instance and may be reappointed for another five years and no more.

The Executive Secretary is responsible for:

a. The day-to-day administration of the Fund;

b. The keeping of the books and proper records of the proceeding of the Board of
Trustees;

c. The administration of the secretariat of the Board of Trustees and the general direction
and control of all other employees of the Fund.

Cessation of Membership

Section 5 of ETA 2004 provides that:

1. A member of the Board of Trustees shall cease to hold office if

a. He becomes of unsound mind; or

b. He becomes bankrupt or make a compromise with its creditors; or

c. He is convicted of a felony or nay offence involving dishonesty; or

d. He is guilty of serious misconduct in relation to his duty.

2. A member of the Board of Trustees may be removed for officer by the President if he is
satisfied that it is not in the interest of the Fund or the public that the member should
continue in office.

3. A member of the Board of Trustees, other than an ex-officio member, may resign his
appointment by a notice in writing under his hand, addressed to the President.

4. Where a vacancy occurs in the membership of the Board of Trustees, it shall be filled by
the appointment of a successor to hold office for the remainder of the term of the
office of his predecessor, so however that the successor shall represent the same
interest and shall be appointed by the President.

Functions of the Board of Trustees

174
Section 6 of ETA 2004 provides that the Board of Trustees shall have responsibility to:

a. Monitor and ensure collection of tax by the Federal Inland Revenue Service and ensure
transfer to the Fund;

b. Manage and disburse the tax;

c. Liaise with the appropriate ministries or bodies responsible for collection or safe
keeping of the tax;

d. Receive requests and approve admittable projects after due consideration;

e. Ensure disbursement to various levels and categories of education;

f. Monitor and evaluate execution of the projects;

g. Invest funds in appropriate and safe securities;

h. Update Federal Government on its activities and progress through annual and audited
reports;

i. Do such other things as are necessary or incidental to the objects of the Fund under this
Act or as may be assigned by the Federal Government.

Disbursement of Education Tax Fund

The Board of Trustees is charged with the responsibility of administering the education tax and
disbursing the amount in the Education Tax Fund to Federal, State and Local Government
educational institutions including primary and secondary schools, for the restoration,
rehabilitation and consolidation of education in Nigeria, but specifically for the following:

a. Work centers and prototype development;

b. Staff development and conference attendance;

c. Library system at different levels of education;

d. Research equipment procurement and maintenance;

e. Higher education book development and maintenance;

f. Redressing any imbalance in enrolment mix as between the higher educational

institutions; and

175
 g. Execution of the 9 year compulsory education programme.

The tax is to the disbursed to the various levels of education as follows:

Higher education - 50%

Secondary education - 20%

Primary education - 30%

The amount allocated to the higher education is to be distributed to the universities,

polytechnics and colleges of education in the ratio of 2:1:1.

The concept of ETF is now changed to TETFUND in the year 2011.

Offences and Penalties under Education Tax Act 2004

Failure to pay the education tax on the due date (i.e. within 60 days after the service of notice
of assessment on the company) attracts a penalty of 5% of service of the tax unpaid. A demand
note shall be served on the company for the unpaid tax plus penalty and if payment is not
made within two months of the demand, the company shall be guilty of an offence. The FIRS
shall, with the approval of the Board of Trustees, remit in whole or in part the penalty.

Where a company commits an offence under ETA, every director, manager, secretary or other
similar officer of the company is severally guilty of that offence and liable for punishment,
unless he proves that the act or omission constituting the offence took place without his
knowledge, consent or connivance.

A person guilty of an offence under ETA shall be liable:

a. For the first offence, to a fine of N10,000 or imprisonment for a term of three years.

b. For a second and subsequent offence, to a fine of N20,000 or imprisonment for a term
of five years or to both such fine and imprisonment.

Payment of penalty does not in any way discharge a company’s liability to pay to tax due.

176
4.10 Information Technology Development Levy

The National Information Technology Development Agency Act, 2007 imposes a levy of 1% on
the profit before tax of companies and enterprises listed below with an annual turnover of
N100 million and above. The businesses are as follows:

a. GSM service providers and all telecommunication companies;

b. Cyber companies and internet providers;

c. Pension managers and pension related companies;

d. Banks and other financial Institutions;

e. Insurance companies.

The levy when paid by the companies shall be tax deductible, that is, the levy is an allowable
deduction in computing a company’s profits for tax purposes. All monies accruing to the
National Information Technology Development Fund and accounts of the National Information
Technology Development Agency form the sources specified in the Act shall be exempted form
income tax and all contributions to the Fund and the accounts of the Agency shall be tax
deductible.

It should be noted that the NITDA does not define the ‘profit before tax’ on which the levy is to
be imposed. Therefore, the profit to be used should be as defined in the tax legislations. That is
assessable profit ascertained in accordance with the Companies Income Tax Act and not the
accounting profit.

4.11 Review Questions

Jovita Ltd is a Nigerian telecommunication company. The profit or loss account of the company
for the year ended 31st December, 2009 showed the following:

Profit of the year after charging 950,000

Depreciation 280,000

General provision for doubtful debts 130,000

177
Donations to political parties 500,000

Additional information:

a. Capital allowances agreed for the year ended 31st Dec. 2009:

Annual allowance 205,000

Balancing charge 55,000

b. Unrelieved losses brought forward 124,000

Required: Compute the information technology levy payable by the company. Ignore education
tax.

Solution

Jovita Limited

Computation of Information Technology Levy

N N

Profit for the year per profit and loss account 950,000

Add disallowable expenses:

Depreciation 280,000

General provision for doubtful debts 130,000

Donations to political parties 500,000 910,000

1,860,000

Less:

Information technology development levy 18,416

Adjusted/assessable profit N1,841,584

Tutorial Note
178
In accordance with Section 12(2)(a) of NITDA, Information Technology Development Levy is tax
deductible, which means that the levy must be deducted before arriving at the
adjusted/assessable profit of a company. The implication is that the levy should be computed
as 1% of assessable profit remaining after deduction of the levy and not as 1% of assessable
profit before such levy is deducted.

In the above example, the adjusted/assessable profit before the deduction of the levy
amounted to N1,860,000. If 1% of N1,860,000 is calculated as ITD levy, the levy will be N18,600
and the assessable profit remaining after the levy will be N1,841,400. Unfortunately, 1% of
N1,841,000 gives N18,410 hence the answer of N18,600 is incorrect! The correct formula to be
applied in the calculation of ITD levy is:

Rate of ITD levy x Adjusted/assessable profit before ITD levy

100 + Rate of ITD levy

Applying the formula, the correct answer is:

1 x N1,860,000 = N18,415.84 ITD levy

100+1

The assessable profit remaining after ITD levy is N1,841,584.16 and as 1% of N1,841,584.16 is
N18,415.84 the answer has been confirmed as being correct.

Assessment and Collection of ITD Levy

The National Information Technology Development Agency Act, 2007 empowers the FIRS to
assess and collect the information technology development levy. The assessment of a company
for the levy is done at the same time the company is assessed for companies income tax. The
ITD levy is due and payable within 60 days after the FIRS has served notice of the assessment on
a company.

Offences and Penalties under NITDA 2007

Failure to pay the ITD levy on the due date attracts a penalty of 2% of the levy unpaid. A
demand note shall be served on the company for the unpaid levy plus penalty and if payment is
not made within two months of the demand, the company shall be guilty of an offence.

179
Where an offence under NITDA is committed by a body corporate or firm or other association
of individuals, every chief executive officer of the body corporate or any officer acting in that
capacity or on his behalf and every person purporting to act in that capacity commit an offence,
unless he proves that the act or omission constituting the offence took place without his
knowledge, consent or connivance.

Anybody corporate or person who commits an offence under NITDA where on specific penalty
is provided is liable on conviction:

a. For a first offence, to a fine of N200,000 or imprisonment for a term of one year or to
both such fine and imprisonment; and

b. For a second and subsequent offences, to a fine of N500,000 or imprisonment for a

term of three years or to both such fine and imprisonment.

The institution of proceedings or imposition of a penalty does not discharge a company’s

liability to pay the levy due to the FIRS.

180
 MODULE 5

5.00 PIONEER LEGISLATIONS (INDUSTRIAL DEVELOPMENT INCOME

TAX RELIEF) ACT, CAP 179 LFN 1990)
5.01 Learning Outcome

On successful completion of this Module, Students should be able to:

i. Evaluate the concept of Pioneer Legislation and its implication for tax purposes;

ii. Proficiently compute the Company Income Tax of a Pioneer Company;

iii. Analyze the legal framework and administration of the Pioneer Legislations in Nigeria.

5.02 Conditions for Pioneer Status

Pioneer company is like any other company incorporated in Nigeria, except that it is a privilege
one as the status (pioneer) makes it possible for the affected companies to enjoy certain
incentives which are not available to all other companies. The status is conferred under the
industrial Development (Tax Relief) Act 1971 No. 22. Pioneer company is therefore any
company that is certified by pioneer certificate issued under the authority of the Federal
Executive Council. The main purpose of the pioneer status is to encourage development or
establishment and process of industrialization in Nigeria, hence incentives are granted to the
pioneer industries and products.

The following are qualified to apply for Pioneer Status

a. Any company incorporated in Nigeria

b. A group of persons on behalf of a company, which is to be so incorporated (promoters).

5.03 Conditions for Application for Pioneer Status

Requirements: No application for the issue of certificate shall be made unless the qualifying
capital expenditure to be incurred on or before production day:

a. In the case of an indigenous control company is not less than N50,000.00.

b. In-the case of any other company not less than N150,000

The following must also be stated

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a. Whether the company or the proposed company when established is going to be an
indigenous controlled company.

b. The particulars of the assets on which qualifying capital expenditure will be incurred by
the company including their source and estimated cost:

i. On or before production day

ii. During a period of 3 years following production day

c. The place in which the assets are to be taunted.

d. Estimate and state the probable date of production date of the company or proposed
company.

e. Specify any product and by-product (not being a pioneer product) proposed to be
produced by the company or proposed company and then give a reasonable estimate of
the quantities and value of such product and by product during a period of one year
from production day.

f. The particulars of loans and share capital or the proposed loan and share. capital
including the amount and date of each issue or proposed issue and the sources from
which the capital is to be or has been raised.

g. In the case of a company already incorporated, give the name, address and nationality
of each director of the company and the number of shares held by him.

h. In the case of a proposed company give the name, address and nationality of each
promoter.

i. A declaration signed by the applicant that all the particulars contained in the application
are true and an undertaken undertaking to produce proof when required.

j. Include a non-refundable fee of a hundred naira, which is to be credited to the

consolidated revenue fund of the Federation.

5.04 Production Day/Material Day

Not later than one month after the material date a pioneer company shall apply in writing to
the director to certify the date of its production day. Unusually the company must propose a
day to be certified and give reasons for proposing that date.

182
Production Date therefore is the day on which the business commences for commercial
purpose.

Not later than one month after the production date the company must apply to the directors to
certify its qualifying capital expenditure incurred prior to production day. In determining the
qualifying expenditure however, disposals not made at arm length must be disallowed.

After obtaining all the above certificate and for a period not exceeding 30 days the company
shall notify the minister in what respect the proposals and the estimate made in its application
for pioneer certificate or any conditions contained therein have not been fulfilled.

5.05 Certification of Pioneer Companies

a. Established Company

A pioneer certificate may specify any by-product, which may be produced by the pioneer
company in addition to the pioneer product. It might even limit the proportion of the by-
product in relation to the pioneer product either in quantity, in value or both.

b. The Proposed Company

The pioneer certificate must specify the period within which the company must be
incorporated, not later than 4 months after the date of notification of the approval to the
applicant or any other conditions as deemed necessary when issue. Such certificate may
become effective from the date of incorporation or the date such application W3S submitted

Amendment to Pioneer Certificate

a. The pioneer product or products specified in the certificate.

b. State reasons for the application, when application is approved it shall aimed the
pioneer certificate of the company.

5.06 Tax Relief Period

The tax relief period of a pioneer company shall commence on the date of production day and
shall continue for three years.

The tax relief period may be extended at the end of three years for:

(a) A period of 1 year and thereafter another period of one year commencing from the end
of first period of extension.

183
(b) For one period of two years.

5.07 Conditions for Extension

The Executive Council must be satisfied as to:

(a) The rate of expansion, standard of efficiency and the level of the development of the
company.

(b) The implementation of any scheme. For the utilization of local raw material in the
processes of the company and

(b) For the training and development of Nigerian personnel in the relevant industry.

(c) The relative importance of the industry in the economy of the country and any other
such relevant matter as may be required.

(d) The application should be made not later than 1 month after the expiration of the initial
tax relief period of3 years.

Accounting Date

(a) The pioneer trade or business shall be deemed to have permanently ceased at the end
of the tax relief period and a new trade commencing on the day next following the end of its
tax relief period.

(b) The accounting period shall be:

(i) A period not exceeding one year commencing on its production day.

(ii) A successive periods of 1 year thereafter

(iii) A period not exceeding one year ending at the date when its tax relief period ends.

Section 17-Account

No tax shall be payable during the pioneer period on the profit in the Section 17 Account and
consequently no capital allowance could be claimed.

Dividends can be declared out of section 17account but not more than the balance standing in
that account. No loan can be granted to any director without the permission of the Minister.

184
Other incomes derivable but under the pioneer status shall be chargeable to tax under the
company income tax accordingly.

Tax Reliefs

(a) Profit of the pioneer company during the relief period shall not attract tax.

(b) Dividend paid out of S 17 account shall not be subject to tax in the hand of first
recipient.

(c) No capital allowance shall be claimable on all the qualifying capital expenditure incurred
on or before production date and certified accordingly i.e. all qualifying capital expenditure
(QCE) shall be deemed to have been incurred on the first date of new trade.

(d) Losses brought forward from the pioneer relief period, shall be available on the first
year of the new trade for the computation of the total-profit any part unrelieved in the first
year shall lapse accordingly.

5.08 Merits of Pioneer Company

(i) A pioneer company certificate entitles the company to tax exemption for a minimum of
3 years and maximum of 5 years.

(ii) Losses incurred by the pioneer company during the pioneer period and certified by the
Board may be relieved alter the pioneer period.

(iii) Dividends declared out of pioneer profits are not taxable.

(iv) The net qualifying expenditure for capital items during the pioneer period are
accumulated and are qualified for both initial and annual allowances in the new
business.

Demerits of Pioneer Company

(i) A pioneer company is prevented from carrying on any business apart from its pioneer
enterprises.

(ii) There is a limitation imposed on a pioneer company in the computation of its allowable
trading loss for the purpose of income tax relief.

185
(iii) There is also a limitation on a distribution of company dividends. No dividend may be
distributed in excess of a certain balance on its P or L account.

(iv) A pioneer company cannot be granted loans without the written permission of the
Federal Minister for Industries

5.09 Revocation of Pioneer Certificate

It can be revoked under the following conditions:

a. Where it is discovered that the production day is more than one year later than the
estimate given in the application for pioneer certificate.

b. Where it is discovered that the qualifying capital expenditure incurred on or before

production date is less than:

(i) In the case of an indigenous controlled company N50,000

(ii) In the case of other company N150,000.

c. Upon application of the pioneer company

d. Where the minister is of the opinion that the pioneer company has contravened any
provision of this Act.

Effective Date of Revocation

a. Where the company has been in operation as a pioneer company for a period less than
one year from the pioneer the effective dark for the cancellation is the Pioneer date.

b. Where the company has been in operation for more than 1 year from the pioneer date;
the date of the last anniversary of the pioneer day is the effective date for the
revocation.

5.10 List of Pioneer Industries/Products

1. Cultivation and processing of food crops, vegetables and fruits

2. Manufacture of cocoa products.

3. Processing of oil seeds.

4. Integrated dairy production

186
5. Cattle and other livestock ranching

6. Bone crushing

7. (a) Deep sea trawling and processing

(b) Coastal fishing and crimping

(c) Inland lake fishing and processing

8. Manufacture of salt

9. Mining oflead and zinc ores by underground mining methods

10. Manufactureof iron and steel from iron ore

11. Smelting and refining of non-ferrous base metals and the manufacture of their alloys.

12. Mining and processing of baryttes and associated minerals.

13. Manufacture of oil well drilling materials containing a pre dominant proportion of
Nigerian raw materials.

14. Manufacture of cement

15. Manufacture of glass and glassware

16. Manufacture of lime from local limestone

17. Quarrying and processing of marbles

18. Manufacture of ceramic products

19. Manufacture of basic and intermediate industrial chemicalsfrom predominantly Nigeria

raw materials.

20. Manufacture of pharmaceutical

21. Manufacture of surgical dressing

22. Manufacture of search from plantation crop

23. Manufacture of yeast, alcohol and related products

24. Manufacture of animal foodstuff

187
25. Manufacture of paper pulp, paper and paperboard

26. Manufacture of leather

27. Manufacture of articles of paper pulp paper and paperboard

28. Manufacture of textile fabrics and man-made fibbers

29. Manufacture of products made wholly or mainly metal

30. Manufacture of machinery involving the local manufacture of substantial proportion of

components thereof.

31. Manufacture of goods made wholly or partly of rubber

32. Manufacture of spare parts including automotive spare parts and components

33. Manufacture of telecommunication equipment, cables, etc.

34. Manufacture of medical and dental equipment

35. Manufacture of educational and science equipment

36. Manufacture of office and school stationery

37. Manufacture of building and home furnishing materials

5.11 Review Questions

1. Dona Ltd. Is a company engaged in the manufacturing of bicycle. It applied for and
obtained pioneer status. The following information concern its first few years of operation.

N’000

1st March 1997 to 30th Sept 1997 (800)

Year to 30th Sept 1998 4,000

Year to 30th Sept 1999 8,500

Year to 30th Sept. 2000 8,200

Required:

188
(i) Compute the pioneer period profit or loss.

(ii) How should the pioneer period profit or loss be treated?

(iii) Compute the post pioneer period assessable profit or loss.

Suggested solution:

Dona Ltd.

Computation of Pioneer Period Profit or loss

Year Profit or (Loss)

N’000

1997 (800)

1997/98 4,000

1998/99 8,500

11,700

(ii) the aggregate balance being a profit in the reserve account will be held in that account
for the next 6 years before it can be utilized for any purpose.

(iii) Post pioneer period assessable profit

Yoa Basis Period A. I.

N’000

1999 /10/99 31/12/99

3/12 x 8,200 2,050

2000 1/10/99 – 30/09/00 8,200

2001 PYE 30/09/00 8,200

Notes:

189
1. In respect of the above, where the aggregate balance is a los, it shall be relieved against
the first post-pioneer profit whereupon the unrelieved balance shall lapse.

2. Observed the application of the commencement o business rule provision of CITA 24 (3)
immediately after the pioneer period ended in recognition of the commencement of a new
business.

2. Osongo Ltd. Is a company involved in the fabrication of carburetor for engineers and
cars. The company was granted pioneer status on 31 st may 1998 and commenced production
since then. The following return s were made available.

N’000

Period 31st Dec. 1998 (2,500)

Year ended 31st Dec. 1999 (1.060)

Year ended 31st Dec. 2000 1,880

Year ended 31st Dec. 2002 1,960

Year ended 31st Dec. 2002 10,000

Qualifying expenditure were:

i. 4 trailers (heavy duty vehicle) acquired 16th July 1996 N5,000

ii. Industrial building acquired on same date N4,000

iii. 10 Plants & Machinery acquired on 1/1/998 for N10,000

iv. 1 Plant acquired on 31st Dec. 2002 N1,200

Required: Compute the company income tax for the relevant years of assessment.

Suggested solution

Osongo Ltd.

Computation of Company Income Tax for the Relevant Years of Assessment

N’000 N’000

190
2001 YOA

Assessable Income Wk2 1,960

Loss b/fwd wk1 (1,680)

Loss relief 1,680 (1,680)

Assessable Profit 280

C. A for year wk3 11,815

C. A granted (280) (280)

Lapsed investment Allow (1500 – 280)

(1,220)

C. A. c/fwd 10,315 ______

Total Profit Nil

2002 YOA:

Assessable Income Wk2 1,960

C. A b/fwd

A. A for yr. wk3 10315

2215 12,530

C. A granted (1960) (1960)

C. A c/fwd 10,570

Changeable profit Nil

191
2003 YOA:

Assessable Income Wk2 10,000

C. A b/fwd 10,570

C. A. for year wk 3 3145

13,715

C. A granted (10,000) (10,000)

C. A c/fwd 3,715 _________

Chargeable Profit Nil

WORKINGS:

Wk1: Computation of Pioneer period profit:

Year Profit/(Loss)

N’000

1998 (2500)

1999 (1060)

2000 1,880

(1680)

Wk2: Computation of Assessable Profit

YOA Basis Period A. I

2001 1/1/01 31/12/01 2,000

2002 1/1/01 31/12/01 2,000

192
 2003 PYE 2002 10,000

Wk3: Computation of Capital Allowance:

QCE: Vehicles I. B P&M C.A

Rates: I. A% 50 15 50

A. A% 25 10 25

N’000 N’000 N’000 N’000

2001 YOA:

Cost 5,000 4,000 10,000

I. A. (2,500) (600) (5000) 8,100

A. A. (625) (340) (1250) 2,215

Investment Allow: - - - 1,500

2002 YOA: TWDV 1875 3060 3,750 11,815

A.A (625) (340) (1,250) 2,215

2003 YOA: TWDV 1,250 2,720 2,500

Cost - - 1,200

I.A - - (600) 600

A.A (625) (340) (1400) 2365

Investment Allow: - - - 180

2004 YOA: TWDV 625 2380 1,700 3,145

193
Vehicles. I A = 5000 x 50% = 2,500

A.A = 500 – 2500 = 625

I.B I.A = 400 x 10% = 600

A.A = 10,000 – 5000 = 1250

Investment Allowance = 10,000 x 15% = 1,500

2003 YOA:

Plant & Machinery:

I.A = 1200 x 50% = 600

A. A = 1200 – 600 = 150

= 1,250 1,400

Existing investment allowance = 1200 x 15% = 180

Notes:

1. As a rule, investment allowance cannot be carried forward; it must therefore be relieved

as much as possible since the unrelieved balance will lapse.

2. Loss incurred during the pioneer period will be available for relief against the first post-
pioneer period profit, thereafter the unrelieved balance will lapse.

3. Election provision rule under Sc 24(3) have been ignored.

4. Education and Corporation Tax cannot be computed because there was no available
Total Profit for the relevant years of assessment.

194
3. Namu Glass sheets Ltd. Was granted pioneer status in 1993, which expired in 1996 and
was not renewed. There was a loss of N136,000 certified by the Federal Board of Inland
revenue Service (FBIRS) as at the end of the pioneer period. The cumulative costs of assets
acquired by the company are as follows:

N’000

Plant and machinery 85,000

Factory Building 575,000

Furniture and Fittings 60,000

Motor Vehicles 170,000

The company did not change its accounting year end which was 30 th September. Recorded
profit after the pioneer period where:

Net profit after charging depreciation

2,000,000

Depreciation 50,000

Ignore tax payer’s right of election for second and third year of assessments. Namu Glass Sheet
Ltd.

Computation of Corporation Tax for the relevant Years of Assessment

N’000 N’000

Assessable Income Wk2 62,500

Pioneer Period Loss b/fwd (136,000)

Loss relief 62,500 (62,500)

Lapsed loss 73,500

Total Profit Nil

C.A wk3 264,000

195
C.A Granted Nil

C.A Lapsed (13,000)

C.A c/fwd 251,000

Chargeable Profit Nil

1997 YOA:

Assessable Profit Wk2 250,000

C.A b/wd 251,000

C.A b/fwd 104,000

C.A for year wk3 104,000

355,000

C.A Charged (250,000

(250,000)

C.A c/fwd 105,000

Total Profit Nil

1998 YOA:

Assessable income Wk. 2 250,000

C.A b/fwd 105,000

C.A for Year 104,000

219,000

C. A Charged (219,000) 219,000)

Total profit 31,000

Corporation Tax @ 30% 9,300

196
Total Tax Due: N

Education Tax (31,000 @ 2%) 620

Corporation Tax 9,300

9,920

Workings

Wk1: Adjusted profit: N

Profit per account 200,000

Add back depreciation 50,000

250,000

Wk2: Computation of Assessable income

YOA: Basis Period A. I.

N’000

1996 1/10/99-31/12/96

3/12 x 250,000 62,500

1997 1/10/96 – 30/09/97 250,000

1998 PYE 30/09/97 250,000

Wk. 3: Computation of Capital Allowance

QCE: P/M F/B F/F M/V C.A

Rates: I.A% 50 15 25 50

A.A% 25 10 20 25

197
 N’000 N’000 N’000 N’000 N’000

Cost 85 575 60 170

I.A (43) (86) (15) (85) 229

A.A (3) (12) (2) (5) 22

Investment Allow: - - - 13

1997 YOA:TWDV 39 477 43 80 264

A.A (13) (53) (11) (27) 104

1998 YOA: 26 424 32 53

A. A. (13) (53) (11) 27) 104

TWDV c/fwd 13 371 21 26

1996 YOA:

N’000

P/M I.A = 85 x 50% = 43

A.A = 85 – 43 x 3/12 =3

F/B I.A = 575 x 15% = 86

A.A = 575 - 86 x 3/12 = 12

10

F/F I.A. = 60 x 25% = 15

A. A. = 60 – 15 x 3/12 = 2

198
 5

M/V I.A = 170 x 50% = 85

A.A = 170 – 85 x 3/12 = 5

P/M Invest. Allow = 85 x 15% = 13

1997 YOA: N’000

P/M A. A =39 = 13

4-1

F/B A.A = 477 = 53

10-1

F/F A.A = 43 . = 11

10-1

M/V A.A = 80 = 27

4-1 104

Notes:

1. Observe the prorating of the annual allowance to agree with the basis period of 3
month of the commencement year of assessment.

2. Students are advised to always do the workings first, in the way the final tax
computation becomes a matter of rules application.

Further Questions

1. Explain the meaning of pioneer legislation, its objectives and importance if any.

199
2. What are the conditions to be fulfilled before pioneer certificate can be granted by the
Minister of Industry?

3. Under what circumstances an extension would be granted to a company before or after

the expiration of a pioneer period?

4. Qualifying Capital expenditure acquired by a pioneer company must be certified by the

Minister of Industry. How asset acquired before, during and after the pioneer period should be
treated for purpose of capital allowance?

5. Discuss the treatment of profit or loss made by a company granted a pioneer certificate
also how should the profit from unlisted or uncertified product and byproducts be treated?

6. Jayne Nigeria Ltd. Was incorporated on March 31, 1994 to manufacture a pioneer
product. It was granted a pioneer certificate with a production day certified to be June 1, 1994.
You are given the following information:

Net profit for the year ended May 31, 1998 1,540,000

Depreciation charged for year ended May 31, 1998 132,145

Capital expenditure incurred up to and including year ended May 31, 1997
certified by the tax office are as follows:

Motor Vehicles 1,250,000

Plant & Machinery 1,425,000

Industrial Buildings 1,890,000

Non industrial Buildings 920,000

Accumulated profit at May 31, 1997 725,000

It is not the intention of the directors to apply for an extension of the pioneer period.

You are required to compute the tax liabilities for the relevant years.

200
7. Mao Paul Limited was incorporated as a pioneer company on March 27, 1990 to
manufacture nails. It was issued a pioneer certificate on November 1, 1991 with a production
day given as July 1, 1991. The company’s records showed the following information:

Accumulated profit as at June 30 1994 330,000

Capital expenditure up to June 30, 1994 and certified by the FIRS:

Plant and Machinery 521,000

Industrial Buildings 1,200,000

Non Industrial Buildings 235,000

Plantations 485,000

Motor 250,000

The trading result for type year ended June 30, 1995 showed a net profit of N2,450,000 after
charging depreciation of N160,000 and withholding tax on rent included in expenses was
N15,000.

You are required to compute the tax liabilities of the company for the relevant years of
assessment, assuming that the company does not intend to elect.

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 MODULE 6

6.00 CAPITAL GAINS TAX

6.01 Learning Outcome

On successful completion of this Module, Student should be able to:

i. Appraise the basis of assessment of Capital Gain Tax;

ii. Identify the exemptions and reliefs available for capital gain tax purposes;
iii. Explain and interpret capital gain tax computations and losses;
iv. Discuss the meaning of indexation relief and how and who claims it;
v. Analyze capital gains on stocks, shares and quoted securities and how they are treated
under the CGTA;
vi. Disintegrate between capital transaction of partnership and companies with other
business transaction;
vii. Appraise the tax treatment of legatees and artificial transactions;
viii. Deconstruct the concept of connected persons and part disposal of assets treatments;
ix. Compute capital gain tax arising from takeover and line purchase transactions.

6.02 Bases of Assessment

Capital gain tax is tax on gains and profits made of disposal of assets. Consequently, the
students must have knowledge of taxable persons liable to pay capital gains tax. The module
begin by explaining the Basis of assessment and chargeable persons and cover exemptions and
reliefs, computations of gains and losses, indexation relief capital gains tax as it applies to
stocks, shares, and quoted companies tax treatment of legatees and artificial transactions.

The bases of assessment of CGT on chargeable gains on disposal of assets are assess to tax in
the year in which the chargeable assets were disposed of. Chargeable persons other than
company and non-president are required to file in any year of assessment; capital gain tax
returns on any disposal with the relevant state internal revenue service while companies,
nonresident individuals and resident of FCT are to file tax returns with the Federal Inland
Revenue Service.

The current rate for CGT is 10% on chargeable gain payable as soon as the disposal of such
chargeable capital assets is made. Where the tax payer fails to file returns, the relevant tax
authority shall raise a Best of Judgment assessment. CGT assessment is expected to be paid

202
within 60 days of the date of service of notice of assessment. Failure to pay attracts penalty at
10% per annum and interest at the ruling commercial rate.

Chargeable Assets

Section 3 of the capital Gain Tax Act CI, LFN 2004 as amended provides Inter alia - ”all form of
property shall be assets for the purpose of this Act whether situated in Nigeria or not”
including:

a. Any currency other than Nigeria currency

b. Options, debts and incorporeal property

c. Any form of property created by the person disposing it or otherwise coming to be

owned without being acquired.

NOTE: Capital Gain Tax is chargeable on assets on which capital allowance are claimable in
accordance with the PITA, CITA and PPT Acts.

6.03 Exemptions and Reliefs

Persons and Institutions Exempted from CGT

Section 26(1) of the Act exempted the following from CGT

a. Any statutory or registered friendly society.

b. Ecclesiastical, charitable or educational institutions of a public character.

c. Any trade union registered under the Trade Union Act. Provided:

i. assets disposed are not used for other trade or business

ii. Gains obtained are applied for the purpose of the society or union.

d. Any cooperative society registered under the cooperative societies law of any state.

e. organization formed under local government law

f. Companies formed for the purpose of promoting sports.

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Assets Exempted From CGT

Section 28 to 42 of the Act exempted the following assets from tax on the capital gain arising
from their disposal:

1. Land disposed to an authority with compulsory power of acquisition: No chargeable

gain shall arise on the disposal of land to any authority with compulsory power of
acquisition provided that:

a. The owner of the land must not have taken such steps is to indicate his voluntary
intention to sell.

b. The owner of the land must have taken such steps as to ensure that the authority had
not acquired the land before he acquired his interest.

2. Private Resident or Dwelling House: no chargeable gains shall arise on the disposal by a
person of his only or main dwelling house. Where a person has more than one dwelling
house, he is expected to inform the tax authority, which of the dwelling house is the
main residence, failing on this, the tax authority will decide which of the house is the
main residence. Where a private residence is partly occupied by the owner and partly
let out, the capital gains arising from the disposal shall be prorated accordingly.

3. Gift: Assets acquired by way of gifts and disposed in similar manner shall not give rise to
chargeable gains.

4. Disposal of chattels: No chargeable gain will arise on the disposal of chattels sold for
N1,000 or less. However, where the sales proceeds is more than N1,000 the CGT
payable shall be lower of:

(a) (sales proceeds less cost) x CGT rate

(b) Half of (sales proceed less N1,000) i.e. (sales proceeds – 1,000)/2

Where there are more than one disposals by one person within the same tax year, the
sale proceed shall be aggregated and exempted from tax accordingly.

5. Decorations: No chargeable gain shall arise on the disposal by a person of decorations

award for valour or gallant conducts. For instance; national merit awards.

6. Compensation from injury or damages suffered: No chargeable gain shall arise from
any sum received for injury or damages suffered by a person either to his person or in
his profession for example; piracy, libel, slander, enticement.
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7. Compensation for loss of office: No chargeable gin shall arise for any sum received as
compensation for les of office.

8. Shares and stock: No chargeable gains shall arise from the acquisition of share or stock
of any description of a company either through merger, takeover, and absorption of any
other forms. If acquisition of a business as result of which the acquired company losses
is identity as company provided that no cash payments is made in respect of shares
acquired under merger.

9. Life Assurance Policy: No chargeable gain shall arise on the disposal of an interest in a
life assurance policy provided the person disposing is the original beneficiary and
acquired his interest either in consideration in money or money with.

10. Nigerian currency: No chargeable gain shall accrue from the disposal of Nigeria
currency.

11. Unit trust scheme: No chargeable gain shall arise on disposal of an investment under
any unit trust scheme provided the proceeds are reinvested.

12. Disposal of interest in a superannuation fund: No chargeable gains shall arise from the
disposal of an interest in a superannuation fund of a retirement benefit scheme
approved the joint tax board.

13. Nigeria Government Securities: Gains accrue from the disposal of Nigeria treasuring
bills, premium bonds, saving certificates are not chargeable.

14. Capital gain occurring to a diplomatic body.

Note: However, that if any asset relating to the exempted institutions above and which is held
on trust cease to be subject to such trust, any gain on disposal shall be liable to capital gain tax.
In so far as the gain is not derived from any disposal of any assets acquired in connection with
any trade or business carried on by the institution or society as the case may be (section
27(11)).

Disposition means any trust, grant, covenant, agreement or arrangement (section 21 (3s).

Transaction between connected person shall be deemed to be artificial or fictitious if in the

opinion of the board, those transactions have not been made on terms which might fairly have
been expected to have been made by persons engaged in the same or similar activities dealing
with one another at arm’s length (section 21 (3b).

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In relation to any direction made under this section, this provision of the Act as to appeals
against an assessment shall have effects as if such direction were an assessment (section 21
(3c))

Connected Persons

Section 23 of the Capital Gains Tax Act defined connected persons as:

a) A person is connected with an individual if that person is that individual’s husband

or wife, or is a relative, or the husband or wife of a relative, of individual or of the
individual’s husband or wife.

b) A person in his capacity as trustee of a settlement is a settle, and with any person
who is connected with such an individual.

c) A person is connected with any person with whom he is in partnership, and with the
husband and wife or a relative of any individual with whom he is in partnership.

d) A company is connected with another company:

i) If the same person has control of both, or a person has control of one and
persons connected with him or he and the person connected with him have
control of the other or

If a group of two or more persons has control of each company and the groups either consists
of the same persons by treating (in one or more cases) a member of either group as replaced by
persons with whom he is connected.

e. Any two or more persons acting together to secure or exercise control of a company shall be
treated in relation to that company as connected with one another and with any person acting
on the directions of any of them to secure or exercise control of the company.

Having covered our objective, let us now use a complex illustration to demonstrate them.

Treatment of Capital Losses

A capital loss arises from the disposal of capital assets if the proceed from the disposal is less
than the cost the capital assets and allowable expenditure. Section 5, of capital Gain Tax ACT
(CGTA) CAP CI LFN 2004 state that in the computation of chargeable gain. For CGT purpose, a
loss made on the disposal of any asset shall not be deductible from gains made on the disposal
of similar asset or any other asset.

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Reliefs

• Double Taxation Relief:

Double taxation relief is applicable to CGT as it is applicable with the substitution of the wards
’’capital gains for income and profits, and CGT for income tax’’.

• Delayed Remittance Relief:

Section 42(1): A person charged or chargeable for any year of assessment in respect of
chargeable gains accruing to him from the disposal of assets situated outside Nigeria may claim
that the following provisions of this section shall apply on showing that:

i. he was unable to transfer these gains to Nigeria; and

ii. that the inability was due to the law of the country where the income arose, or to the
executive action of its government, or the impossibility of obtaining foreign currency in
that territory; and

iii. The inability was not due to any want of reasonable endeavors on his part.

Section 42(2) if he so claims, then for the purpose of capital gain tax:

i. there shall be deducted from the amount on which he is assessed to capital gain tax for
the year in which the chargeable gains accrued to the claimant the amount as respects
which the conditions in paragraphs (a), (b) an (c) of subsection (1) of this section are
satisfied, so far as applicable, but

ii. The amount so deducted shall be assessed to capital gains tax on the claimant (or his
personal representatives) as if it were an amount of chargeable gains accruing in the
year of assessment in which the said conditions cease to be satisfied.

Section 42(3) no claim under this section shall be made on respect of any chargeable gain more
than six years of assessment in which he might have made under this section if he had not died.

Assets Situated Outside Nigeria:

Where an asset situated outside Nigeria is disposed of, capital gains tax is chargeable on that
part received or brought into Nigeria. A CGT will be charged on the gains if the individual is in
Nigeria on temporary basis, if the disposal is made by a trustee of any trust or settlement
whose seat of administration is outside Nigeria or by a non-Nigeria company (a company whose

207
activities are managed and controlled outside Nigeria during the whole year of assessment)
shall be charged on the amount received or brought into Nigeria in respect of CGT.

NOTE: There is no liability to tax if the gains are not received or brought into Nigeria.

Roll over Relief (section 32 CGTA)

If the consideration received on disposal of an old assets used only for the purposes of a trade
is applied in acquiring a new asset in replacement to be used for the purposes of the same
trade, and the old assets and the same one of the classes of assets listed in the Act, the person
carrying on the trade shall, on making a claim as respects the consideration which has been so
applied, be treated for CGTA purpose:

a. As if the consideration for the disposal of old assets were (if otherwise of a greater
amount or value) of such amount as would secure that on the disposal neither a
loss nor a gain accrues to him, and

b. As if the value of the consideration for the acquisition of the new assets were
reduced by the excess of value of the actual consideration for the disposal of the
old assets over the amount of the consideration which he is treated as receiving
under paragraph (a) above.

The foreign will not have any effect on the parties to the transactions involving the old or new
assets other than the purchaser of the old assets will still be treated as acquiring that asset at
the price which he has paid for it.

Where an unconditional contract for the acquisition has been entered into this section may be
applied on provisional bases without waiting to ascertain whether the new asset is acquired in
pursuance of that contract. When the fact is ascertained, all necessary adjustment s shall be
made by making additional assessments or by repayment or discharge of tax and shall be made
not withstanding any limitation in the act on the time within assessments maybe made. The
assets to which this section applies are classified as:

Class 1. Assets:

A. Land and building and any permanent or semi-permanent structure in the nature of a
building, occupied as well as used only for the purposes of trade.

B. Fixed plant or machinery

Class 2. Assets -–----- ships

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Class 3. Assets -------- Aircraft

Class 4. Assets -------- Goodwill

If over the period of ownership, or any substantial part of the period of ownership, a part of a
building or structure is partly used for the purposes of a trade, this section shall apply as if the
part so used is a separate assets it will be subject to any necessary apportionment for an
acquisition or disposal (section 32(7).

This section shall apply in relation to a person who, either successively or at the same time,
carries in two trades which are in different localities, but which are concerned with goods or
services of the same kind, as if in relation to old assets used for the purposes of the other trade,
the two trades we the same (section 32(9).

This section shall apply with necessary modifications in relation to a business, profession,
vocation or employment as it applied in relation to a trade. The expressions “trade’’,
’’business’’, ’’profession’’, vocation’’, and ’’employment’’ have the same meanings as in the
Income Tax Acts, but not so as to apply the circumstances in which, on a charge in the persons
carrying on a trade is to be regarded as discontinued, or as set up and commenced (section
32(10).

Format for Computing Roll-over Relief

N N

Sales proceed of old asset XX

Less cost of old assets (X)

Chargeable gains XX

Less roll-over relief

Amount reinvested XX

Less cost of old assets (X) (X)

Chargeable gains rolled over X

Balance liable to capital gain

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CGT at 10% X

Carrying Cost N

Actual cost of new assets XX

Less chargeable gain rolled over (X)

Carrying cost of the new assets X

Steps for determining roll over relief

1. Compute the capital gains on disposal of the assets.

2. Compare the sales fixed on the disposal of the assets to the amount invested in the
new asset acquired in replacement for the one disposed.

3. Choose the lower of the two

4. Deduct from step 3 above, the original cost of acquiring the asset disposed. This gives
the amount rolled over.

5. The amount rolled over obtained in step 4 is deducted from the capital gains computed
in step 1 above to determine the net capital gain.

6. Apply the relevant rate of tax on the net capital gain tax payable.

7. Compare the capital gain tax payable if the rate of tax were applied on step 1 above.

The following conclusion should be reached upon the comparison:

• Full Roll-Over Relief: Where no tax is payable after the relief is computed

• Partial Roll-Over Relief: Where only a portion of the tax computed per step 1 is
immediately due.

• No Roll-Over Relief: Where the full amount computed per step 1 is immediately due.

Other types of capital gain tax relief and allowance are:

210
Indexation relief and tape allowance which are not claimable in Nigeria tax laws. We shall deal
with this latter in this chapter.

Illustration 1:

Chief Akpos sold his factory plant which he acquired 8 years ago for N1,000,000.00. The cost of
acquisition at that time was N200,000.00 He acquired a new factory plant for N1,500,000 to
enable him carry on his business. Required determine the relief available to chief Akpos.

Solution 1:

For the purpose of capital gain tax, and upon chief Akpos making a claim, he will be treated,

a. As if neither a loss nor a gain accrues to him on the disposal, that is the proceeds of
disposal will be taken to be equal to the cost which is N200,000.00 and therefore no
capital gains tax is payable.

b. As if the cost of acquisition of the new assets (N1,500,000.00) where reduced by the
excess of the actual proceeds of disposal of the old assets (N1,000,000.00) over the
amount of the proceed which he is treated as receiving under (a) above
(N200,000.00) that is N8,000,000.00 which would otherwise be the capital gain on
the disposal of the old assets, will be deducted from the cost of the new asset.

Thus the cost of the new asset for CGT practice will be N750,000.00 (N1,500,000.00 –
N800,000.00). This is referred to as roll over relief in the CGT practice. The liability to CGT on
gains which have been fully reinvested in the same assets used for the same trade being
deferred until the replacement asset is finally disposed. Note that where the insurance
compensation money for loss or destruction of a capital asset is applied within three years of
receipt in acquiring a replacement asset, the above shall also be applicable if the owner so
claims(section 19)

Illustration 2:-

Assuming that in the illustration I above, Chief Akpos disposed of the plant for N1,200,000.00
with the acquisition cost of N500,000.00 and new factory plant was acquired to replace the old
plant. The cost of the new plant is N1,080,000.00.

Required: Determine the relief available and carrying cost of the new plant?

Solution 2: CHIEF AKPOS

COMPUTATION OF ROLL OVER RELIEF 20X TAX YEAR.

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 N(000) N(000)

Sales Proceed 1,200

Less cost of acquisition 500

Capital gains 700

Deduct lower of:

a. Sales Proceed 1,200

b. Amount Reinvested 1,080

Less cost of acquisition (500)

Amount rolled over 580

Net Capital gain 120

Tax (LGT) at 10% 12

Carrying Cost N000

Actual cost of new assets 1080

Less chargeable gain rolled over 580

Carrying cost of the new asset 500

Loss Relief

Section 5 of CGTA Acct 2004 stipulates that in computation of chargeable gains for CGT
purposes, the amount of any loss which accrues to a person on disposal of any asset shall not
be deducted from gain accruing to any person on a disposal of such asset.

6.04 Computation of Capital Gain and Losses

The chargeable gain shall be the difference between the consideration accruing to any person
on a disposal of assets and any sum to be excluded from that consideration and there shall be
added to sum the amount of the value of any expenditure allowable to such person on such
disposal. That is net proceed less allowable acquisition cost of that asset. Under section 14, the
following gains are allowable as deduction from proceed when computing chargeable gain on
disposal.
212
 i. Cost of acquisition of the assets including any incidental cost upon acquisition where
the asset is not required any expenditure wholly, exclusively and necessarily in
providing the asset.

ii. Any expenditure incurred in establishing, preserving or defending the title to or right
over that asset.

iii. The incidental cost of making the disposal.

iv. Any expenditure incurred for the purpose of enhancing the value of the assets and
which is reflected in the state or nature of the asset at the time of the disposal

Note that: Any premium paid on insurance policy taken against risk of damage or injuries of
assets disposed are not allowable – section 16.

Disposal: occurs when ownership changes or when owner divests himself of his right or interest
over the property. The proceed on disposal to be used when computing the chargeable gain is
either the actual consideration received or the market value whichever is higher. Where an
asset is acquired by a creditor in satisfaction of his debt or part thereof, the asset shall not be
treated as disposed of by the debtor or acquired by the creditor for a consideration greater
than its market value at the time of the creditor acquisition of it.

Where an asset is given for another asset of lesser value, the transaction is assumed not be at
arm’s length and will be deemed to have been at the market value on the date of the exchange
and tax will be paid on the computed chargeable gain. Similarly, the other party would also be
deemed to have made his disposal at the prevailing market price at that time of exchange and
would be liable to pay capital gain tax on chargeable gain.

Property Acquired as a Gift

When an asset is acquired as a gift or otherwise (not being on devolution on death) is disposed
of as a gift, the person acquiring the asset on disposal is deemed to have acquired it for a
consideration equal to the amount for which the asset was last disposed of by a way of bargain
made at arm’s length. In a scenario where the amount cannot be ascertained, the consideration
shall be deemed to be equal to the market value of the asset on the date of that disposal.

Illustration 3

Eku Ltd donated a chargeable asset with a market value N450,000 to Ohoyakpo charitable
organization. The company acquired the asset six years ago at the cost of N500,000.

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The consideration for the acquisition of the asset by the charitable organization is N510,000
(the consideration for which the asset was last disposed of at arm’s length).

However, if that amount cannot be ascertained, the consideration would be N450,000 (the
market value of the assets as at the date of disposal as gift to Ohoyakpo charitable
organization).

Chargeable Gain on Disposal of assets situated outside Nigeria

Where a disposal of such asset is made by an individual who is in Nigeria on temporary basis by
a trustee of any trust or settlement whose seat of administration is outside Nigeria or by a non-
Nigerian company that is a company whose activities are managed and controlled outside
Nigeria during whole year of assessment, capital gain tax shall be charged on the amount (if
any) received or brought into Nigeria in respect of any chargeable gains, such amount being
treated as gains accruing when they are received or brought into Nigeria.

Chargeable gain on consideration due after time of disposal (Instalmental payment) section
cap C1 LFN 2004.

Where the consideration or part of the consideration due on disposal of an asset is payable by
installments over a period exceeding 18 months, the chargeable gain accruing on the disposal
shall be regarded as accruing in proportionate parts in the year of assessment in which the
disposal is made and in each of the subsequent years of assessment down to and including the
year of assessment in which the last installment is payable. The proportionate parts to be
recorded as accruing in the respective years of assessment, according to section 17(2) shall
correspond to the proportions of the amounts of the installments payable in each of the years
of assessment. This means that the gain accruing to any years of assessment is determined by
applying a ratio of the amount of installment payable in that year over the total amount of
installments involved in the transaction on the chargeable capital gain. The part of chargeable
gain attributable to any year of assessment is deemed to accrue on the last day in that year of
assessment section 17(5) provides that consideration for a disposal shall be brought into
account without any discount for the postponement of the right to receive any part of it and in
the first instance, without regard to a risk of any irrecoverable or to the right to receive part of
the consideration being contingent. This means that the apportionment of chargeable gains to
years of assessment should be based on the initial or original agreed pattern on training of
installments. Where any part of the consideration so brought into account (that is even when
the payment of the installment is postpone to future date or time but brought into account
based on original timing) is subsequently shown to the satisfaction of the board to be

214
irrecoverable, such adjustment, whether by way of discharge, or replacement of tax or
otherwise, shall be made as is required in consequence.

Note; that section 17(1) will only be applicable if the period for the payment of the installments
exceeds 18months. Thus all payments for installments including any initial deposit is treated as
belonging to the assessment year in which the disposal is treated as belonging to the
assessment year in which the disposal is made.

Format for computing capital Gain Tax N

Sales proceed XX

Less allowable expenses (X)

Net sales proceed XX

Deduct cost of acquisition (X)

Capital gains XX

Capital gain tax 10% X

Steps in computing CGT

1. Identify the sales proceed on the disposal of the chargeable assets.

2. Deduct allowable expenses from the sales proceed to obtain the net sales
proceed.

3. The cost of acquisition and other capital cost are then deducted from the Net
sales proceed to obtain the capital gain.

4. Compute the capital gains tax liability by applying the capital gain tax rate of
10% on the capital gains obtains in step 3.

Steps in computation of capital gain payable by installment.

1. Compute the total capital gain as stated above.

2. Identify the dates that each installment is paid.

3. Identify the corresponding years of assessment that the dates of installment fall into.
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 4. Compute the chargeable gain for each installment using the relationship establish in
step 3 above.

5. Compute the capital gain tax payable on each installment made for the relevant tax
years by applying the relevant tax rate.

Illustration 4

Chinyere Nig. Ltd sold a plant to Bokoh Ltd for N1,000,000 in 1st February 2007. The terms of
the disposal provided for 6 equal semi-annual installments payable with the first installment
due on 1st March 2007. An initial deposit of N250,000 was paid on the day of the disposal. The
plant was acquired from Paul & co ltd for N575,000. Chinyere Ltd incurred N60,000 for the
dismantling of the plant during disposal. Bokoh Ltd made payment as follows

Initial deposition on 1/2/07 250,000

1st payment on 1/3/07 110,000

2nd Payment on 1/9/07 100,000

3rd Payment on 1/4/08 90,000

4th Payment on 1/11/08 90,000

5th Payment on 1/5/09 90,000

6th payment on 1/10/09 100,000

7th payment on 1/3/10 85,000

8th payment on 1/9/10 85,000

Required: compute the capital gain tax payable by Chinyere Ltd for the first three relevant years
of assessment

Solution CHINYERE NIG LTD

COMPUTATION OF CAPITAL GAIN TAX

N000
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Proceed on disposal 1000

Less dismantling expenses 60

Net proceed on disposal 940

Deduct

Cost of acquisition 575

Total chargeable gain 365

Capital gain tax payable for 2007 years of assessment:

Amount due per original term of disposal:

Initial deposit 1/2/2007 250,000

1st installment 1/3/2007 125,000

2nd installment 1/9/2007 125,000

3rd installment 1/3/2007 125,000

625,000

CGT = 625 x 365

1000 1 = 228,125

CGT payable for 2008 YOA Amount due per original term of disposal:

4th installment 1/9/2008 125,000

CGT payable 125,000 x 365 = 45625

1000,000

CGT payable for 2009 YOA

Amount due per original term of disposal

5th installment 1/3/2009 125,000

6th installment 1/9/2009 125,000

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 250,000

CGT = 250,000 x 365 = 91250

1000000

Note

1. Determination of amount and time of installment by original term of disposal

Sales proceed/consideration agreed 1,000,000

Less initial deposit 250,000

Total payable in 6 installment 750,000

Amount payable per installment 75,000/6 125,000

2. Due dates 1st installment 1/3/2007

2nd installment 1/9/2007

3rd installment 1/3/2008

4th installment 1/9/2008

5th installment 1/3/2009

6th installment 1/9/2009

3. First year of assessment is 18 months

Part Disposal of Assets – Section 16

Where only a part of an asset is disposed of, cost relating to the disposed part shall be
computed as follows:

a. Ascertain the proceed on disposal of the part disposed.

b. Determine the market value of the undisposed part. Then the cost attributable to
disposed part is determined as follows: A x C
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 A+B

Where

A = The sales proceeds of part sold

B = The market value of part not sold

C = Cost of the whole asset

Note: Where the transaction is between connected persons and the market value is higher than
sales proceed “A” shall be used as the market value of the asset.

If the unsold part is sold in later day, the cost shall be the total cost of acquisition less cost of
already disposed part and add if any, the cost of improvement after the earlier disposal.

Illustration 5

Ohoga Nig Ltd in July 2013 sold part of the company’s building at Okene, Kogi State for
N10,000,000. The building which was acquired at the cost of N6,000,000 ten years ago. The
market value of the remaining part of the building held by the company was N20,000,000 on
31st July, 2013.

Required:

Compute the CGT payable by Niger Nig ltd on the disposal of the asset.

Solution

Proceed from disposal N10,000,000

Less cost of acquisition relating to disposal

10,000,000 x 6,000,000 = 2,000,000

10,000,000 + 20,000,000

Total chargeable gain 8,000,000

CGT at 10% 800,000

6.05 Indexation Relief

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Indexation relief otherwise called inflation allowance is an allowance which reduces the taxable
gain on an investment by increasing its base. It is an adjustment on the effect inflation on the
cost of chargeable assets.

It is argued that in an inflationary environment, indexation of capital gains is required to

prevent the taxation of inflation gains that do not represent increase in real economic power.
The argument is difficult to sustain on a theoretical level and almost impossible to sustain a
practical level. It is true that inflation distorts the measurement of real gains. The adjustment is
made by multiplying the relevant item of allowable expenditure by a factor, the multiplier. The
multiplier to be applied depends on the year of assessment in which the expenditure was
incurred and the year of assessment in which the disposal is made.

Indexation allowance is practiced in United Kingdom up to 2008 years of assessment. In the

Nigerian tax system, there is no allowance for indexation or inflection relief and taper
allowance. Hence it is not claimable in the against any capital gain for income tax in Nigeria;
That no adjustment will be made to recognize the effect of inflection on the acquisition cost or
chargeable gain under CGT Act 2004.

6.06 Capital Gains Tax as it Applies to Stocks, Shares and Quoted Securities:

Stock and share of every description disposed at gain, that such capital gains are chargeable to
tax up to 31st December 1997. This means that such gains were exempted from capital gains tax
effective from 1998 years of assessment.

Section 32A of capital gain tax Act 2004 provides that a person shall not be chargeable to tax
under the Act, in respect of any gains arising from the acquisition of the shares a company,
either merged with or taken over or absorbed by another company as a result of which the
acquired company has lose its identity. However, where shareholders are either wholly or
partly paid in cash for surrendering their shares in the ceased business, the gains arising from
the cash payment will be subject to C

A. Property in Set:

Section 38(3) capital gain tax Act 2004 Cap C1 LFN 2004 states that where two or more assets
formed part of a set of articles of any kind and all owned or bought at one time by one person
are disposed by that person and to another person or persons in an arm’s length transaction
whether on the same or different occasions, the two or more transaction shall be treated as a
single transaction and the asset/property as single but with the necessary apportionments of
the reduction in tax.

220
Illustration 6:

Dr. Oke Okih bought a set of furniture consisting of two units in Jan 2012 for a total cost of
N20,000. He sold one unit of the furniture to Peter for N14,000 on 30th June 2013. On that date,
the market value of the unit remaining unsold was N14,000. In March 2014, he sold the second
unit for N13,000.

Required: Compute the capital gains tax payable

Note: The sales/disposal of the furniture is a case of partial disposal while the purchase is a case
of property in set.

Solution DR OKE OKIH

COMPUTATION OF CAPITAL GAINS TAX PAYABLE FOR 2013 YEAR OF ASSESSMENT.

Sales proceeds of the first unit sold 14,000

Less cost attributable to the first unit sold

A x C 14,000 x 20,000 =

A+B 14,000+14,000

Capital Gain 10,000

Capital Gain Tax payable 4,000

10% of Capital Gain 400

Or

½ x (A+b – 1,000) = (28,000-1,000) /2 13,500

Whichever is lower

2014 YOA (Year of Assessment)

Sales proceeds of the last unit sold 13,000

Less cost of the last unit sold:

Total cost 20,000

Cost of last unit sold 10,000 (10,000)

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Capital Gain 3,000

CGT payable (10% of 3,000) 300

Treating the two transaction as a single transaction.

Total sales proceed (14,000 + 13,000) 27,000

Less total cost of acquisition (20,000)

Capital Gain 7,000

CGT payable:

10% of capital Gain 700

or

½ x (27,000 – 1,000)= ½ (26000) 13,000

Whichever is lower – apply CGT rate.

6.07 Treatment of Capital Gain of Partnership and Companies Transaction.

Capital gain and losses are treated differently from regular business transactions of individuals,
partnerships and companies in Nigeria. Gains arising from the disposal of assets are taxed at the
rate of 10%. Capital losses of partnership and companies cannot be charged against normal
trading income but can be carried forward to offset future capital gains tax from the same
source; such capital loss on disposal of asset is not deductible from capital gains on disposal of
any other asset even if both are of the same type (Section 5).

In the usual income computation, profits or losses on disposal of fixed assets are excluded by
means of adjustments to the relevant accounting results. At the same time balancing
adjustments would be made in capital allowances computation in respect of the difference
between the proceeds of disposal and tax written down value of such assets balancing
allowance will be granted if the proceed falls short of the written down value and a balancing
charge if the proceed is higher. In the latter case, if the proceed is greater than the cost, the
amount of the balancing change would be restricted to the amount of capital allowances
previously granted. This will be the difference between the cost of acquisition and tax written
down value of disposal. In such a situation, another surplus, that is the difference between the

222
proceed and the cost, which has not been subjected to any taxation treatment arises. In
taxation laws and practice, all transactions of capital nature are excluded from income tax of
companies and partnership. In view of the fact that the surplus referred to is a capital receipt, it
cannot be included in profit or loss of any business for there is no liability to capital gains tax in
respect of the disposals of those fixed assets.

6.08 Tax Treatment of Legatees and Artificial Transactions

Tax Treatment of Legatees/Death Section 8 CGT Act 2004

On the death of an individual, any assets of which he was competent to dispose of, shall for the
purposes of the Act be deemed to be disposed of by him at the date of his death and acquired
by the personal representatives or other person on whom the assets devolve for a
consideration equal to.

(a) The amount of the consideration for which this asset was last disposed of by way of a
bargain (see section 20) made of arm’s length if ascertainable, or

(b) In any other case, the market value of the asset at that date (subsection1). The gains
which accrue in consequence of subsection (1) of this section shall not be chargeable
to capital gain tax under the act(subsection 2). The personal representatives shall be
treated as having the deceased’s residence and domicile at the date of death
(subsection 3).

Person Acquiring Assets as Legatee:

a) No chargeable gain shall accrue to the personal representatives and

b) The legatee shall be treated as if the personal representative’s acquisition of the asset
had been his acquisition of it (subsection 4).

Legatee means any person acquiring an asset under a testamentary disposition or on an

intestacy or partial intestacy whether he takes beneficially or as trustee and a donation mortis
causa shall be treated as a testamentary disposition and net as a gift.

Personal Representatives means;

a) The executor, original or by representation or administrators for the time being of a

deceased person under any law in force in Nigeria.
223
 b) Persons having in relation to the deceased under the law of another country any
functions corresponding to the functions for administration purposes under any law
in force in Nigeria or personal representatives as defined under para (a) of this
section, and references to personal representatives as such shall be construed as
references to the personal representatives in their capacity as having such functions.

Tax Treatment for Artificial Transaction

Where the board is of the opinion that any disposition is an artificial or fictitious transaction or
where any transaction which reduces or would reduce the amount of any capital gains tax is
artificial or fictitious, the board shall disregard such disposition and may direct that such
adjustments shall be made with respect to the liability of any person for the payment of capital
gain tax as it considers appropriate so as to counteract the reduction of liability to capital gain
tax effected or reduction which would otherwise be affected, by the transaction and any person
concerned with such transaction shall be assessable accordingly (section 21(11).

Any person in respect of whom, any direction is made under this section shall have a right of
appeal in like manner as though for the purposes of the Act such direction were an assessment
to CGT (Section 21(2).

Other Capital Gain Tax Matters

Capital Gains Arising from Takeover

Gains arising from absorption, takeover or merger are exempted from capital gains tax
provided cash does not form part of the consideration offered for the shares acquired. When
cash is received as part of consideration, for settlement, the proportion of the gains
attributable to the cash element of the consideration is taxable.

Note:

When the shares of a company are acquired, and such company is absorbed, taken over by or
merged with another company, the gains from such transaction will not be subjected to tax
provided:

- The acquired company losses its identity

- No cash payment for the shares involved and

224
 - There is no disposal of such share by the original holders.

Illustration 7:

The shareholders of Jedeko sold the company to ISEE Plc. in exchange for N500,000 disposal
value consisting of N220,000 cash and 120,000 ordinary share of N1 each values at N10 each.
The assets of the business were revalued on the date of transfer as follow:

Items Cost of Acquisitions Market value

N N

Freehold Premises 130,000 180,000

Plant and Machinery 165,000 205,000

Debtors 48,000

Furniture 55,000 65,000

Goodwill - 30,000

Stock 102,000 97,000

Total 625,000

Less Creditors 125,000

500,000

Required: Compute the capital gains tax payable by Jedeko

Solution: JEDEKO NIGERIA LTD.

Computation of Capital Gains Tax Payable for 2013 Year of Assessment (YOA)

Gains(N)

Freehold Premises (130,000 – 180,000 50,000

Plant and Machinery (165,000 – 205,000) 40,000

Furniture (55,000 – 65,000) 10,000

225
 Goodwill 30,000

130,000

Chargeable Gain 130,000 x 220,000 57,200

500,000

Capital Gains Tax (10% x 57,200) 5,720

Note: The actual value realized from the sales of an in corporal property is taken to be capital
gain e.g. Goodwill.

Capital Gain Tax on Hire Purchase Transaction

When an asset is sold on hire purchase, it is treated as full disposal at the beginning of the
period the buyer/hirer obtain the use of the assets for the purpose of capital gain tax both in
relation to the hirer/buyer and the seller.

Provision for necessary adjustment will be made by way of discharge or repayment of tax in
case the hirer /buyer period of use of the assets terminate without the asset passing over to
him.

In computing capital gains accruing on the disposal of an asset acquired on hire purchase and
later disposed of the cost of the asset is used as the hire purchase prices.

The cost of hire purchase comprises of two elements, the hire purchase price and the hire
purchase interest. In computing the capital gains for tax purposes, only the hire purchase price
paid in installment that is regarded as the qualifying expenditure/cost for tax purpose while the
hire purchase interest is ignored.

Illustration 8:

Erhiga Ltd purchased a vehicle on hire purchase on the 1st Jan 2012 on the following terms.

Deposited on 1st Jan 2012 450,000

Monthly installments commencing on 1st Feb 2012 100,000

Interest element in each installment 10,000

Repayment period 2 years

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On 30th June 2014, the company sold the vehicle for N3,500,000 inurning cost relating to the
disposal of N35,000.

Required: Compute the capital gains tax payable by Erhiga Ltd.

Solution: ERHIGA LTD

COMPUTATION OF CAPITAL GAINS TAX PAYABLE FOR 2007 YEAR OF ASSESSMENT.

Sales Proceeds 3,5000,000

Less incidental cost of disposal 35,000

Net sales proceeds 3,465,000

Less:

Cost of acquisition 2,610,000

Capital gains 855,000

Capital gains tax (10% x 855,000) 85,500

Computation of cost of acquisition

Initial deposit 450,000

Installment (24 x 100,000) 2,400,000

Hire purchase Price 2,850,000

Less Hire Purchase Interest 240,000

2,610,000

Illustration 9.

Palm estate ltd is an investment property company. The following transactions were carried out
during the year ended 31st December 2013.

a. On 1st Feb, 2013 the company disposed one of its office building in Aba for N5,250,000.
The tax written down value of the asset as at the time of disposal was N582,250. The
asset was acquired for N3,150,000 8years ago. Before developing the property for

227
 office, N275,000 was incurred to put the building in commercial purpose. N26,500
was incurred annually as insurance cost of the building.

b. On 3rd March 2013, two out of the three warehouses acquired for N60,000,000 were
disposed to two separate individuals for N84,500,000. One of the buyer who is the
managers’ son-in-law paid N41,000,000. Prior to the disposal, the estate valuer
engaged by the company stated that the fair value of each bay was N45,000,000.
The company incurred N325,000 as advert cost and 1.5% of the valuation was paid
to the estate valuer. The third warehouse was sold on 7th of January 2014 for
N45750,000.

c. An industrial plant purchased for N2,210,000 and cost N62,500 to install was disposed
for N2,550,000 on 6th of April 2014. Five weeks before the disposal, a more efficient
plant was acquired for N2750,000 and cost N65,000 to install, Another sound proof
plant that was purchase for N675,000 was disposed for N875,000. After incurring
advert cost of N6250. Three weeks later, a new model of the plant was acquired for
N725,000.

d. A solar system equipment acquired N2,250,000 for residential use was considered unfit
for the purpose and disposed for N2,000,000 Uriri and Voke Ltd on 8 th April.

e. A six wing complex which cost N45,000,000 to construct was disposed for N90,000,000.
Deposit of N20,000,000 was paid on 5th of march 2013 and the balance was agreed
to be paid over four equal installment starting 1st June 2013.

Required: Determine the capital gains tax payable 1 deferred the carrying cost and the value for
capital allowance for each of the transactions.

Solution : PALM ESTATE LTD:

Office Building N N

Sales proceed 5,250,000

Less T WDV (Tax written down value) 582,250

Balancing charge 4,667,750

Acquisition cost 3,150,000

Improvement cost 275,000

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 3,425,000

Initial allowance at 15% (513,750)

Annual allowance 10%(291125X8) (2,329,000)

Total capital allowance (2,842,750)

Chargeable gain 1,825,000

CGT at 10% 182,500

Ware House 2013

N000 N000

Sales proceeds (willing buyer) 43,500

Connected person (MKT Value) 43,500 87,000

Less advert cost 325

Valuation fee (1.5%X90000) 1,350 (1,675)

85,325

Less acquisition cost

87,000 X 60,000

87,000 + 45,000 39,545.45

Chargeable gain 45,779.55

2014 N 000

Sales proceeds 45,750

Cost of acquisition 60,000-39,545.45 20,454.55

Chargeable gain 25,295.45

Industrial plant N000 N000

Sales proceed 2,550

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Cost of assets 2,210

Installation cost 62.5 (2,272.5)

277.5

Less Roll-Over Relief

Amount Re-invested 2,550

Cost of old Asset 2,272.5 277.5

Chargeable gain Nil

Cost of new asset 2,815

Chargeable gain rolled over 277.5

Carrying cost 2,537.5

Cost for capital allowance purpose 2,815

Sale Profit Plant N N

Sale proceeds 875,000

Advert cost (6,250) 868,750

Less acquisition cost (675,000)

193,750

Less Rolled over Amount

Re-invested 725,000

Cost of old Assets 675,000

Chargeable gain rolled over (50,000)

Chargeable gain 143,750

CGT at 10% 14,375

Solar System N N

230
Sales proceeds 2,000,000

Less acquisition cost (2,250,000)

Capital loss 250,000

Complex N 000 N 000

Sales proceeds 90,000

Acquisition cost 45,000

Chargeable gain 45,000

Payment

1/3/2013 deposit 20,000

1/6/2013 1st installment 17,500

1/12/2013 2nd Installment 17,500

1/6/2014 3rd Installment 17,500 = 72,500

1/12/2014 4th Installment 17,500 = 17,500

90,000

Capital gain tax payable

2013 Tax year (18 Months) N000

72500 X 45,000 = 36,250

90000

Capital gain tax at 10% 3,625

2014 Tax year N000

17500 X 45000 = 8,750

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 90000

CGTat 10% 875

Note that installment within 18 months of disposal as per original agreement will be chargeable
in the 1st year of assessment.

Revision Questions

1. Explain the following terms

a. Roll over relief

b. Chargeable gain

c. Connected person

d. Indexation relief

2. Explain clearly, how capital transaction of business partnership and companies are
treated under CGTA 2004.

3. a. What do you understand by the term ’’legatees’’?

b. What are the requirements of CGTA 2004 0n Artificial Transactions?

4. APC and PDP Ltd is a firm of contractors from whose books, the following transaction
was extracted at 31st June 2013:

Cost of acquisition 1st July, 2012 N

Motor vehicle 1,400,000

Freehold plant & equipment 1,210,000

Generator 200,000

Disposals:

Freehold plant & equipment 1,460,000

Generator 300,000

232
 Re-acquisition: plant & equipment 1,560,000

Generator 180,000

You are required to determine:

a. chargeable gain

b. Roll over relief

c. Carrying cost and capital allowance available for 2013 tax year.

6.09 Review Questions

a. Discuss in details the Term ‘Chargeable Assets’

b. List the persons, assets and institutions exempted from Capital Gain Tax
c. Explain the concept of ‘Connected Persons’ in relation to Capital Gains Tax
computations

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 MODULE 7

7.00 VALUE ADDED TAX

7.01 Learning outcome

On successful completion of this Module, Students should be able to

i. Examine the principles underlying the operation of Value Added Tax (VAT) in
Nigeria;
ii. Evaluate the penalties and offences relating to VAT;
iii. Appraise the basic principles and application of VAT;
iv. Identify the goods and services that are taxable and chargeable.

7.02 Introduction

Value added tax is a topic that can be examined in the context of almost any income tax
question. It is a tax on the production and consumption of goods and services which is borne by
the final consumer but collected at each stage of the production and distribution chain. In this
module, the purchases underlying the operations of VAT, Methods and bases of Assessment of
VAT are examined. This will enable students have a very sound understanding of the whole
issues behind VAT.

7.03 Principles Underlying the Operations of VAT

VAT is a tax payable on the goods and services consumed by any individual, business
organization or government agencies. VAT is levied at each stage of supply or production. It is
ultimately borne by the consumer who, not being registered for VAT purposes is unable to
reclaim it.

7.04 Legislative Requirement and Procedure

VAT was introduced into Nigeria to replace sales tax following the recommendation of the
study group set up by the federal government in 1991. VAT came into existence following the
234
 enactment of the Value Added Tax Act 102 of 1993 which repealed the sales Tax Act 1986.
However, VAT became effective from 1st January 1994. The VAT Act was amended 2004 to
become Value Added Tax Act Cap VI LFN 2004. VAT is chargeable at the rate of 5% on the
supply of taxable goods and services except items specifically stated as exempt or zero-rated.
VAT is administered by the Federal Inland Revenue Services.

a. Objection and Appeal

Where a tax payer is aggrieved by an assessment, the law allows such a tax payer to object and
subsequently file an appeal before the VAT tribunal. The VAT tribunal is set up in 5 zones of the
federation adjudicating on disputes between the taxpayer and the tax authority.

b. Vat Tribunal

This is a recent creation aimed at dissolution of issues or disputes between tax payer and tax
authority. Five zonal tribunals have been created by the Federal Ministry of finance. Each Zonal
Tribunal shall0 be made up of not more than 8 persons none of whom shall be a serving public
servant. One of the members shall be the chairman who shall be a legal practitioner of not less
than 15 years post call experience.

c. Contents of a Notice of Appeal

The notice of appeal against a VAT assessment must contain the following:

(a) The name and address of the taxable person

(b) Any tax input

(c) The net amount of tax payable

(d) The precise ground of appeal

(e) The total amount of goods and services chargeable to tax in respect of each month.

d. Offences and Penalties

S/N SECTIONS OFFENCES PENALTY

1 Section 26 Participates in or takes steps with a view to, the Liable on conviction to a fine of
evasion of tax by him or any other person N30,000 or twice of the amount

2 Section 27 Failure to make attribution or notify the board Liable to pay a penalty of

235
 of the attribution made N5,000

3 Section 29 Failure to notify the Board of any change of Liable to pay a penalty of
address N5,000

4 Section 29 Failure to issue tax invoice for goods and Liable on conviction to a fine of
service rendered 50% of the cost of the goods
and services

5 Section 30 Resists, hinders, or obstructs or attempts to Liable on conviction to a fine of

resist authorized officer from carrying out N10,000 or imprisonment for a
inspection term of 6 months or both

6 Section 32 Failure of register Liable on conviction to a fine of

N5,000

7 Section 33 Failure to keep proper records and accounts Liable to pay a penalty of
N2,000 for every month

8 Section 34 Failure to collect tax Liable to pay 150% of the

amount not collect plus 5%
interest above the CBN Re-
discount rate.

9 Section 35 Failure to submit returns Liable to a fine of N5,000 for

every month in which the
failure continues

e. Registration by Government Ministries Etc.

Section 9 provides that every Government Ministry, statutory body, and other agency of
Government shall register as agents of the Board for the purpose of collection of VAT. Every
contractor transacting business with a Government Ministry, statutory body, and other agency
of the Federal, State or Local Government shall produce evidence of registration with the Board
as a condition of obtaining contract.

f. Registration by Non-Resident Companies

236
Section 8B states that for the purpose of the VAT, a non-resident company that carries on
business in Nigeria shall register for the tax with the Board, using the address of the person
with whom it has a subsisting contract, as the address for purposes of correspondence relating
to the tax. A nonresident company shall include the tax in it’s invoice and the person to whom
the goods or services are supplied in Nigeria shall remit the tax in the currency of the
transaction.

7.05 Definition, Objectives and VAT Administration in Nigeria

VAT is administered and managed by the Federal Inland Revenue Service through VAT
directorate. The Act allows the Board to do such things as it may deem necessary and expedient
for the assessment and collection in accordance with the provisions of the VAT Act Cap VI, LFN,
2004.

Section 21 of the VAT Act provides for the establishment of a technical committee known as the
Value Added Tax Technical Committee. The committee is composed of the following members.

(a) A chairman who shall be the chairman of the FIRS.

(b) All Directors in FIRS.

(c) The legal adviser to the FIRS.

(d) A Director in the Nigeria custom service.

(e) Three representatives of the State Government who shall be members of the Joint
Tax Board.

7.5.1 The Functions of the VAT Technical Committee

(i) To consider all tax matters that requires professional and

technical expertise and make recommendations to the Board.

(ii) To advise the Board (Service) on the assessment and collection of

VAT.

(iii) To attend to such other matters as the Board (Service) may from
time to time referred to it.

Taxable Goods and Services

237
The tax shall be charged and payable on the supply of all the goods and services other than
those goods and services listed in the schedule to VAT Act as exempted.

Goods and Services Exempted from VAT

A. Goods Exempt:

(i) All medical and pharmaceutical products

(ii) Basic food items like beans, yam, rice, etc.

(iii) Books and educational materials

(iv) Baby products

(v) Commercial vehicles and their spare parts

(vi) Agricultural equipment and products and veterinary

(vii) All exports

(viii) Plants and machinery used in export processing zone.

(ix) Fertilizers, farming machinery etc.

(x) Plant and machinery and equipment purchased for utilization of gas in downstream
petroleum operations.

(xi) Tractors, ploughs, etc. for agricultural products.

B. Services Exempt:

(i) Medical Services

(ii) All exported services

(iii) Services rendered by community banks, people’s bank and mortgage institutions.

(iv) Plays and performances conducted by educational institutions as part of learning.

VAT Revenue Distribution

238
Section 36 of VAT Act of 2004 states that, notwithstanding any formula that may be prescribed
by any other law, the revenue accruing from VAT shall be distributed as follows:

(a) 15% to the Federal Government.

(b) 50% to the State Government and the Federal Capital Territory Abuja and

(c) 35% to the Local Government.

This sharing formula took effect from 1st January 1999. Between 1994 and 1999, the revenue
from VAT was shared amongst the three tiers of government in Nigeria as thus:

1994 1995 1996 and 1997 1998

Federal Government 20% 50% 35% 25%

State Government 80% 25% 40% 45%

Local Government - 25% 25% 30%

Tax Invoice

Section 11A VAT (amendment) No 12, 2007 states that a VAT-able person who makes a taxable
supply shall in respect of that supply, furnish the purchases with a tax invoice containing inter
alia the following:

(a) Tax payers identification number (TIN)

(b) Name and address

(c) VAT registration number

(d) The date of supply

(e) Name of purchaser or client

(f) Gross amount of transaction

(g) Tax charged and rate applied

Returns and Remission of Tax

239
Section 15 of VAT Act as amended of Act No 12 of 2007, a taxable person shall render to the
Board on or before 21st day of the month following that in which the purchase or supply was
made. A person who imports taxable goods into Nigeria shall render to the Board returns on all
the taxable goods imported by him into Nigeria.

On remission of tax, section 16 of VAT Act LFN 2004, provides that a taxable person shall on
rendering a return make remittances as follows:

(a) If the output tax exceeds the input tax, remit the excess to the Board or

(b) If the input tax exceeds the output tax, be entitled to a refund of the excess tax from
the Board on production of such documents as the Board may from time to time
require.

7.06 Accounting for VAT

A. VAT Exclusive and VAT Inclusive

VAT Exclusive: This occur when the VAT element is not hidden in the price or value of goods
and services but is separately disclosed in the invoice or receipt VAT inclusive: Where the VAT
element is subsumed or hidden in the price of goods and services stated on the invoice without
being separately disclose, we say the price is VAT inclusive

Illustration 1

Awe received supply from two different manufacturers the same day. The first supply worth
N220,000 VAT exclusive and the second supply worth N180,000 VAT inclusive.

Required: Determine the value of goods supplied (net of VAT)

Solution:

Step I: Determine the value of VAT

Step II: Add the VAT to the cost of the goods supplied

• VAT Rate 5%

Supply 1: VAT amount = 220,000 X 5% = 11,000

Add: VAT amount to the original cost of the article supplied 11,000 + 220,000 = N23,000

Note: The value of the article – 231,000 is the combination of the price plus VAT.
240
Supply II: If the price of the supply is N180,000 VAT inclusive, it means that VAT is wrapped up
in the price quoted. Therefore, VAT can be ascertained using the

Formula:

VAT Rate = 0.05 X 180,000 = 8,571

100 + VAT Rate 1.05

Price of article = 171,429

B. VAT and foreign goods

International trade allows VAT to be imposed on goods in the country in which they are
produced or in the country in which they are consumed. The Principle of Origin and Destination
applies in this case.

The Principle of Origin: This principle allows VAT to be imposed on goods in the country in
which they are produced rather than consumed. This principle is practiced in Balarus. In
Balarus, VAT is levied on goods produced for export at the country VAT rate.

The Principle of Destination: This principle allows VAT to be levied on goods and services in the
country where they are consumed rather than produce. Nigeria operates this VAT principle;
VAT is levied on the goods and services imported into the country.

Where the VAT is inclusive, VAT payable on an item is calculated as 5/105 X price of the item or
service. Where the VAT is not inclusive, VAT payable on an item is calculated as 5/100 X price of
the item or service.

Illustration 2:

Total value of VAT-able suppliers/sales during the month of January 2013 was N220,000. Total
value of VAT-able purchase and expenses during same period was N178,000.

Required: Compute the VAT payable by the business in the month of February.

NOTE: All the amounts are VAT inclusive.

Solution: Computation of VAT liability

Output tax = 5/105 X N220,000 = N10,476

Less: Input tax = 5/105 X N178,000 = N8,476

241
VAT payable to FIRS = N2,000

Illustration 3:

In 2013, a VAT-able product was sold to the final consumer for N250,000. This product initially
moved from raw materials to a manufacturer at N100,000. The finished goods were sold to a
wholesaler at N150,000 and later to a retailer at N200,000.

Required: Compute

(i) Total output tax

(ii) Total input tax

(iii) Total VAT payable to the government

(Adapted from ICAN 2001)

Solution: (i) Computation of total output VAT N

Value of sales 250,000

VAT Output at 5% 12,500

(ii) Computation of Total input tax

Cost of Raw Material 100,000

VAT input at 5% 5,000

(iii) Computation of VAT payable for 2013 Tax year

Total output tax 12,500

Less total input tax (5000)

VAT payable 7,500

7.07 Vat-able Persons and Zero-Rated Items

242
Vat able Person is one who deals on Vat able goods and services. Anyone who trades on vat-
able goods and services for consideration is a vat able person. This includes

(i) A sole trader

(ii) A professional e.g. Accountant, Lawyer etc.

(iii) A partnership

(iv) A limited liability company

(v) A club or association

Specifically, they are persons who independently carryout in any place any economic activities
such as:

(a) Producer/manufacturer

(b) Wholesaler

(c) Importers

(d) Supplier of goods etc.

Zero-rated Goods and Services

The following goods and services are vat able at zero-rate:

(i) Non-oil exports

(ii) Goods and services purchased for diplomats

(iii) Goods and services for use in humanitarian donor funded project.

7.08 Review Questions

Question 1:

Value Added Tax (VAT) is a form of indirect taxation introduced by the Federal Inland Revenue
Service. Discuss (ICAN 2000).

Question 2:

Compute the VAT payable to government on a product that moves from Raw materials
producer
243
 (a) To manufacturer

(b) At N25,000; then to wholesaler

(c) At N30,000; then to retailer

(d) At N45,000; and finally to the consumer

(e) Who pays N60,000 to the retailer

Question 3:
The following transactions were carried out by Jedeko Nig. Ltd in the month of April, 2014.
Purchase of PMS 11,600
Cost of AGO 7,200
Cost of DPK 3,600
Purchase of Lubes 920
Total oil 420
Grease 4,300
Purchase of motor vehicle 8,250
Sales of PMS 12,000
Sales of AGO 8,500
Sales of DPK 4,100
Sales of Lubes 1,150
Sales of Grease 4,100
Sales of Total Oil 120
th
Stock as at 30 April, 2014
PMS 180
AGO 210
Grease 470
Total Oil 500

Required: Ascertain the VAT liability/payment for the month of May, 2014

Question 4:

a. Discuss the principles underlying the operations of VAT

b. What are the contents of a notice of appeal under VAT?
c. List the various offences and penalties under VAT
d. Identify the organs administration and the composition of the VAT Technical Committee
in Nigeria
e. List the Good and services exempted from VAT

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 MODULE 8

8.00 TAXATION OF SPECIALIZED COMPANIES OR TRANSACTION

8.01 Learning outcome

At the end of this Module, Students should be able to:

i. Examine the special provisions of CITA regarding the taxation of non-Nigerian shipping
or air transport companies and compute the tax liabilities of such companies.

ii. Evaluate special provisions of CITA regarding the taxation of insurance companies and
compute the tax liabilities of such companies.

8.02 Introduction

Taxation of special companies is a topic that can be examined in the context of almost any
income tax question. In this module, the general issues concerning air/sea transportation,
insurance companies, banks, unit schemes and gambling are examined. This will enable the
students to have a sound understanding of the issues behind taxation of specialized companies.

8.03 Taxation of Air/Sea Transport

The business of air and sea transportation is very special in-nature. A ship that left Nigeria sea
port on a given day may stay there till six months or more outside Nigerian shores before
returning back to the same port. The return of a ship back to Nigerian port will depend on the
availability of cargo and passenger it has for the Nigeria trip.

However, what makes them special is the fact that the company may apply to the Federal
Inland Revenue Service to be subject to tax using two ratios.

A. Non-Nigerian Company

Section 21(1) of CITA Cap C21, LFN 2004 as amended and consolidated provides that: where a
Non Nigerian-company carries on the business of transport by seal air, and any ship or aircraft
owned or chartered by it calls at any port or airport in Nigeria, its profits or loss to be deemed
to be derived from Nigeria shall be the full-profits or loss arising from the carriage of
passengers, mails, livestock or goods shipped, or loaded into an aircraft, in Nigeria except
where the goods etc. are brought to Nigeria solely for transshipment of for transfer from one
aircraft to another or in either direction between an average and a ship.

245
Section 14(2) provides where a country tax assessment and computation are similar the same
to that of Nigeria, the profit or loses chargeable in Nigeria shall be computed by applying the
percentage ratio of profit or loss before depreciation to the total income receivable in respect
of the carriage of mails, passenger, livestock or goods and deducting there from, capital
allowance, ratio of depreciation to the total sums receivable in respect of the carriage of
passengers etc. out of Nigeria

DETERMINATION OF TAXABLE INCOME.

Format:

Adjusted Profit Receivable in Nigeria XXX

Less

Capital allowance (using depreciation ratio or actual) (X)

Total Taxable Income XX

Steps:

1. Determine the amount of income derived in Nigeria from the carriage of mails,
passenger, livestock or goods out of Nigeria.

2. Determine all income generated from other sources.

3. Determine the total adjusted profit for the period (Total Income less allowance
expenses).

4. Calculate the depreciation charge for the period.

5. Calculate the adjusted profit ratio as follows:

Adjusted Profit x 100

Total Income from all sources 1

6. Ascertain the Depreciation Ratio

Depreciation Charge x 100

Total Income from all source 1

246
 7. Calculate the adjusted profit receivable in Nigeria by applying the adjusted profit
ratio in(5) above to the income derived in Nigeria (1) above, that is;

Adjusted Profit Ratio x Income derived in Nigeria

8. Determine the capital allowance by applying the depreciation ratio in (6) above on the
total amount derived in Nigeria (1) above, that is;

Depreciation Ratio x Income derived in Nigeria

9. Taxable profit for the relevant assessment year is determined by subtracting adjusted
profit from capital allowance.

10. The tax liability is computed by applying the prevailing tax rate to the total taxable
profit, 30% of taxable profit (a) above.

Illustration 1:

Airiko Airway Ltd a Ghanaian air transport company made up its account to 30th June 2010. The
following was extracted from the books of account. N N

Freight into Nigeria 82,465,200

Freight out of Nigeria 45,234,600

Freight to other routes 118,475,900

246,175,700

Less: Expenses

Allowable 121,607,600

Depreciation 23,416,100 145,023,700

Net Profit 101,152,000

Required: Compute the tax liability of Airiko Airway Ltd in Nigeria for2011 assessment year.

247
Solution: AIRIKO AIRWAY LTD

COMPUTATION OF TAX LIABILITY FOR 2011 ASSESSMENT YEAR

Adjusted profit (5) 22,888,708

Less: Capital Allowance (6) (4,301,810)

Taxable income 18,586,898

Tax liability (7) 5,576,069

Minimum tax (2) 904,692

The Income tax payable is N5,576,069 because it is higher than minimum tax N904,692

Workings:

1. Income Derived in Nigeria 45,234,600 while total Income is 246,175,700

2. Determination of Adjusted Profit:

Net Profit for the year 101,152,000

Add Depreciation 23, 416,100

Adjusted profit 124,568,100

3. Determination of Adjusted profit Ratio

Adjusted Profit x 100 = 124,568,000 x 100 = 50.6%

Total Income from all source 1 246,175,700

4. Determination of Depreciation Ratio:

Depreciation charge for the year x 100 23,416,100 x 100 =9.51%

Total Income from all source 1 246,175,700 1

5. Determination of Adjusted profit Receivable in Nigeria

=Adjusted Profit Ration x Income derived in Nigeria

248
 =50.6% x 45,234,600 = 22,888,708

6. Determination of capital Allowance

Depreciation Ratio x Income Derived in Nigeria

9.51% x 45, 234,600 = 4,301,810

7. Prevailing tax rate is 30%= 30% 18,586,898 = 5,576,069

8. Minimum tax payable is 2% of income derived in Nigeria

2% of 45,234,600

=904,692

Illustration 2

I See International Airway ltd a Cameroon Airline makes its profit and loss account for the year
ended 31st Dec 2012 as follows. N

Income from passenger freight to Nigeria 225,000

Income from passenger freight out of Nigeria 235,000

Income from goods loaded into aircraft in Nigeria 165,000

Income from goods loaded into Aircraft on other routes 275,000

900,000

Less: Depreciation 190,000

Salaries and other expenses 500,000

Other disallowable expenses 40,000 730,000

Net Profit for the year 170,000

Additional Information

1. Salary and other Expenses Included:

a. Payment of N25,000 to Nigeria Airport Authority

249
 b. Payment of N10,000 as rent for accommodation used as transit flat by the airline
officials

c. Payment of N50,000 for routine repairs and aircraft serving

d. Capital expenditure N60,000

2. The Nigeria tax authority has agreed to allow the company to claim the amount of
N170,606 as capital allowance.

Required: Compute the tax liability in Nigeria

Solution: See International Airways Ltd

Computation of tax liability for 2013 Assessment year

Adjusted Profit Received in Nigeria 208,000

Less:

Capital allowance 170,606

Taxable Income 37,394

Tax liability 11,218

Minimum tax 8,000

Education tax 4160

The Income tax payable is N11,218 higher than the minimum value of N8,000.

Workings:

1. Income derived in Nigeria = 235,000 + 165,000 = 400,000

2. Determination of adjusted profit

Net profit 170,000

Add: Depreciation 190,000

Disallowable expenses 40,000

Rent 10,000

250
 Capital expenditure 60,000

Adjusted profit 470,000

1. Adjusted Profit Receivable in Nigeria

52% x 400,000 = 208,000

2. Adjusted Profit Ratio = Adjusted Profit x 100

Total Income

470,000 x 100 = 52%

900,000

3. Minimum tax = 2% of income receivable in Nigeria (400,000) = 8,000

4. Education tax = 2% of Adjusted profit (208,000) = 4160

5. Tax liability = 30% of taxable Income (37,394) = 11,218

8.04 Taxation of Insurance Company

Insurance business involves the transfer of risk of loss from one entity to another in exchange
for payment (premium). Section 16(1) CITA 2004 LFN deals with the taxation of insurance
companies. The Act classified insurance business into two categories:

i. Life Assurance business

ii. Non-life insurance businesses.

The difference between the life assurance business and non-life insurance business for tax
purpose is that in life assurance business the premium received does not form part of income
for tax purposes even under an endowment policy. Since the premium does not form part of
the income, claims are not tax deductible. For Non-life insurance, the premium paid form part
of income and the claim also is subject to tax.

However, from 1995, a company engage in composite insurance business (life and non-life
insurance business) is taxed separately. This means that life assurance will be taxed and life
insurance will be taxed separately such that any loss in one source cannot be relieved by the
other source.

251
Insurance company like every other company, treats dividends received as Franked Investment
Income, there are tax exempted.

Life Assurance Business

A. Nigerian Life Assurance Company: Section 16(5b) of CITA 2004 amended prescribed the
criteria for the determination of taxable profit in the year of assessment. According to the
section, the taxable profit shall be:

a. Investment Income

b. Actuarial Revaluation Surplus

c. Deduct;

i. General Reserves

ii. Transfer during the year

iii. Allowable management and Administrative expenses

d. Add: Balancing charge (If any) and;

Deduct unrelieved losses (if any) and Capital allowances.

e. Tax payable shall be the higher of:

i. 20% of cross income in that year of assessment or;

ii. 30% of the total profit as computed.

Note: The Investment Income includes Dividend (exempted from tax), annuities, commission
received from the assured.

Format:

Investment Income XX

Actuarial Revaluation Surplus distributed XX

Other Income XX

Gross Income XXX

Deduct:
252
 i. General Reserve XX

Transfer during the year XX

Less Net liabilities on polices XX

Special Reserve (X) X

The higher of

1% Gross premium X

10% Net profit X X

Allowable management expenses X (X)

Assessable Profit XX

Less Capital Allowance (X)

Total Profit X

Tax payable: Higher of

30% of total profit or

20% of Gross Income

Note: The transfer to special Reserve depend whether the minimum statutory paid up capital is
equal to or less than the total Reserve.

B. Non Nigeria Assurance Company

The assessable profit of a non-Nigeria company whose income accrue in part outside Nigeria,
the profit of such company shall be taxed in proportion to the total investment income of
premium received in Nigeria less management expenses and other allowable expenses. This
means that company’s investment income taxable shall be that which accrue in Nigeria within
the period under received.

An insurance company is liable to tax when the company carries out a business through a
branch management or in a fixed place, but this does not include an agency in Nigeria unless
the agent has and habitually exercises a general authority to negotiate and enter contracts on
behalf of such company.

253
The investment income in Nigeria is determined by:

=Premium Received in Nigeria X Global Investment Income

Global Premium Received by Company.

Non-life Insurance Company

Nigeria Company: Section 16(1) CITA LFN 2004, provides that the tax payable by a Nigeria
Insurance Company whose profit accrues in Nigeria or part outside Nigeria shall be ascertain by:

a. Taking the gross premium, interest and other income receivable in Nigeria less any
company.

b. Deduct Reserve for un expired risk using a percentage adopted by the industry at the
end of the period for which the profit is ascertain and add reserve for unexpired
risks outstanding at the beginning of the period.

c. Add reserve for unexpired risk outstanding at the beginning of the period and Deduct
Reserve for unexpired risks using an industry adopted percentage at the end of the
period subject to:

i. In case of marine cargo -25% of total premium

ii. In the case of general insurance business other then marine business -45% of
total premium.

d. Add Balancing charge (if any) and Deduct unrelieved Losses (if any) and Capital
allowance.

e. Deduct claims and outgoings of the company (expenses) restricted to 25% of total
premium in the year.

f. Tax payable shall be higher of:

30% of total profit or

15% of gross income in that year of assessment.

Format: N N N

Gross Premium XX

Less Premium to Re-insurance (X)

254
Net premium XX

Add Interest Income X

Other Income X X

Gross Income XX

Less: Provision for unexpired risk X

Add: Restricted to 45% of total premium for General business

25% of total premium for marine cargo X (X)

Less Allowance Expenses:

Claims X

Commission X

Management Expenses X

Agency Expenses X

Proportion of head office expenses X (X)

Assessment Profit XX

Less unrelieved loss b/f (X)

Capital allowance XX

Adjusted profit XX

Tax payable shall be higher of

Tax paid as per adjusted profit

Tax paid on 15% of Gross profit

Note: The proportion of head office expenses relating to non-Nigeria tax authority approves the
amount in relation to that every year.

Illustration 1:

255
 Boaska Insurance Plc. which had been in business for several years in Nigeria make up its
account every 31st Dec. Details of the company transaction for the year ended 2013 were:

2013 2012

Non-life Insurance Revenue 3,517,840 5,190,970

Life assurance 220,000 115,000

Investment and other Income 24,621,880 7,987,740

Provision for doubtful balance (11,386,670) (1,987,740)

Adm Expenses (9,138,190) (4,879,950)

Profit before tax 7,834,860 6,426,020

Tax (2,350,450) (1,927,800)

Profit after tax 5,484,410 4,498,220

Non-life Insurance Revenue Account 2013

Marine Motor vehicle Accident Fire Total

Gross premium 5,935,550 6,288,580 7,455,750 20,671,750 40,351,630

Premium (1,187,110) ---- (1,863,930) (5,167,930) (8,218,970)

Ceded

Net Premium 4,748,440 6,288,580 5,591,820 15,503,820 32,132,660)

Reserve for (1,602,500) (1,886,570) (3,504,200) (9,715,720) (16,708,990)

unexpired Risk

314,594 4,402,010 2,087,620 5,788,100 15,423,670

Claim 623,110 ------- 970,100 2,184,300 3,777,510

Recoveries

Claim paid (1,602,590) (2,012,340) (1,148,200) (3,472,860) (8,235,990)

Underwriting (1,095,470) (1,166320) (1,376,060) (3,815,200) (3,447350)

256
Expenses

1,070,990 1,229,050 533,460 684,340 3,517,840

Life Assurance 2013 2012

Premium Income 12,401,330 6,367,820

Premium Cede (3,650,000) (1,151,600)

Net Premium 8,751,330 5,216,220

Claim Recoveries 430,370 270,510

Claim paid (4,448,770) (1,239,980)

Commission (2,890,200) (1,330,740)

1,843,730 2,916,010

Transfer to special Reserve (184,373) (291,600)

Transfer to profit and loss A/C (220,000) (115,000)

Transfer to life fund 1,439,360 2,509,410

8Investment and other Income: 2008 2007

Life Nonlife Total

Gains on the disposal of investment property 9,751,290 - -

Security and stock 475,650 1,517,310 267,940

Rental income 2,268,400 4,457,040 1,020,180

Commission - 3,189,090 461,110

Franked Invest. Income 71,570 694,050 99,570

Interest on fixed Deposit 893,940 1,180,880 108,360

Profit on Disposal of fixed assets - 122,660 30,580

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 13,460,860 11,161,030 1,987,740

Provision for Doubtful Debts 2013 2012

Life Nonlife Total

Re-insurance Debtors - 4,065,750 3,575,750

Bad Debts written off 1,673,350 460,000 718,300

Diminution in value of Invest 3,110,170 958,220 2,710,580

Other receivable - 1,119,180 983,110

4,783,520 6,603,150 7,987,740

Adm Expenses 2013 2012

Life Nonlife Life Nonlife

Depreciation 644,830 2,089,630 426,330 900,750

Mgt Expenses 1,899,320 3241,250 652,860 1,928,950

Adult fee 250,000 200,000

Staff cost 663,170 492,660

Director`s Remuneration 344,830 278,400

Exchange loss 5,160 -

9,138,190 4,879,950

Additional Information

i. The total capital allowance is N6,638,180

ii. One third of the cost below relates to life business

Audit fee

Director`s remuneration

258
Staff cost

Capital allowance

Required: Determine the tax liability for life and non-life insurance business for 2014 tax.

Solution: BOASKA INSURANCE PLC

COMPUTATION OF LIFE ASSURANCE TAX LIABILITY FOR 2014 TAX YEAR.

N N

Transfer to profit & loss (Actuarial surplus) 220,000

Gains from sales of Investment property 9,751,290

Rental Income 2,268,400

Interest on fixed deposit 893,940 13,133,630

Less Transfer to Reserves

General Reserve life fund 4,718,350

Transfer during the year 1,439,360

6,157,710

Less Net liabilities on actuarial policy in force 6,037,710 120,000

Special Reserves: Higher of

1% of Gross Premium 124,010

10% of Net Profit 755,240 755,240

Allowable expenses

Management expenses 1,899,320

Audit fee 83,330

IT levy of 1% of profit b/4 tax 75,520

Direction Remuneration 114,940

259
Staff Cost 221,060

Bad Debt written off 1,673,350 4,067,520

4,942,760

Assessable Profit 8,190,870

Less capital allowance 2,212,727 2,212,727

Total profit 5,978,143

Tax Payable

Income tax at 30% of total profit 1,793,443

Minimum Tax 1,551,731

Education Tax at 2% of Assessment profit 163,810

IT levy at 1% of profit before tax 75,520

Workings:

Minimum Tax

Gross premium 12,401,330

Interest & other income 13,460,860 25,862,190

20% as total profit 5,172,438

Minimum tax at 30% 1,551,731

Non-life Insurance Business

Gross premium 40,351,630

Premium (8,218,970)

32,132,660

Investment and other income

Rental income 4,457,040

260
Commission 3,189,090

Interest on fixed deposit 1,180,880 8,827,010

40,959,670

Less

i. Provision for unexpired risk:

Marine Business restricted to 25% gross Premium 1,483,888

General Business restricted to 45% Gross premium 15,106,490 16,590,378

Less

Allowance expenses

Claims paid 8,235,990

Deduct recovered (3,777,510)

4,458,480

Under writing Expenses 7,447,350

Bad Debt written off 460,000

Management expenses 3,241,250

Re-insurance Debtor 4,065,750

Audit fee 166,667

Director Remuneration 229,887

Staff cost 442,113

IT levy 19,062

20,539,559

Restricted to Gross Premium 10,087,908 10,442,652

27,033,030

261
Assessable Profit 13,926,640

Less capital allowance (4,425,453)

Total profit 9,501,187

Tax payable: Income Tax @30% of total profit 2,850,356

Minimum tax 2,850,356

Education tax @2% of assessment profit 540,661

IT levy 19,062

8.05 Taxation of Banks

Banks like other companies are subject to company income tax payable under CITA as
amended. In addition to the income tax payable, a special levy of 10% on excess profit was
introduced in 1979 assessment year. The special levy rate was increase form 10% to 15% in
1989 but was however abolished with effect from 1991 assessment year.

Excess profit here means difference between total profit and the standard or normal estimated
profit. Standard profit according to section 29(3) is the addition of the amount arrived at after
applying an approved percentage to the amount of capital employed at the end of the
accounting period as follows:

General Reserves 20%

Statutory Reserves 20%

Long-term loan 20%

Paid-up Capital 40% Or N6 million whichever is higher.

Note: In determining the standard profit, the Net Profit for that year is not included as part of
general reserve. In a case where statutory reserve is different from Capital Reserve, either
should be used in computing the normal profit.

Tax Exemptions of Certain Interests Received by Banks

a. Loan for Local Plant and Tools: Interest earned by banks on loan granted to a company
engaged in the fabrication of local plant machinery and tools shall be exempted
262
 from tax if at least 18 months moratorium is allowed and the interest rate is not
more than the lending rate base at the time the loan was granted. Base rate is the
weighted average cost of found to the bank.

b. Loan for Manufacturing Goods for Export: Interest earned by banks on loan granted for
the purpose of manufacturing goods for export shall be exempted from tax as
provided in Table2,schedule3 CITA Cap 11(5) 2007 LFN, subject to two conditions:

i. The bank shall present a certificate issued by the Nigeria Export Promotion Council
stating that the level of export specified had been achieved by the company.

ii. The beneficiary company must export not less than 50% of the goods manufactured and
such goods are not re-exported to Nigeria.

A company is deemed to be engaged in manufacturing for export if the Nigeria Export

Promotion Council certified it for that purpose.

c. Loan For Agricultural Business: Section 11(2) of 2007(amended) stipulates that interest
on loan granted by banks to a company engaged in Agriculture shall be exempted
from tare if at least 18 months moratorium is allowed and the interest rate on the
loan is not more than the base lending rate at the time the loan is obtain.
Agricultural business is defined by the Act as:

i. The cultivation or production of cereals crops, tubers, fruits, cotton, beans, groundnut,
sheanuts, vegetable and plantain;

ii. Animal husbandry, poultry, piggery, cattle rearing, fish rearing and deep fish trawling.

iii. Plantation for production of rubber, oil palm, cocoa, tea or similar products.

The above sections also apply to loan for local plant and tools; loan for cottage industry.

Illustration 1:

Echi Int. Bank Ltd makes up its accounts to Dec 31st annually. The following information was
extracted from the balance sheet of the Bank for the year ended 31st Dec 2010. N

Non-Current Assets 35,000,000

Current Assets 60,000,000

Total Assets 95,000,000

263
Share Capital 10,000,000

Statutory Reserve 5,000,000

General Reserve 5,000,000

Long term loan 5,000,000

Current liabilities 70,000,000

Total liabilities 95,000,000

Additional Information:

i. The turnover of the year ended 31st Dec, 2010 was N20,000,000.

ii. Adjusted profit for 2011 year of assessment was N72,000.

iii. Unrelieved loss brought forward from 2008 is N12,000 while unutilized capital
allowance brought forward from 2010 year of assessment was N20,000.

iv. Capital allowance for the 2011 year of assessment was N30,000. This excludes a
balancing charge of N8,000 for the same year of assessment

v. Gross Profit was N2,000,000.

Solution: ECHI INT. BANK LTD

COMPUTATION OF TAX LIABILITY FOR 2009 ASSESSMENT YEAR.

Assessable Profit 72,000

Add Balancing charge 8,000

80,000

Less Unrelieved Loss 12,000

68,000

Less Capital Allowance

Unutilized C.A b/d 20,000

264
 For the year 30,000

50,000

Maximum 662/3 of assessable profit (48,000) 48,000

Unutilized Capital Allowed c/d 2,000

Chargeable Profit 20,000

Income tax liability at 30% of chargeable profit 6000

Minimum tax:

i. 0.5% of Net Asset 20,000,000 = 100,000

ii. 0.5% of Gross Profit of 2,000,000 = 10,000

iii. 0.25% of the turnover of 20,000,000 = 50,000

iv. 0.25% of paid up capital 10,000,000 = 25,000

The highest of i-iv (Net Asset) 100,000

Add 0.215% of N20,000,000 - N50,000 = N24937.5

N124937.5

Education tax 2% of assessable profit 1,440

Note: The minimum tax of N124937.5 is more than the income tax liability of N6000.

Workings:

Net Assets = Total – Liabilities (95,000,000-75,000,000)= 20,000,000

Note: The minimum tare was calculated as prescribed in section 33(2) of CITA Cap C21 LFN 200

8.06 Taxation of Unit Trust Scheme

A unit trust scheme is established for the purpose of providing facilities for the participation of
the public as beneficiaries under a trust, in profits or income arising from the acquisition,
holding, management or disposal of securities or any other property whatever.

Accounting Treatment And Determination Of Taxable Profit

265
 N N

Investment income X

Other taxable incomes X X

Deduct: Trust managers remuneration X

Management expenses X

Other allowable expenses X (X)

Adjusted profit XX

Less capital allowance X

Relieved (X) (X)

Taxable profit XXX

8.07 Taxation of Gambling Betting Or Lottery Winning

Gambling betting like CASINO is governed by Casino Licensing Act of 1964. It is a tax on the net
gaming revenue thereof to be known as Casino revenue tax and payable by the licensee as
provided in the Act.

Assessment

Section 2 of the Act provided that tax shall be twelve and one half percent (12½%) of such
revenue, and a license to operate a Casino shall be granted only to a company having such
purpose as it’s main object and duly registered and incorporated in Nigeria under the
companies and Allied matters Act of 2011 LFN as amended.

A. Lottery Winnings

The Lagos State Lotteries Board (LSLB) is unique in Nigeria. It has a pioneer status in the
country as a lottery regulatory body. The board was established by the Lagos State lotteries law
Cap L89 2004 laws of Lagos State. They are saddled with responsibilities aimed at regulation of
lotteries, promotional competition, and gaming activities within Lagos State.

8.08 Review Questions

266
a. Comment on the taxation of a Unit Trust Scheme as per the provisions of section 14A
CITA 1979 as amended to date.

b. Identify the special provisions of CITA regarding the taxation of non-Nigerian shipping or
air transport companies and compute the tax liabilities of such companies (iii) Total VAT
payable to the government.

c. What are the steps to be taken in the determination of taxable income for a Non-
Nigerian company?

MODULE 9
267
9.00 PETROLEUM PROFIT TAX

9.01 Learning Objectives

At the end of this Module, Students should be able to:

i. Examine how petroleum profit tax is administered and how to deal with the tax
authorities in connection with the tax.
ii. Appraise the nature and classification of production cost in the upstream sector of the
petroleum industry
iii. Compute adjusted profits of companies engaged in crude oil prospecting and
production.
iv. Analyze the principles underlying allowable and non-allowable deductions as applicable
to petroleum profit tax.
v. Compute capital allowances for petroleum profit tax purposes.
vi. Elucidate the concept of memorandum of understanding (MOU) as applicable to
companies engaged in the utilization of associated gas.
vii. Prepare petroleum profit tax computations in accordance to PPTA and MOUs.

9.02 Introduction

Module 8 represents a rigorous exposure of the student to concepts computation techniques,

principles and practice of crude oil prospecting and production companies in the upstream
sector in the Nigeria Petroleum industry. The module begin with the definition of assessable
profits and chargeable profits in the petroleum industry and departs from that basis to nominal
treatment of loses, double taxation relief, and acquisition, MOUs, deferred taxation; gas
incentives objectives and uses and the implications of Joint Venture Contract. In this module
students discover tax concepts and treatments that are different from that of trading or
manufacturing companies or companies operating in the downstream sector.

9.03 Definition of Assessable Profits and Changeable Profit

Section 8 of PPTA provides that there shall be levied upon the profits of each accounting period
of any company engaged in petroleum operations during that period, a tax to be charged,
assessed and payable in accordance with the provisions of the Act. Companies taxable under
the Companies Income Tax Act are assessable to tax on preceding year basis. For example, if a
company usually prepares it accounts to 31st December, the profits for the accounting year
268
ended 31st December, 2010 is taxable in 2011 year of assessment and the basis period if
1/1/2010 – 31/12/2010. On the other hand, profits arising from petroleum operations are
assessable to tax on current or actual year basis under the provisions of PPTA. For example,
petroleum profits for the accounting period ended 31st December, 2010 is taxable in 2010 year
of assessment and the basis period is 1/1/2010-31/12/2010. In other words, in the accounting
year and the year of assessment are the same.

Example

A Company engaged in petroleum operations commenced a sale or bulk disposal of chargeable

oil under a programme of continuous production and sales on 1st September, 2007 and ceased
operation on 30th April, 2011.

Required: State all the relevant years of assessment and accounting periods.

Solution

The relevant years of assessment and accounting periods are as follows:

Year of Assessment Accounting Period

2007 (year of commencement) 1/9/07 – 31/12/07

2007 (2nd year) 1/1/08 – 31/12/08

2009 (3rd year) 1/1/09 – 31/12/09

2010 (4th year) 1/1/10 – 31/12/10

2011 (year of cessation) 1/1/11 – 30/04/11

Profit of an Accounting Period

The profit of an accounting period of a company engaged in petroleum operations is the

aggregate of:

(a) The proceeds of sales of all chargeable oil sold by the company in that period;

(b) The value of all chargeable oil disposed of by the company in that period; and

(c) The value of all chargeable natural gas in that period; and

(d) All income of the company of that period incidental to and arising from one or more of
its petroleum operations [PPTA 2004, s. 9(1)]
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Value of any chargeable oil so disposed of

In respect of 3.2 (b) above, section 9(2) of PPTA 2004 provides that the value of any chargeable
oil so disposed of is taken to be the aggregate of:

(i) The value of that oil as determined for the purpose of royalty in accordance with the
provisions of any enactment applicable thereto and any financial agreement or arrangement
between the Federal Government of Nigeria and the oil producing company;

(ii) Any cost of extraction of that oil deducted in determining its value; and

(iii) Any cost incurred by the company in transporting and storage of that oil between the
field of production and place of disposal.

Value of chargeable natural gas

For the purposes of 3.2 (c) above, the Fourth Schedule to PPTA states that the value of all
chargeable natural gas in the accounting period shall be the sum of gross proceeds under
individual gas sales contracts in the accounting period less the G-Factor Allowance as
applicable to individual gas sales contract at the appropriate rate per cent of such proceeds
under any such individual gas sales contracts as specified in the table to the Schedule.

Table of G-Factor Allowance

Load Factor G-Factor per centum

50 16.9

60 15.5

70 14.3

80 13.6

Factors in between the figures stated in the table are calculated on a pro-rata basis. G-Factor
means gas production cost adjustment factor.

The Government of the federation may from time to time review the G-Factor allowance
specified in the table to the Schedule.

Example

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The natural gas sold by Island Petroleum Company Ltd during 2016 came from two contracts as
follows:

Contract Value(N) Load Factor

A 5,000,000 70O

B 8,000,000 56O

Required: Calculate the value of gas sold for tax purposes.

Solution:

Contract A N

Value of contract 5,000,000

Less G-Factor allowance (14.3% x 5,000,000) 715,000

Taxable value of gas sold 4,285,000

Contract B

The table for G-factor allowance does not have a G-factor for 56O, therefore, the factor for 56O
must be calculated on a pro-rata basis as follows:

16.9 – [(16.9 – 15.5) x 56 – 50]

60-50

= 16.9 – (1.4 x 6/10)

= 16.9 – 0.84

= 16.06% N

Value of contract 8,000,000

Less G-factor allowance (16.06% x 8,000,000) 1,284,800

Taxable value of gas sold 6,715,200

Determination of Adjusted Profit

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The adjusted profit of an accounting period is the profit of that period after the deduction of
allowable expenses and any adjustments necessary to exclude any profit or loss attributable to
the transportation of chargeable oil by ocean going oil tankers operated by or on behalf of the
company from Nigeria to another territory.

Exclusion of certain profits

Activities in the petroleum industry are divided into two broad categories: upstream and
downstream. Profits from petroleum operations (i.e. upstream activities) are included in the
adjusted profit and are subject to tax under PPTA. Profits from downstream activities are
excluded from adjusted profit and are assessable to tax under CITA. Section 12 of PPTA
specifically states.

Where a company engaged in petroleum operations is engaged in the transportation of

chargeable oil by ocean going oil tankers operated by or on behalf of the company from Nigeria
to another territory then such adjustment shall be made in computing an adjusted profit or a
loss as shall have the effect of excluding there from any profit or loss attribution to such
transportation.

Assessable Profit

The assessable profit of an accounting period is the adjusted profit of that period after the
deduction of loss relief available to the company.

Chargeable Profit

The chargeable profit of an accounting period is the assessable profit of that period after the
deduction of capital allowances.

The above stated points can be summarized as follows:

Proceeds of sales of chargeable oil x

Value of chargeable oil disposed of x

Value of chargeable natural gas x

Incidental income from petroleum operations _____x

Profit of an accounting period xxxx

Less allowable expenses attributable to

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 Petroleum operations x

Adjusted profit xxx

Less loss relief x

Assessable profit xx

Less capital allowances x

Chargeable profit x

9.03.2 Deductions Allowed (Allowable Expenses)

In order to ascertain the adjusted profit of any company for any accounting period from its
petroleum operations, PPTA allows the deduction of outgoings and expense “wholly, exclusively
and necessarily” incurred, whether within or outside Nigeria, during that period by the
company for the purpose of those operations. The following expenses are specified in section
10(1) of PPTA 2004 as allowable deductions:

(a) Rents incurred by the company for that period in respect of land or buildings occupied
under an oil prospecting license or an oil mining lease for the disturbance of surface
rights or any other like disturbance;

(b) All non-productive rents, the liability for which was incurred by the company during that
period;

(c) All royalties, the liability for which was incurred by the company during that period in
respect of natural gas sold and actually delivered to the Nigerian National Petroleum
Corporation, or sold to any other buyer or customer or disposed of in any other
commercial manner;

(d) All royalties, the liability for which was incurred by the company during that period in
respect of crude oil or casing head petroleum spirit won in Nigeria.

(e) All sums the liability for which was incurred by the company to the Federal Government
of Nigeria during that period by way of customs and excise duty or other like charges
levied in respect of machineries, equipment and goods used in the company’s
petroleum operations;

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 (f) Sums incurred by way of interest upon any money borrowed by such company, where
the FIRS is satisfied that the interest was payable on capital employed in carrying on
its petroleum operations;

(g) All sums incurred by way of interest on any inter-company loans obtained under terms
prevailing in the open market, that is, the London Inter-Bank Offer Rate, by
companies that engage in crude oil production operations in the Nigerian oil
industry;

(h) Any expenses incurred for repairs of premises, plant, machinery or fixtures employed
for the purpose of carrying on petroleum operations or for renewal, repairs, or
alteration of any implements, utensils or articles so employed;

(i) Debts directly incurred to the company and proved to the satisfaction of the FIRS to
have become bad and doubtful in the accounting period for which the adjusted
profit is being ascertained notwithstanding that such bad or doubtful debts were
due and payable prior to the commencement of that period:

Provided that:

(i) The deduction to be made in respect of a doubtful debt shall not exceed the portion of
the debt which is proved to have become doubtful during that accounting period, nor in
respect of any particular debt shall it include any amount deducted in determining the
adjusted profit of a previous accounting period;

(ii) All sums recovered by the company during that accounting period on account of
amounts previously deducted in respect of bad or doubtful debts shall be treated as
income of that company of that period; and

(iii) It is proved to the satisfaction of the FIRS that the debts in respect of which a deduction
is claimed were either-

● Included as a profit from the carrying on of petroleum operations in the accounting

period in which they were incurred; or

● Advances made in the normal course of carrying on of petroleum operations not being
advances on account of any disallowable expenses;

(j) Any other expenditure, including tangible costs directly incurred in connection with
drilling and appraisal of development well, but excluding expenditure which is qualifying
expenditure for the purpose of capital allowances, and any expense or deduction in
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 respect of a liability incurred which is deductible under any other provisions of this
section:

(i) Any expenditure directly incurred in connection with exploration, drilling and the drilling
of the first two appraisal wells in a particular field, including expenditure in respect of
cement and casing of well fixtures;

(ii) Where a deduction may be given under this section in respect of any such expenditure
that expenditure shall not be treated as qualifying drilling expenditure for the purpose
of capital allowances;

(k) Any contribution to a pension, provident or other society, scheme or fund which may be
approved, with or without retrospective effect, by the FIRS subject to such general
conditions or particular conditions in the case of any such society, scheme or fund as the
FIRS may prescribe: Provided that any sum company, from any approved pension,
provident, or other society, scheme or fund, in any accounting period of that company
shall be treated as income of that company of that accounting period;

(l) All sums, the liability of which was incurred by the company during that period to the
Federal Government or to any State or Local Government Council in Nigeria by way or
duty, customs and excise duties, stamp duties, education tax, tax (other than the tax
imposed by this Act) or any other rate, fee or other like charges;

(m) Such other deductions as may be prescribed by any rule made under this Act.

Notes

Paragraphs (b), (e) and (g) were included in section 10(1) with effect from 1 st January, 1999. In
respect of (k), note that under the Pension Reform Act 2004 the National Pension Commission
is responsible for regulating supervising and ensuring the effective administration of pension
matters in Nigeria and not the FIRS or the Joint Tax Board.

Waiver or Refund of Liability or Expense

Where a deduction has been allowed to a company in respect of any liability or expense
incurred by that company and the whole or part of the liability or expense is later waived or
released or refunded to the company, the amount of that liability or expense which is waived,
released or refunded, as the case may be, shall be treated as income of the company of its
accounting period in which such waiver, release or refund was made or given.

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9.03.3 Deductions not allowed (Disallowable Expenses)

The following expenses are specifically listed in section 13(1) of PPTA 2004 as deductions not
allowed in computing the adjusted profit of any company for any accounting period from its
petroleum operations:

(a) Any disbursements or expenses not being wholly and exclusively laid out or expended,
or any liability not being a liability wholly or exclusively incurred, for the purpose of
those operations;

(b) Any capital withdrawn or any sum employed or intended to be employed as capital;

(c) Any capital employed in improvement as distinct from repairs; any sum recoverable
under an insurance or contract of indemnity;

(d) Any sum recoverable under any insurance or contract of indemnity;

(e) Rent or cost repair to any premises or part of any premises not incurred for the purpose
of those operations;

(f) Any amount incurred in respect of any income tax, profit tax, or similar tax whether
charged within Nigeria or elsewhere;

(g) The depreciation of any premises, buildings, structures, works of a permanent nature,
plant, machinery or fixtures;

(h) Any payment to any provident, savings, widows, orphans or other society, scheme or
fund except such payments are allowed under section 10 of the Act;

(i) Any customs duty on goods (including articles or any other things) imported by the
company.

(i) For resale or for personal consumption of employees of the company, or

(ii) Where goods of the same quality to those so imported are produced in Nigeria and are
available, at the time the imported goods were ordered by the company for sale to the public at
price less or equivalent to the cost to the company of the imported goods;

(j) Any expenditure for the purchase of information relating to the existence and to the
extent of petroleum deposits.

(k)

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9.03.4 Interests on Inter-Group Borrowings

Under section 13(2) of PPTA 2004, no deduction is allowed in respect of interest on money
borrowed where such money was borrowed from a second company if during that period:

(a) Either company has an interest in the other company; or

(b) Both have interests in another company either directly or through other companies; or

(c) Both are subsidiaries of another company.

For the purposes of section 13(2):

(a) A company shall be deemed to be a subsidiary of another company if and so long as an

interest in it is held by that other company either directly or through any other
company or companies;

(b) An interest means beneficial interest in issued share capital (by whatever name called);
and

(c) The FIRS shall disregard any such last-mentioned interest in their opinion is
insignificant or remote, or where in their opinion that interest arises from a normal
market investment and the companies concerned have no other dealings or
connection between each other [PPTA 2004, s. 13(3)].

There seems to be a contradiction between sections 10(1)(g) and 13(2). Section 13(2) disallows
interests on inter-group borrowings. On the other hand, interests on inter-company loans
obtained under terms prevailing in the open market (i.e. London Inter-Bank Offer Rate) are
allowable deductions under section 10(1)(g) with effect from 1999.

Donations

Under the Companies Income Tax Act, donations made by companies not engaged in petroleum
operations to approved funds, bodies and institutions are allowable deductions. On the other
hand, the Petroleum Profits Tax Act is silent on donations made by companies engaged in
petroleum operations. This silence could be interpreted to mean that such donations are not
allowable deductions. Nevertheless, donations made by companies engaged in petroleum
operations may be allowed if the companies can prove to the satisfaction of the Federal Inland
Revenue Service that such donations were wholly, exclusively and necessarily incurred for the
purposes of petroleum operations.
277
9.04 Types of Contract Agreements in the Oil and Gas Industry

9.04.1 Joint Venture

Joint Venture is a contractual arrangement whereby two or more parties undertake an

economic activity which is subject to contractually agreed basis of sharing of control.

Companies producing crude oil in Nigeria are not allowed to produce the oil solely on their
own. Each company is required to enter into a Joint Venture Agreement with the Nigerian
National Petroleum Corporation (NNPC) in respect of the company’s operation in a particular oil
field. A detailed joint venture operating agreement will be entered into by the parties. The
agreement will spell out in detail the rights and obligations of each party with respect to the
particular venture.

NNPC will usually take up a majority of the venture while the oil producing company will take
up the balance. One of the parties to the venture is given the responsibility to operate the
venture, that is, the production of crude oil from the concession that is the subject of the
venture. This is the operator. The operator is the party that conducts the operations under a
joint venture. This may include the drilling of a well and/or the production of oil from a tract or
field under an agreed contract. In all or most of the cases, in spite of NNPC majority
shareholding, it is the oil producing company that is appointed as field operator of the joint
venture.

Each party to the joint venture is expected to fund its equity share in the venture. This is done
when the operator makes calls for the needed cash (Cash Calls). Each party also lifts crude oil,
from the crude oil produced, in proportion to its equity interest in the joint venture. When
NNPC is unable to lift all its share of the crude produced, the field operator will under special
arrangement with NNPC, lift the balance, sell it and pass the proceeds of sale to NNPC. Each
joint venture agreement will make provision for an Operating Committee to oversee the
preparation and approval of budgets and operational plans that would be prepared by the field
operator.

Each party accounts for and pays its petroleum profits tax liabilities arising from the venture.

9.04.2 Production Sharing Contracts

In Production Sharing Contracts (PSC), the petroleum producing companies enter into
agreement with NNPC for the production of crude oil in particular oil fields respectively. The

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operating expenses for the petroleum operations would be met by each operator. This is a
major shift from the terms in Joint Venture Contracts. In case of joint venture, NNPC will fund
the operational expenses of the venture in proportion to its share in the joint venture, but in
respect of PSC’s, the petroleum producing company will fund 100% of the contract. The
provision for the reimbursement of costs to the operator in executing the contract will be
contained in the PSC. This is usually achieved through the allocation to the operator of a
proportion of the oil produced from which the company is expected to recover its cost of
producing the oil and of executing the contract generally.

Oil recovered in the contract area is split into

(i) Royalty Oil

(ii) Cost Oil

(iii) Tax Oil

(iv) Profit Oil

Business activities under PSC are subject to tax under the Petroleum Profits Tax Act and the
Deep Offshore and Inland Basin Production Sharing Contracts Decree No 9 of 1999. The Decree
requires that the tax computation is done by the Petroleum Profits Tax to the Revenue. This is
slightly contradictory to the relevant provision of PPTA. PPTA provides for persons engaged in
petroleum operations to prepare tax returns, submit same and pay the PPT due. The
responsibility for the payment of PPT is clearly stated in PPT. it is less clear in the Deep Offshore
and Inland Basin Production Sharing Contract.

The key provisions of the Deep Offshore and Inland Basin Production Sharing Contracts Decree
1999 are:

(i) That the Petroleum Profits applicable to the contract area shall be 50% flat rate of
chargeable profits for the duration of the Production Sharing Contracts.

(ii) That in respect of any qualifying capital expenditure incurred wholly, exclusively and
necessarily for the purposes of the petroleum operations carried out under the terms of a
Production Sharing Contract in the Deep Offshore or Inland Basin, there shall be due to the
parties-

(a) In respect of Production Sharing Contracts executed prior to 1 July, 1998, an Investment
Tax Credit at a flat rate of 50 per cent of the qualifying expenditure;

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 (b) In respect of Production Sharing Contracts executed after 1 July, 1998 there shall be due
to such Parties an Investment Tax Allowance at a flat rate of 50 per cent.

(iii) In both cases, royalty is payable as follows: Rate

(a) In areas from 201 to 500 metres water depth 12%

(b) From 501 to 800 metres water depth 8%

(c) From 801 to 1000 metres water depth 4%

(d) In areas in excess of 1000 metres water depth 0%

(e) The royalty payable in respect of Inland Basin shall be 10%

(iv) Computation and payment of estimated and final petroleum profits tax shall be made in
US dollars on the basis of the US dollar returns filled.

(v) The Corporation or the Holder, as the case may be shall pay royalty, concession rentals
and petroleum profits tax on behalf of itself and the Contractor out of the allocated royalty oil
and tax oil.

(vi) Separate tax receipts in the names of the Corporation or the Holder and the Contractor
for the respective amounts of the petroleum profits tax paid on behalf of the Corporation or
the Holder and Contractor shall be issued by the Federal Inland Revenue Service in accordance
with the terms of the Production Sharing Contract.

(viii) The chargeable tax on petroleum operations I the contract area under the Production
Sharing Contracts shall be split between the Corporation or the Holder and the Contractor in
the same ratio as the split of profit oil as defined in the Production Sharing Contract between
them.

(i) Sole Risk: There is no special agreement between the operator and the government other
than the granting of lease license (OML, OPL). The operator bears all the risks, pays royalty
on production and Petroleum Profit Tax on its profit. These operators are mostly the
indigenous companies.

(ii) Service Contract: Here, NNPC holds all concessions, on behalf of government; an operator is
invited to carry out oil operations on a block of oil or oilfield and shares the oil profit with
the NNPC in a manner enshrined in the service contract agreement. In this case, the
contractor is taxed under Companies Income Tax Act and not under Petroleum Profits Tax
Act.
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9..05 Treatment of Losses in Petroleum Profit Tax Computations (section 14)

To arrive at the assessable profits, there shall be deducted from the adjusted profits:

(a) The amount of any loss incurred by the company during the previous accounting period;

(ii) For a new company, the amount of any loss incurred during its first accounting period in its
trade or business.

Losses that cannot be fully deducted in any one period can be carried forward to the next
succeeding accounting periods until fully relieved. The four years’ time limit for the carry
forward of trade loss under CITA and PITA is not applicable to losses incurred in petroleum
operations as there is no provision in PPTA in that regard. Furthermore, the company has the
right to defer the utilization of any loss relief available to it. This is possible where within five
months after the end of the accounting period, the company elects in writing not to deduct the
amount of the loss or part thereof from the profits of the accounting period under
consideration. The amount so deferred will be deducted from the following year’s accounting
profits unless the company makes a similar election in that following year.

9.06 Treatment of Capital Allowance under Petroleum Profit Tax (PPT)

Capital Allowance (CA) is referred to as allowance granted to tax payers that have incurred
Qualifying Capital Expenditure (QCE) as provided in PPTA, QCE include among others, the
following:

(i) Pipelines and storage tanks.

(ii) Building and structures.

(iii) Plant, machinery, fixtures, fittings, motor vehicles etc.

(iv) Tangible drilling expenditure.

With effect from 1st April 1977, the law provides for only Annual Allowance (AA) Capital
Allowance (CA) in PPTA while in CITA it provides for AA and Initial Allowance (IA). Annual
allowance is granted on a straight line basis over a period of five years subject to book value of
1% on each QCE in the fifth year. At the time of disposal, where the proceeds is less than the
book value, the difference constitutes a balancing allowance which is claimable by the tax
281
payer. On the other hand, if the proceeds exceed the book value, the difference constitutes a
balancing charge which is to be treated as an income to the tax payer.

Rate for capital allowance

Year 1 - 20%

Year 2 - 20%

Year 3 - 20%

Year 4 - 20%

Year 5 - 19%

Investment Tax Credit or Petroleum Investment Allowance

This is an incentive given to any petroleum company for incurring Qualifying Capital
Expenditure (QCE). The allowance is computed based on the operational area for which the
QCE is located which will be either on shore or offshore. The following apply.

On-shore attracts – 5%

Off-shore vary from

- Up to including 100m of water depth - 10%

- Between 100-200m of water depth - 15%

- Beyond 200m of water depth - 20%

The incentive is referred to as Investment Tax Credit up to 1994 and it forms part of tax offsets.
From 1995 the nomenclature is changed to Petroleum Investment Allowance (PIA) and treated
like other items of capital allowance and deducted from assessable profit. PIA is granted only
once in the accounting period in which the QCE is incurred and put to use.

Illustration

UDOSCO Petroleum Company incurred QCE amounting to N63m out of which N30m is located
on shore and the balance distributed as follows:

▪ Up to 100m depth = N6m

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 ▪ Between 100m – 200m depth = N4m

▪ The balance are beyond 200m

Required: Calculate the PIA claimable for the period.

Solution

i. 5% of N30m 1,500,000.00

ii. 10% of N6m 600,000.00

iii. 15% of N4m 600,000.00

iv. 20% of N23m 4,600,000.00

Total PIA N7,300,000.00

Balancing Allowance and Balancing Charge

Where an asset on which capital allowance has been provided is disposed of the proceed on
disposal will be analyzed based on the book value of the asset. If the book value is greater than
the proceed, balancing allowance is experienced but if the book value is less than the proceed,
we have balancing charge.

Tax Offsets

These are items of expenditure which are allowable up to 1994 year of assessment and are off
settable from computed chargeable tax. From 1995 they are not allowable items of expenditure
hence deductible to arrive at adjusted profit. These items are:

▪ Non-productive rent

▪ Royalties paid on local sales

▪ Custom duties on essentials

▪ Investment Tax Credit.

Example

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Adebisi Petroleum Co. Plc. is engaged in petroleum operations. The following is a summary of
its profit and loss account for the year ended 31st December, 2017:

Sale of crude oil – export 120,000,000

Value of chargeable oil disposed of to local refinery 8,200,000

Sale of natural gas 6,500,000

Incidental income from petroleum operations 1,278,000

Profit from oil refining business (after deducting all related expenses) 7,200,000

Profit from transportation of chargeable oil to other countries (after

deducting all related expenses) 3,800,000

Profit on sale of assets 600,000

147,578,000

Less:

Production cost 32,000,000

Administrative expenses 8,500,000

Salaries and wages 16,000,000

Expenses on information relating to the existence and extent of petroleum

deposits 1,200,000

Customs duties on plant and machinery 1,560,000

Depreciation 3,420,000

Charitable donations 1,000,000

Royalties on crude oil exported 24,000,000

Rent 2,250,000

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Court fines 160,000

Interest on loan from subsidiary company 2,500,000

Harbor dues 300,000

First two appraisal wells expenditure 1,450,000

Intangible drilling expenditure 7,400,000

Education tax 768,000

Bank charges and interest 3,350,000

Net profit 41,720,000

Required:

Compute the adjusted profit of the company for the purpose of petroleum profits tax.

Solution

Method 1 Adebisi Petroleum Co. Plc.

Computation of Adjusted Profit for the Accounting Period ended 31 st December, 2017

N N

Sale of crude oil – export 120,000,000

Value of chargeable oil disposed of 8,200,000

Sale of natural gas 6,500,000

Incidental income 1,278,000

Profit of the accounting period 135,978,000

Less allowable expenses:

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Production cost 32,000,000

Administrative expenses 8,500,000

Salaries and wages 16,000,000

Customs duties on plant and machinery 1,560,000

Royalties on crude oil exported 24,000,000

Rent 2,250,000

Harbor dues 300,000

First two appraisal wells expenditure 1,450,000

Intangible drilling expenditure 7,400,000

Education tax 768,000

Bank charges and interest 3,350,000 97,578,000

Adjusted profit 38,400,000

Method 2 Adebisi Petroleum Co. Plc.

Computation of Adjusted Profit for the Accounting Period ended 31 st December, 2017

N N

Net Profit 41,720,000

Less incomes not subject to PPT:

Profit from oil refining business 7,200,000

Profit from transportation business 3,800,000

Profit on sale of assets 600,000 11,600,000

30,120,000

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Add disallowable expenses:

Expenses on information relating to the existence and

extent of petroleum deposits 1,200,000

Depreciation 3,420,000

Charitable donations 1,000,000

Court fines 160,000

Interest on loan from subsidiary company 2,500,000 8,280,000

Adjusted profit 38,400,000

Notes

(b) Refining of oil and transportation of chargeable oil from Nigeria to other countries are
not included in the definition of petroleum operations. The profits from these non-
petroleum operations are excluded from the adjusted profit for the purpose of
petroleum profits tax. They are taxable under CITA

(c) Profit on sale of assets is excluded from the adjusted profit. It is outside the scope of
PPTA. Capital profit or gain is taxable under Capital Gains Tax Act.

(d) Deduction of expenses on information relating to the existence and extent of

petroleum deposits is specifically prohibited under s. 13(1)(j) of PPTA 2004.

(e) Deduction of depreciation is specifically prohibited under s. 13(1)(g).

(f) Charitable donations of N1,000,000 are disallowed since they were not wholly,
exclusively and necessarily incurred for the purpose of petroleum operations.

(g) Court fines for breach of the law are not allowed.

(h) Deduction of interest on loan from subsidiary company is specifically prohibited under
s.13(2) of PPTA 2004.

(i) Education tax is an allowable deduction under s. 10(1)(I) of PPTA.

Artificial or Fictitious Transactions

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Transactions between connected persons (e.g. a holding company and its subsidiary company,
companies under common control, etc.) may not be made on terms which might fairly have
been expected to have been made by independent persons engaged in the same or similar
activities dealing with one another at arm’s length. If the FIRS feels that such transactions are
made to reduce the tax liability of the persons concerned, it may direct that appropriate
adjustments be made to counteract the reduction of liability to tax effected or would otherwise
be affected.

In order to prevent the avoidance of tax through artificial or fictitious transactions, CITA
stipulates that where the FIRS is of the opinion that any disposition is not in fact given effect to
or that any transaction which reduces or would reduce the amount of any tax payable is
artificial or fictitious, it may disregard any such disposition or direct that such adjustments shall
be made as respects liability to tax as it considers appropriate so as to counteract the reduction
of liability to tax effected, or reduction which would otherwise be effected, by the transaction
and any company concerned shall be assessable accordingly.

“Disposition” includes any trust, grant, covenant, agreement or arrangement. A company

affected by such direction can appeal against it as if it were an assessment.

9.07. Memorandum of Understanding (MOU)

Rationale and Highlights

There was a fall in the world price of crude oil which resulted in a fall in government revenue in
the early 1980s. Oil companies were, therefore, discouraged from making further investment in
the Nigerian oil industry. Government had to introduce some fiscal incentives as contained in
the (MOUT) signed in 1986 between the Federal Government and oil companies (joint venture
partners) to enhance crude oil production and exports. The MOU contains the fiscal incentives
offered by the government to the oil companies (joint venture partners) to encourage
investments in oil exploration and development activities, enhance crude oil exports, oil
recovery and gas utilization. The 1986 MOU was revised in 1991. The 1991 MOU has been
replaced by the 2000 MOU which took effect from 1st January, 2000.

The MOU is designed to guarantee the oil companies a certain profit margin irrespective of
market conditions. The MOU accords a minimum guaranteed notional margin of $2.50/bbl after
tax and royalty to the oil company on its equity crude and a minimum of $1.25/bbl after tax and
royalty on the NNPC’s equity crude which it lifts under the memorandum. The minimum
guaranteed notional margin is premised on the fact that the technical cost (TC) of operation is
288
not more than the notional technical cost which, at present, is $4.00/bbl. The TC is made up of
T1 (Operating Costs) and T2 (Capital Expenditure). The make-up of TC is shown in the Appendix
to the MOU.

Where the actual capital investment cost (T2) of the oil company is greater than $2.00/bbl on
average, the minimum guaranteed notional margin will be increased to $2.70/bbl for the
company’s equity crude and $1.35/bbl for NNPC’s equity crude lifted.

In relation to joint venture operations between the NNPC and the oil company, the
Government Take (which is royalty and petroleum profits tax) for any fiscal accounting year is
the lower of:

● Government Take (i.e. royalty and petroleum profits tax) calculated by substitution of
posted price (PP) with official selling price (OSP), and

● Revised Government Take (i.e. royalty and petroleum profits tax) calculated by
substitution of posted price (PP) with the tax reference price (TRP).

Where the Revised Government Take (RGT) is lower than the Government Take (GT), the
amount by which the RGT is less than GT each month will be accumulated and at the end of the
fiscal accounting year will be applied as the annual tax credit (MOU credit) to be offset against
tax due for that fiscal accounting period.

Calculations

(a) Tax Reference Price (TRP)

This is calculated using the formula:

TRP = RP – (M + O.15 x FC)

0.88

Where:

RP = Realizable price

M = $2.50/bbl when actual capital technical costs (T2) is

$2.00/bbl or less

= $2.70/bbl when actual capital technical costs (T2) is greater than $2.00/bbl

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Example

Qua-Iboe Oil Company Limited produces Bonny Light blend. Given that its realize price (RP),
margin (M) and the capital investment cost (T2) per barrel are $15, $2.50, $2 respectively,
calculate its tax reference price (TRP).

Solution

Tax reference price (TRP) = RP – (M + O.15 x FC)

0.88

= [15 – (2.50 + 0.15 X 4)]/0.88

= [15 – (2.50 + 0.6)]/0.88

= [15 – 3.1]/0.88

= 11.9/0.88

= $13.52

(b) Revised Royalty and Revised Petroleum Profits Tax

By substituting posted price (PP) in the PPTA with the tax reference price (TRP) calculated using
the above state formula, the revised royalty (Roytrp) and revised royalty (Roytrp) and revised
PPT (PPTtrp) are calculated as follows:

Roytrp = RR x TRP x V

Where:

RR = Applicable royalty rate

TRP = Tax reference price

V = Company’s crude oil and condensate production

PPTtrp = [(TRP x Vs) – Roytrp – TC] x TR

Where:

TRP = Tax reference price

Vs = Crude oil and condensate sales volume

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Roytrp = Revised royalty

TC = Deductions under sections 10, 14 and 18 of PPTA 1990 (i.e allowable

deductions, losses & capital allowances excluding royalty)

TR = Applicable tax rate

Example

Qua-Iboe Oil Company Limited produces Bonny Light blend. Given the following information,
calculate the revised royalty and the revised petroleum profits tax.

Tax reference price (TRP) $13.52 per barrel

Production 1,500,000 barrels

Royalty rate 18.5%

Capital allowances $2,500,000

Allowable deductions excluding royalties $5,000,000

Solution

Revised royalty (Roytrp) = RR x TRP x V

= 18.5% x $13.52 x 1,500,000 = $3,751,800

Revised PPT (PPTtrp) = [(TRP x Vs) – Roytrp – TC] x TR

= [($13.52 x 1,500,000) - $3,751,800 - $5,000,000 - $2,500,000] x 85%

= [$20,280,000 - $11,251,800] x 85%

= $7,673,970

(c) Revised Government Take (RGT)

This is calculated using the formula:

RGT = Roytrp + PPTtrp + TIP

Where:

Roytrp = Revised royalty

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PPTtrp = Revised PPT

TIP = Tax inversion penalty

Example

Ukash Oil Company Limited is in joint venture with NNPC. Given the following information in
respect of the company’s operations for the year ended 31st December, 2013, calculate the
MOU tax credit under the fiscal incentive of the 2000 MOU. $

Royalty at RP 95,000

Royalty at TRP 87,000

Petroleum profit tax at RP 140,000

Petroleum profit tax at TRP 128,000

Tax inversion penalty (TIP) 7,500

Note:

RP = Realisable price

TRP = Tax reference price

Solution

Initial Government Take (IGT)= Royalty at RP + PPT at RP

= $95,000 + $140,000

= $235,000

Revised Government Take (RGT) = Royalty at TRP + PPT at TRP+ TIP

= $87,000 + $128,000 + $7,500

= $222,500

(d) MOU Tax Credit

Initial Government Take (IGT)

Less Revised Government Take (RGT)

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MOU Tax Credit

(e) Tax Inversion Penalty (TIP)

For the purpose of encouraging unit cost efficiency, a tax inversion penalty (TIP) of 35% is
applied as specified in the MOU. To the extent that TI (production operating expenses) is less
than $1.70 for any calendar year, the TIP as used in the revised government tax formula is
calculated as follows:

TIP = (TR – TIR) x (TI – LTIT) x V

Where:

TR = Applicable tax rate

TIR = Tax inversion rate = 35%

TI = Production operating expenses (as defined in appendix 1 of MOU)

LTIT = Lower tax inversion threshold = $1.70/bbl

V = Company’s crude oil and condensate production

So the extent that TI is higher than $2.30/bbl for companies producing above an average of
175,000 bbls/day in the same calendar year, then the TIP shall be calculated as follows:

TIP = (TR – TIR) x (TI – UTIT) x V

Where:

TR = Applicable tax rate

TIR = Tax inversion rate = 35%

TI = Production operating expenses (as defined in appendix 1 of MOU)

UTIT = Upper trigger point for tax inversion for T1 = $2.30/bbl for companies producing
above an average of 175,000bbls/day in the same calendar year or $3.00/bbl for companies
producing below an average of 175,000bbls/day in the same calendar year.

V = Company’s crude oil and condensate production

Example

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Given the following information, calculate the tax inversion penalty for Quash Oil Company
Limited which is in joint venture with NNPC.

Company’s crude oil production 54,750,000 barrels

Average daily production 150,000 barrels

Production operating costs $6.50/bbl

Upper Trigger Point for Tax Inversion$3.00/bbl

Solution

Tax inversion penalty (TIP) = (TR – TIR) x (TI – UTIT) x V

= (85% - 35%) x ($6.50 - $3) x 54,750,000

= 50% x $3.50 x 54,750,000

= $95,812,500

MOU is designed to guarantee the oil companies a certain profit margin even if the price of
crude oil should fall drastically. Over the years, the price of crude oil has risen to a level that the
MOU incentive is no longer tenable. Hence, the MOU between the Federal Government and oil
companies (joint venue partners) is in abeyance.

9.08. Assessment of Natural Gas Chargeable Income and Gas Incentives

Incentives for Utilization of Associated Gas

Section 11(1) of PPTA 2004 provides that the following incentives shall apply to a company
engaged in the utilization of associated gas:

(a) Invest required to separate crude oil and gas from the reservoir into usable products
shall e considered as part of the oil field development;

(b) Capital investment on facilities equipment to deliver associated gas in usable form at
utilization or designated custody transfer points shall be treated, for tax purposes, as
part of the capital investment for oil development.

294
 (c) Capital allowances, operating expenses and basis of tax assessment shall be subject to
the provisions of this Act and the tax incentives under the revised memorandum of
understanding.

Section 11(2) of the Act states that the incentives specified under subsection (1) of section 11
shall be subject to the following conditions:

(a) Condensates extracted and re-injected into the crude oil stream shall be treated as oil
but those not re-injected shall be treated under existing tax arrangement;

(b) The company shall pay the minimum amount charged by the Minister of Petroleum
Resources for any gas flared by the company;

(c) The company shall, where practicable, keep the expenses incurred in the utilization of
associated gas separate from those incurred on crude oil operation and only
expenses not able to be separated shall be allowable against the crude oil income of
the company under the Act;

(d) Expenses identified as incurred exclusively in the utilization of associated gas shall be
regarded as gas expenses and be allowable against the gas income and profit to be
taxed under the Companies Income Tax Act;

(e) Only companies which invest in natural gas liquid extraction facilities to supply gas in
usable form to downstream projects, including aluminum smelter and methanol,
Methyl Tertiary Butyl Ether and other associated gas utilization projects shall benefit
from the incentives;

(f) All capital investments relating to the gas-to-liquids facilities shall be treated as
chargeable capital allowance and recovered against the crude oil income;

(g) Gas transferred from the natural gas liquid facility to the gas-to-liquids facilities shall be
at zero per cent tax and zero cent royalty.

All incentives granted in respect of associated gas shall be applicable to investments in non-
associated gas (PPTA 2004, s.12). According to ICAN (2006, p. 71):

Associated gas is the gas element of hydrocarbon, which is either utilized or flared in the course
of crude oil exploration and production. This can be distinguished from non-associated gas as
that which exists exclusive of crude oil and is capable of being extracted.

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The above provisions of sections 11(1_ and paragraphs (a) – (e) of 11(2) were first inserted in
the Petroleum Profits Tax Act by the Finance (Miscellaneous Taxation Provisions) Decree 1998
(i.e. Decree No. 18) with effect from 1st January, 1997. Paragraph (f) and (g) of section 11(2)
were inserted in the Petroleum Profits Tax Act with effect from 1 st January, 1999 by the Finance
(Miscellaneous Taxation Provisions) Decree (No. 30) 1999.

Section 11(2) provides that expenses incurred in the utilization of associated gas should be
separated from those incurred on crude oil operation. Associated gas expenses are to be
allowable against the gas income or profits to be taxed under the Companies Income Tax Act.
Prior to these amendment, gas income taxable under section 9(1)(c) of PPA as part of
petroleum profit tax income. Section 11(2) also provides that capital allowance on all capital
investments relating to gas-to-liquids facilities shall be deducted from the crude oil income. This
implies that capital allowance on capital investments in gas operation cannot be deducted from
gas income; it must be deducted from crude oil income.

Example

Odesh Oil Ltd is an oil producing company which is also involved in gas operation. The following
information has been extracted from the books of the company:

Oil operation $

Income 50,000,000

Allowable deductions (including education tax) 20,000,000

Capital allowances 10,000,000

Gas operation

Income 15,000,000

Allowable deductions 8,000,000

Capital allowances 4,000,000

Required:

Compute the tax liabilities of the company

Solution

(a) Petroleum Profit Tax $

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Income 50,000,000

Allowable deductions (including education tax) 20,000,000

Adjusted/assessable profit 30,000,000

Less capital allowances

Oil operation 10,000,000

Gas operation 4,000,000 14,000,000

Chargeable profit 16,000,000

Assessable tax (85% of chargeable profit) 13,600,000

(a) Companies Income Tax $

Income 15,000,000

Allowable deductions 8,000,000

Total profits 7,000,000

CIT (30% x 7,000,000) 2,100,000

Based on the provision of section 11(2)(f), Odesh Oil Ltd can only set off the capital allowances
in respect of gas operation ($4 million) against oil income. Assuming that there is no oil income,
the company will not be able to deduct the capital allowances of $4 million from gas income.

9.09 Tertiary Education Tax Computation

What is Tertiary Education Tax?

Tertiary Education Tax (formally Education Tax) is a tax imposed on the assessable profits of all
companies registered in Nigeria (including companies subject to tax under Petroleum Profits
Tax Act) for the enhancement of tertiary education in Nigeria. This tax was imposed by Tertiary
Education Trust Fund (Establishment, Etc.) Act No 16, of 2011

The Rate of Tertiary Education Tax

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It is charged at the rate of 2 percent (2%) on the assessable profits of a company registered
(including petroleum companies) in Nigeria

Those expected to pay Tertiary Education Tax

Every Nigerian company chargeable under the Company Income Tax (CIT) and the Petroleum
Profit Tax (PPT) is expected to pay Tertiary Education Tax

Primary objective of the Education Tax

Education tax is intended to achieve restoration, rehabilitation, consolidation and development

of tertiary education in Nigeria.

The Due Dates for Filing Returns

Filing of returns for Tertiary Education tax is done along with the Company or Petroleum
Income Tax as the case may be.

For companies engaged in petroleum operations, due date for filing is;

1. a) Filing of a return of estimated tax is within 2 months after the commencement of

each accounting period, i.e. on or before February.

2. b) Filing of a final return is within 5 months after the end of the accounting period, that
is, on or before May.

For companies other than those engaged in petroleum operations due date for filing is;

1. a) In the case of a newly registered company, either within eighteen (18) months from
the date of incorporation or six (6) months from the end of the company's first
accounting year whichever is earlier.

2. b) In the case of an existing company, within six (6) months from the end of company's
accounting year.

9.10 Review Questions

Question I

The following details have been extracted from the books of Ubama Company Limited for the
year ended 31st December, 2016.
298
(i) Sales of Crude Oil:

Export 25,000 barrels

Domestic 10,000 barrels

(ii) Income from supplies 200,000

(i) Income from interest on current account 220,000

(ii) Administrative and Operational Expenses 3,000,000

(v) Royalty on oil exported 3,170,000

(vi) Customs and other duties 205,000

(vii) Royalty on local oil sales 370,000

(viii) Intangible drilling oil sales 50,000

(ix) The capitalized expenditure written down

Net of 1% retention for 2012:

- 2012 3,000,000

- 2013 5,000,000

(x) Qualifying assets purchased in 2016 9,000,000

The following additional information was provided:

(a) Posted price for crude oil exported was $22 per barrel and exchange rate was N100.00
per $1

(b) Posted price for domestic crude oil was N1,000 per barrel

(c) The capitalized expenditures for 2006 were as follows:

(i) Onshore N5,000,000

(ii) Offshore N4,000,000

299
(d) Administrative and operating expenses include:

(i) Donations to Christian Association of Nigeria N50,000

(ii) Depreciation N25,000.

(iii) Donations to social club and political parties amounted to N10,000 and N30,000
respectively.

(e) Included in the figure for export was 2,500 barrels of crude oil sold locally.

You are required to compute:

(i) Fiscal value of chargeable oil

(ii) Total income

(iii) Assessable profit

(iv) Capital Allowance

(v) Chargeable profit

(vi) Assessable tax

(vii) Petroleum Investment Allowance

(viii) Chargeable tax

Solution I

Ubama Petroleum Company Limited

Petroleum Profit Tax Computation for 2016 Year of Assessment

N N N

Value of crude oil exported 49,500,000

Value of crude oil sold locally 12,500,000

Fiscal value of chargeable oil 62,000,000

Add: other income:

300
Income from supplies 200,000

Income from interest on current account 220,000

420,000

Total income 62,420,000

Less Expenses:

Royalty on oil exported 3,170,000

Customs and other duties 205,000

Royalty on local oil sales 370,000

Intangible drilling costs 50,000

Admin and operation expenses 3,000,000

Less: Donations (50,000+10,000+30,000) (90,000)

Depreciation (25,000)

2,885,000

Education tax 1,092,941

(7,773,941)

Assessable profit 54,647,059

Less: Capital Allowance:

The lower of:

i. Capital allowance Actual 7,300,000

Petroleum investment allowance 1,050,000

8,350,000

Or

ii. 85% of assessable profit 46,425,000

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Less: 170% of petroleum investment

allowance 1,785,000

44,640,000

Capital Allowance absorbed (8,350,000)

Chargeable profit 46,297,059

Chargeable tax at 85% 39,322,500

Education tax at 2% of assessable profit 1,092,353

Tutorial Notes

(i) With effect from 1995, investment tax credit was changed to petroleum investment
allowance and to be treated like capital allowance.

(ii) With effect from 1996, education tax is to be treated as allowable expense in arriving at
adjusted profit of a petroleum company.

(iii) With effect from 1995 year of assessment, royalty on local sale of crude, custom duties on
essentials and non-productive rent are to be treated as allowable expenses.

(iv) Donations in whatever form is not allowed for a petroleum company.

Workings

i. Education tax = (62,420,000 - other expenses) x 2/102

= 62,420,000 - 6,680,000) x 2/102 =1,092,941

ii. Value of crude oil exported = (25,000 - 2,500) x (22,100.00)

= N49,500,000.

iii. Value of crude oil sold locally = (10,000 + 2,500) x N1,000

= N12,500,000

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 iv. Capital allowance computation

2006 Acquisition 9,000,000 x 20% 1,800,000

2002 Acquisition net of 1% (4 years written off) 3,000,000

2003 Acquisition net of 1% (3 years written off)

(5,000,000/2) 2,500,000

7,300,000

Petroleum investment allowance

On shore operation (5,000,000 at 5%) 250,000

Off shore beyond 200 meters (4,000,000 at 20%) 800,000

1,050,000

Question 2

Amaka Petroleum Limited has prepared tax computations for the payment of petroleum profit
tax of N12,458,960 for 2017 year of assessment. In arriving at the tax liability, the company had
made the following deductions:

Loss brought forward 6,000,000

Unexpensed royalties paid 2,000,000

Custom duty 1,000,000

Capital allowance b/f 15,000,000

Capital allowance for current year 9,000,000

Intangible drilling expenses 8,000,000

Administrative expenses 11,000,000

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You are required to compute the adjusted profit, the chargeable profit and the chargeable tax
payable.

Solution

Amaka Petroleum Limited

Computation of Petroleum Profit Tax (2017 YOA)

N N

Tax payable as computed 12,458,960

Chargeable profit:

Tax payable grossed up at 85%

i.e. 12,458,960 x 100/85 14,657,600

Add: disallowable expenses

Loss brought forward 6,000,000

Capital allowance b/f 15,000,000

Capital allowance for the year 9,000,000 30,000,000

44,657,600

Education tax 757,992

Adjusted profit 43,899,608

Less loss relief 6,000,000

Assessable profit 37,899,608

Less capital allowance:

The lower of

Actual capital allowance or 24,000,000

85% of Ass. Profit 32,214,667

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Less 170% of Pet. Inv. Allow.

C.A Absorbed 24,000,000

Chargeable Profit 13,899,609

Assessable tax at 85% 11,814,667

Tax Payable 11,814,667

Working:

Education Tax:

Adjusted profit 44,657,600

Less loss 6,000,000

38,657,600

38,657,000 x 2/102 757,992

MODULE 10

10.00 STAMP DUTIES

10.01 Learning outcome

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At the end of this Module, Students should be able to:

i. Demystify the meaning and concept of Stamp Duties and its modus operandi
especially within the context of Nigeria;
ii. Clearly examine the underlying conditions for granting waiver for Stamp Duty
payment and its associated exemptions;
iii. Identify the various types of instruments and the procedures for their
assessment on flat rate.

10.02 Administration of Stamp Duty in Nigeria

Stamp duties are taxes imposed on documents. It is currently governed by the provisions of the
Stamp Duties Act of 1939 as amended to date. The tax is relatively cheap to administer and
collect.

Since Stamp duty is a tax on instruments. Instrument is defined here as any written document.
If a transaction is orally effected or it arises solely from the conduct of the parties, no duty will
be due because no document is available to be stamped.

Form of Stamp Duties

There are basically two forms of stamp duties:

(a) Fixed duties

(b) Ad-valorem Duties

(a) Fixed Duties: These are duties that do not vary with the consideration for thedocument
being stamped. This means that irrespective of the value of the instrument, the same
duty is payable. Examples of instruments assessable by fixed duties include:

* Payment Receipt

* Bank Notes or Bills payable at sight

* Cheque Leaves

* Admissions as solicitor or Notary public

* Guarantor forms

* Proxy Forms
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(b) Ad-valorem Duties: These are duties that vary with the amount of consideration and in
accordance with a scale stated in the reliant schedule fixed by the government.

Examples of instruments for ad-valorem assessment include:

* Bills of Exchange

* Share Capitals of Companies

* Mortgage and Debenture Loans

* Promissory Notes

* Property Valuation

* Policy of life Insurance

Schedule of Instruments Subject to Stamp Duties

(a) Agreements

(b) Appraisements

(c) Instruments of apprenticeship

(d) Bank Notes, Bills of Exchange and promissory Notes

(e) Bills of Lading

(f) Contract Notes

(g) Conveyance on Sale

(h) Other Conveyances

(i) Duplicates and Counterparts.

(j) Exchange, Partition or Division

(k) Leases

(l) Letters of Power of Attorney and voting papers

(m) Marketable Securities

(n) Mortgages
307
(o) Notarial Acts

(p) Policies of Insurance

(q) Receipts

(r) Settlements

(s) Share Warrants

(t) Warrants of Goods

(u) Capital of Companies.

10.03 Stamping of Documents:

It is critical to determine the time a document should stamped, the method of stamping and
the significance of denoting stamp.

(a) Time to Stamp Documents

Stamp duties on a document should be paid as it is being prepared before its execution. Where
instruments are stamped after execution, a penalty will be imposed. In practice, 40 days of
grace is usually allowed for the stamp duties to be paid after execution, in which case the
penalty may be waived.

(b) Method of stamping

Essentially, the stamping of a document can be by any of the following ways:

* Embossing with dies

* Printing on the instruments

* Affixing p'0stage stamp in lieu of adhesive stamp

* Affixing adhesive stamp

The following should however be noted concerning stamping of documents:

308
i. Instruments must be presented at one of the Stamp Duties offices either at the
Federal or State level.

ii. The instruments are then impressed with die stamps equivalent to the amount of duty
paid. Postage stamps are no longer used.

iii. All the facts and circumstances affecting the liability of any instrument to duty or the
amount of the duty chargeable on the instruments should be fully stated on the instrument.

(c) Denoting Stamp

Where an instrument which is being transferred has been duly stamped, the instrument of
transfer does not need to be duly stamped again. Under such a circumstance, the instrument of
transfer will merely carry a stamp denoting the amount of duty already paid.

Instruments not properly stamped

An instrument is considered to be improperly stamped where it does not carry the correct duty.
An instrument which is not properly stamped is still effective because the failure to stamp a
document is not an offence in itself. The staff cannot sue for duty on an unstamped instrument.
An improperly stamped document is inadmissible in a Court of Law.

Implications of an Improperly Stamped Document

The following are the implications of non-stamping of instrument required to be stamped:

(a) Such an instrument which is not duly stamped in accordance with the law in force at the
time it was first executed shall not be given in evidence. This disadvantage cannot be remedied
or cured by an agreement between the parties in a case.

(b) Such an instrument is not admissible whether directly or for collateral purpose. The
secondary evidence of the instrument is not admissible either.

(c) Cross examination upon an unstamped document is not allowed.

Exceptions to the Admissibility Rule

The stamped or improperly stamped instrument may however be admitted under the following
conditions.
309
(a) Where a criminal proceeding is being held. This is also applicable to a rent tribunal or a
proceeding before the Commissioner of Stamp Duties.

(b) Where it is imperative to refresh the money of a witness;

(c) Where it may be used to prove fraud;

(d) Where it is necessary to prove an act of bankruptcy

(e) Where a plaintiff is trying to prevent a transaction from being implementing if it is

believed that he agreement is void;

(f) Where the instrument may be admitted subject to an undertaking that the instrument
would be stamped later.

10.04 Penalties for Late Stamping

(a) The failure to stamp an instrument is not a criminal offence;

(b) The general rule is that the person presenting an instrument for stamping after the date
of executive must pay, not only the unpaid duty but a penalty of N20must be added. II the
unpaid duty exceed N20, a further penalty or interest at 10%perannum from the day the
instrument was first executed until the interest is exactly equal to the duty payable may also be
imposed. This means that the interest payable is limited to the unpaid duty;

(c) In respect of ad-valorem duty, in addition to the unpaid duty, the person must pay a
penalty of N20 and a sum equal to the unpaid duty unless there is a reasonable excuse for the
delay;

(d) Any penalty due may be remitted by the Commission:

(e) Instruments presented for stamping within 40 days following execution may not have a
penalty imposed on it.

The following table summarizes liability to penalty under the Stamp Duties Act.

310
Title of Instruments Person Liable to penalty

Bond, Covenant or instrument of any kind The obliggee, Convenantee or person taking the
security

Conveyance on Sales the vendee or transferee

Conveyance or Transfers operating as

Voluntary disposition inter vivos the grantor or transferor

Lease Leasee

Settlement The Settlor

Mortgage bonds, debenture Convenante .etc. The Mortgagee or Oblige.

10.05 Review Questions

1. What are the forms of Stamp duty?

2. What do you understand by adjudication?

3. What is the importance of adjudication?

4. Under what conditions may an unstamped instrument be admitted in evidence?

5. What are the implications of improperly stamped document?

MODULE 11

11.00 INTERNATIONAL TAXATION

11.01 Learning outcome

At the end of this Module, Students should be able to:

311
 i. Examine the principles of double taxation arrangement in Nigeria;
ii. Appraise the fundamentals of Treaty Agreements in Nigeria;
iii. Evaluate the mechanics of Transfer Pricing in Nigeria.

11.02 Introduction
The current wave of globalization and technological revolution has had a tremendous effect on
international taxation. The financial and economic liberalisation has brought such sophistication
and complexity into business practices for Nigerian tax administration with a view into
emerging tax problems technology, particularly communication technology. This development
has further complicated this problem by making the taxpayer especially the big, non-resident
corporations, harder to reach. The system watches helplessly to see that traditional rules are no
longer applicable as solutions to international tax problems, thus creating uncertainties which
are not satisfactory for business and tax administration. Furthermore, techniques for tax abuses
have become too sophisticated for developing economies. Since the business world is always a
step ahead, there is a growing need to update knowledge through continuous review of the law
and practice of taxation. There are some of the challenges, international taxation seek to
address.

Generally, countries of the world interact with each other and engage in activities across their
borders for social, economic, cultural, religious, political or any other reasons because no
country can live in isolation of others. Cross border transactions can be linked to economic
activities between countries, which can be placed under the following classifications;

(i) Trading;

(ii) Carrying on business - exploration, manufacturing, etc.

(iii) Investments or Services;

(iv) Employment; ;

(v) Intangibles/Intellectual Property;

(vi) Sports; and

(vii) Government business.

It is quite interesting to note that these transactions or activities have their tax implications in
the source state (i.e. where the income is derived) as well as the state of residence (i.e. where

312
the parties to the transaction reside). Hence, there is a need for proper understating of the
guiding principles of international taxation.

11.02.2 Concept of International Tax

It is an a agreement between two countries for the avoidance of double taxation and the
prevention of fiscal evasion with respect to taxes on income and on capital gains. The
Agreement normally applies to persons who are residents of one or both of the Contracting
States. The Agreement applies to taxes on income and on capital imposed on behalf of a
Contracting State or of its political subdivisions or local authorities, irrespective of the manner
in which they are levied. It is also regarded as taxes on income, capital, wages or salaries paid
by enterprises, as well as taxes on capital appreciation. The existing tax to which the Agreement
applies include; the Personal Income Tax, Companies Income Tax, Petroleum Profit Tax, Capital
Gains Tax, Education Tax and Other taxes of Income and Capital imposed after the date of
signature of the Agreement in addition to, or in place of, the existing taxes.

There is really no tax statute known as International tax law hence the use of the term
'international taxation' may not seem to have much significance. However, for convenience, it
is understood among international taxation experts, that the term "international taxation"
refers to the relevant aspects/provisions of the domestic tax laws of a country and Double
Taxation Agreements (DTAs) which are applicable to taxation of cross-border or international
activities.

A taxpayer may be liable to Nigerian taxation, either because he is resident in Nigeria or

because the source of his income is located there. A Nigerian resident is liable to tax on his
worldwide income, whereas a non-resident will only be liable to tax on Nigerian source income.
The concept of Residency becomes evident for clearer understanding of who is liable to tax,
where and how for effective tax administration.

Basically, international taxation is divided into two branches. They are;

1. Principles of International Tax - Concept/Conventions

2. Application of International Tax - Treaty Negotiations

Why International Tax Division

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In Nigeria tax system; there are two classes of tax payers. They are; resident (individuals &
corporate bodies), and non-resident (individuals & corporate bodies). The international tax
division deals with the imposition of levies on income earned by non-resident individuals and
non-resident corporate bodies involved in cross boarder operations or transactions.

There is growing competitiveness among governments of developed nations and developing

nations to attract resources to them to meet the ever growing needs for development.
Government introduced incentives such as; tax holidays, low tax rates, accelerated capital
allowance, investment tax credits, joint ventures, production sharing contract to attract foreign
investors. The division function by way of:

1. Servicing the Nigerian Tax Treaty Secretariats.

2. Implementation of Nigerian Concluded Tax Treaties.

3. Implementation of Nigerian Domestic Tax Laws for non-residents who derived (non-
petroleum) income from Nigeria.

4. Liaise with Ministry of Justice, Foreign Affairs, all the Embassies, the National Office for
Technology Acquisition and Promotion and Corporate Affairs Commission.

11.02.3 Introduction to OECD Model

Model Tax Convention on Income and on Capital (Organisation for Economic Co-Operation and
Development)

The OECD is a unique forum where the governments of 30 democracies work together to
address the economic, social and environmental challenges of globalization. OECD is also at the
forefront of efforts to understand and to help governments for new developments and
concerns, such as corporate governance, the information economy and the challenges of an
ageing population. The Organization is a setting where governments can compare policy
experiences, seek answers to problems, identify good practice and work to co-ordinate
domestic and international policies.

The OECD member countries are: Australia, Austria, Belgium, Canada, the Czech Republic,
Denmark, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy, Japan, Korea,
Luxembourg, Mexico, the Netherlands, New Zealand, Norway, Poland, Portugal, the Slovak
Republic, Spain, Sweden, Switzerland, Turkey, United Kingdom and the United States. The
Commission of the European Unities takes part in the work of the OECD.

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It has long been recognized among the member countries of the Organization for Economic Co-
operation and Development that it is desirable to clarify, standardize, and confirm the fiscal
situation of taxpayers who are engaged in commercial, industrial, financial, or any other
activities in other countries through the application by all countries of common solutions to
identical cases of double taxation.

This is the main purpose of the OECD Model Tax Convention on Income and on Capital which
provides a means of setting on a uniform basis for the most common problems that arise in the
field of international juridical double taxation as recommended by the council of the OECD,
Member countries, when concluding or revising bilateral conventions. Member countries
should conform to this Model Convention as interpreted by the Commentaries thereon and
having regard to the reservations contained therein and their tax authorities should follow
these Commentaries, as modified from time to time and subject to their observations thereon,
when applying and interpreting the provisions of their bilateral tax conventions that are based
on the Model Conventions.

Historical Background

Progress had already been made towards elimination of double taxation through bilateral
conventions or unilateral measures when the Council of the Organization for European
Economic Co-operation (OEEC) adopted its first recommendation concerning double taxation
on 25th February 1995. At that time, 70 bilateral general conventions had been signed between
countries that are now Members of the OECD. This was to a large extent due to the work
commenced in 1921 by the League of Nations. This work led to the drawing up in 1928 of the
first model bilateral convention and, finally, to the Model Conventions of Mexico (1943) and
London (1946), the principles of which were followed with certain variants in many of the
bilateral conventions concluded or reviewed during the following decade. Moreover, in respect
of several essential questions, they presented there were considerable dissimilarities and
certain gaps.

The increasing economic interdependence and co-operation of the Member countries of the
OEEC in the post-war period showed increasingly and clearly the importance of measures for
preventing international double taxation. The need was recognized for extending the network
of bilateral tax conventions to all Member countries of the OEEC, and subsequently of the
OECD, several of which had so far concluded only very few conventions and some none at all.
At the same time, harmonization of these conventions in accordance with uniform principles,
definitions, rules and methods, and agreement on a common interpretation, become
increasingly desirable.

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It was against this new background that the Fiscal Committee set to work in 1955 to establish a
draft convention that would effectively resolve the double taxation problems existing between
OECD Member countries and that would be acceptable to all Member countries. From 1958-
1961 the fiscal committee prepared four interim reports, before submitting in 1963 its final
Report entitled “Draft Double Taxation Convention on Income and Capital”. The Council of the
OECD adopted, on 30 July 1963, a Recommendation concerning the avoidance of double
taxation and called upon the Governments of Member countries, when concluding or revising
bilateral conventions between them, to conform to that Draft Convention.

The Fiscal Committee of the OECD had envisaged, when presenting its Report in 1963, that the
Draft Convention might be revised at a later stage following further study. Such a revision was
also needed to take account of the experience gained by Member countries in the negotiation
and practical application of bilateral conventions, of changes in the tax systems of member
countries, of the increase in International level. For all these reasons, the Fiscal Committee and,
after 1971, its successor the Committee on Fiscal Affairs, undertook the revision of the 1963
Draft Convention and of the commentaries thereon. This resulted in the publication in 1977 of a
new Model Convention and Commentaries.

The factors that had led to the revision of the 1963 Draft Convention continued to exert their
influence and in many ways the pressure to update and adapt the Model Convention to
changing economic conditions progressively increased. New technologies were developed and
at the same time there were fundamental changes taking place in ways in which cross-boarders
transactions were undertaken. Methods of tax avoidance and evasion became more
sophisticated. The globalization and liberalization of OECD economics also accelerated rapidly
in the 1980s. consequently, in the course of its regular work programme, The Committee on
Fiscal Affairs and, in particular, its Working Party, continued after 1977 to examine various
issues directly or indirectly related to the 1977 Model Convention. This work resulted in a
number of reports, some of which recommended amendments to the Model Convention and
its Commentaries.

In 1991, recognizing that the revision of the Model Convention and the Commentaries had
become an on-going process, the Committee on Fiscal Affairs adopted the concept of an
ambulatory Model Convention providing periodic and more timely updates and amendments
without waiting for a complete revision. It was therefore decided to publish a revised updated
version of the Model Convention which would take into account the work done since 1977 by
integrating many of the recommendations made in the above-mentioned reports.

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Because the influence of the Model Convention had extended far beyond the OECD Member
countries, the Committee also decided that the revision process should be opened up to benefit
from the input of non-member countries, other international organizations and other
interested parties. It was felt that such outside contributions would assist the Committee on
Fiscal Affairs in its continuing task of updating the Model Convention to conform to the
evolution of international tax rules and principles.

This led to the publication in 1992 of the Model Convention in a loose-leaf format. Unlike the
1963 Draft Convention and the 1977 Model Convention, the revised Model was not the
culmination of a comprehensive revision, but rather the first step of an on-going revision
process intended to produce periodic updates and thereby ensure that the Model Convention
countries to reflect accurately the views of Member countries at any point in time.

Through one of the updates, produced in 1997, the positions of a number of non-Member
countries on the Model Convention were added in a second volume in recognition of the
growing influence of the Model Convention outside the OECD countries. At the same time,
reports of a number of previous reports of the Committee which had resulted in changes to the
Model Convention were also added.

10.03. Subjects for Treaty Agreements

CHAPTER ARTICLE TITLE

Cap. I (One) Scope of Agreement

1 Persons Covered

2 Taxes Covered

Cap. II (Two) Definitions

3 General Definitions

4 Fiscal Residence

5 Permanent Establishment

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Cap.III (Three) Taxation of Income

6 Income from Immovable Property

7 Business Profit

8 Shipping and Air Transport

9 Associated Enterprises

10 Dividends

11 Interest

12 Royalties

13 Capital Gains

14 Independent Personal Services

15 Dependent Personal Services

16 Director’s Fees

17 Artistes and Athletes

18 Pensions and Annuities

19 Government Service

20 Students and Trainees

21 Teachers and Researchers

22 Elimination of Double Taxation

Cap. IV (Four) Taxation of Capital

23 Non-discrimination

Cap. V (Five) Method of Elimination of Double Taxation

24 Mutual Agreement Procedure

Cap. VI (Six) Special Provisions

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 25 Exchange of Information

26 Diplomatic and Consular Officials

27 Entry into Force

28 Termination

29

Cap. VII (Seven) Final Provisions

30

31

Components of Double Taxation Agreement (DTAs)

CHAPTER I:

Scope of the Convention

Article 1: Persons Covered

This Convention shall apply to persons who are resident of one or both of the Contracting
States.

Article 2: Taxes Covered

1. This Convention shall apply to taxes on income and on capital imposed on behalf of a
Contracting State or of its political subdivisions or local authorities, irrespective of the
manner in which they are levied.

2. There shall be regarded as taxes on income and on capital all taxes imposed on total
income, on total capital, or on elements of income or of capital, including taxes on gains
from the alienation of movable or immovable property, taxes on the total amounts of
wages or salaries paid by enterprises, as well as taxes on capital appreciation.

3. The existing taxes to which the Convention shall apply are in particular:

a. (In State A):……………………………………………………………………………

b. (In State B):……………………………………………….……………………………

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 4. The Convention shall apply also to any identical or substantially similar taxes that are
imposed after the date of signature of the Convention in addition to, or in place of, the
existing taxes. The competent authorities of the Contracting States shall notify each
other of any significant changes that have been made in their taxation laws.

CHAPTER II

Definitions

Article 3: General Definitions

1. For the purpose of this Convention, unless the context otherwise requires:

a. The term “person” includes an individual, a company and any other body of persons;

b. The term “company” means anybody corporate or any entity that is treated as a
body corporate for tax purposes;

c. The term “enterprise” applies to the carrying on of any business;

d. The terms “enterprise of a Contracting State” and “enterprise of the other

Contracting State” mean respectively an enterprise carried on by a resident of a
Contracting State an enterprise carried on by a resident of the other Contracting
State.

e. The term “international traffic” means any transport by a ship or aircraft operated
by an enterprise that has its place of effective management in a Contracting State,
except when the ship or aircraft is operated solely between places in the other
Contracting State;

f. The term “competent authority” means:

i. (In State A):……………………………………………………………………

ii. (In State B):……………………………………………………………….……

g. The term “national”, in relation to a Contracting State means;

i. Any individual possessing the nationality or citizenship or association of that Contracting

State; and

ii. Any legal person, partnership or association deriving its status as such from the laws in
force in that Contracting State;
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 h. The term “business” includes the performance of professional services and of other
activities of an independent character.

2. As regards the application of the Convention at any time by a Contracting State, any
term not defined therein shall, unless the context otherwise requires, have the meaning
that it has at that time under the law of that State for the purpose of the taxes to which
the convention shall be applied.

Article 4: Resident

1. For the purpose of this Convention, the term “resident of a Contracting State” means
any person who, under the laws of the State, is liable to tax therein by reason of his
domicile, residence, place of management or any other criterion of a similar nature and
also includes that State and any political subdivision or local authority thereof. This
term, however, does not include any person who is liable to tax in that State in respect
only of income from sources in that State of capital situated therein.

2. Where by reason of the provisions of paragraph 1 an individual is a resident of both

Contracting States, then his status shall be determined as follows:

a. He shall be deemed to be a resident only of the State in which he has a permanent

home available to him; if he has a permanent home available to him in both States,
he shall be deemed to be a resident only of the State with which his personal and
economic relations are closer (centre of vital interests);

b. If the State in which he has his centre of vital interests cannot be determined, or if
he has not a permanent home available to him in either State he shall be deemed to
be a resident only of the State in which he has an habitual abode;

c. If he has an habitual abode in both States or in neither of them he shall be deemed

to be a resident only of the State of which he is a national;

d. If he is a national of both States or of neither of them, the competent authorities of

the Contracting States shall settle the question by mutual agreement.

3. Where by reason of the provisions of paragraph 1 a person other than an individual is a

resident of both Contracting States, then it shall be deemed to be a resident only of the
State in which its place of effective management is situated.

Article 5: Permanent Establishment

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 1. For the purposes of this Convention, the term “Permanent establishment” means a fixed
place of business through which the business of an enterprise is wholly or partly carried
on.

2. The term “Permanent establishment” includes especially:

A place of Management, a Branch, an Office, a factory, Workshop and A mine, and oil or gas
well, a quarry or any other place of extraction of natural resources.

3. A building site or construction or installation project constitutes a permanent

establishment only if it lasts more than twelve months.

4. Notwithstanding the preceding provisions of this Article, the term “permanent

establishment” shall be deemed not to include;

a. The use of facilities solely for the purpose of storage display or delivery of goods or
merchandise belonging to the enterprise;

b. The maintenance of a stock of goods or merchandise belonging to the enterprise solely

for the purpose of storage, display or delivery;

c. The maintenance of a stock of goods or merchandise belonging to the enterprise solely

for the purpose of processing by another enterprise;

d. The maintenance of a fixed place of business solely for the purpose of purchasing goods
or merchandise or of collecting information, for the enterprise;

e. The maintenance of a fixed place of business solely for the purpose of carrying on, for
the enterprise, any other activity of a preparatory or auxiliary character;

f. The maintenance of a fixed place of business solely for any combination of activities
mentioned in subparagraphs a) to e), provided that the overall activity of the fixed place
of business resulting from this combination is of a preparatory or auxiliary character.

5. Notwithstanding the provisions of paragraphs 1 and 2, where a person-other than an

agent of an independent status to whom paragraph 6 applies-is acting on behalf of an
enterprise and has and habitually exercises, in a Contrasting State an authority to
conclude contracts in the name of the enterprise, that enterprise shall be deemed to
have a permanent establishment in that State in respect of any activities which that
person undertakes for the enterprise, unless the activities of such person are limited to
those mentioned in paragraph 4 which, of exercised through a fixed place of business,
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 would not make this fixed place of business a permanent establishment under the
provisions of that paragraph.

6. An enterprise shall not be deemed to have a permanent establishment in a Contracting

State merely because it carries on business in that State through a broker, general
commission agent or any other agent of an independent status, provided that such
persons are acting in the ordinary course of their business.

7. The first that a company which is a resident of a Contracting State controls or is

controlled by a company which is a resident or the other Contracting State, or which
carries on business in that other State (whether through a permanent establishment or
otherwise), shall not of itself constitute either company a permanent establishment of
the other.

CHAPTER III

Taxation of Income

Article 6: Income from Immovable Property

1. Income derived by a resident of a Contracting State from immoveable property

(including income from agriculture or forestry) suited in the other Contracting State may
be taxed in that other State.

2. The term “immovable property” shall have the meaning which it has under the law of
the Contracting State in which the property in question is situated. The term shall in any
case include property accessory to immovable property, livestock and equipment used
in agriculture and forestry, rights to which the provisions of general law respecting
landed property apply, usufruct of immovable property and rights to variable or fixed
payments as consideration for the working of, or the right to work, mineral deposits,
sources and other natural resources; ships, boats and aircraft shall not be regarded as
immovable property.

3. The provisions of paragraph 1 shall apply to income derived from the direct use, letting,
or use in any other form of immovable property.

4. The provisions of paragraphs 1 and 3 shall also apply to the income from immovable
property of an enterprise.

Article 7: Business Profits

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 1. The profits of an enterprise of a Contracting State shall be taxable only in that state
unless the enterprise carries on business in the other Contracting State through a
permanent establishment situated therein. If the enterprise carries on business as
aforesaid, the profits to the enterprise may be tax in the other state but only so much of
them as is attributable to that permanent establishment.

2. Subject to the provisions of paragraph 3, where an enterprise of a Contracting State

carries on business in the other Contracting State through a permanent establishment
situated therein, there shall in each Contracting State be attributed to that permanent
establishment the profits which it might be expected to make if it were a distinct and
separate enterprise engaged in the same or similar activities under the same or similar
conditions and dealing wholly independently with the enterprise of which it is a
permanent establishment.

3. In determining profits of a permanent establishment, there shall be allowed as

deductions expenses which are incurred for the purposes of the permanent
establishment, including executive and general administrative expenses so incurred,
whether in the State in which the permanent establishment is situated or elsewhere.

4. Insofar as if has been customary in a Constricting State to determine the profits to be

attributed to a permanent establishment on the basis of an apportionment of the total
profits of the enterprise to its various parts, nothing in paragraph 2 shall preclude that
Contracting State from determining the profits to be taxed by such an apportionment as
may be customary, the method of apportionment adopted shall, however, be such that
the result shall be in accordance with the principles contained in this Article.

5. No profits shall be attributed to a permanent establishment by reason of the mere

purchase by that permanent establishment of goods or merchandise for the enterprise.

6. For the purpose of the proceeding paragraphs, the profits to be attributed to the
permanent establishment shall be determined by the same method year by year unless
there is good and sufficient reason to the contrary.

7. Where profits include items of income which are dealt with separately in other Articles
of this Convention. Then the provisions of those Articles shall not be affected by the
provisions of this Article.

Article 8: Shipping, Inland Waterways Transport and Air Transport

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 1. Profits from the operation of ships or aircraft in international traffic shall be taxable only
in the Contracting State in which the place of effective management of the enterprise is
situated.

2. Profits from the operation of boats engaged in inland waterways transport shall be
taxable only in the Contracting State in which the place of effective management of the
enterprise is situated is situated.

3. If the place of effective management of a shipping enterprise or of an inland waterways

transport is aboard a ship or boat, then it shall be deemed to be situated in the
Contracting State in which the home harbour of the ship or boat is situated, or, if there
is no such home harbour, in the Contracting State of which the operator of the ship or
boat is a resident.

4. The provisions of paragraph 1 shall also apply to profits from the participation in a pool,
a joint business or an international operating agency.

Article 9: Associated Enterprise

1. Where

a. An enterprise of a Contracting State participates directly or indirectly in the

management, control or capital or an enterprise of the other Contracting State, or

b. The same persons participate directly or indirectly in the management, control or capital
of an enterprise of a Contracting State and an enterprise of the other Contracting State,
and in either case conditions are made or imposed between the two enterprises in their
commercial or financial relations which differ from those which would be made
between independent enterprises, then any profits which would, but for those
conditions, have accrued, to one of the enterprise but, by reason of does conditions
have not so accrued may be included in the profits of that enterprise and taxed
accordingly.

2. Where a Contracting State includes in the profits of an enterprise of that State and taxes
accordingly-profits on which an enterprise of the other Contracting State has been
charged to tax in that other State and the profits so included are profits which would
have accrued to the enterprise of the first-mentioned State if the conditions made
between the two enterprises had been those which would have been made between
independent enterprises, then that other State shall make an appropriate adjustment to
the among of the tax charged therein on those profits. In determining such adjustment,
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 due regard shall be had to the other provisions of this Convention and the competent
authorities of the Contracting States shall if necessary consult each other.

Article 10: Dividends

1. Dividends paid by a company which is a resident of a Contracting State to a resident of

the other Contracting State may be taxed in that other State.

2. However, such dividends may also be taxed in the Contracting State of which the
company paying the dividends is a resident and according to the laws of that State, but
if the beneficial owner of the dividends is resident of the other Contracting State, the
tax so charged shall not exceed:

a. 5 per cent of the gross amount of the dividends if the beneficial owner is a company
(other than a partnership) which holds directly at least 15 per cent of the capital of the
company paying the dividends.

b. 15 per cent of the gross amount of the dividends if all other cases. The component
authorities of the Contracting States shall by mutual agreement settle the mode of
application of these limitations.

This paragraph shall not affect the taxation of the company in respect of the profits out of
which the dividends are paid.

3. The term “dividends” as used in this Article means income from shares, “jouissance”
rights, mining shares, founders’ shares or other rights, not being debt-claims,
participating in profits, as well as income from other corporate rights which is subjected
to the same taxation treatment as income from shares by the laws of the State of which
the company making the distribution is a resident.

4. The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the
dividends, being a resident of a Contracting State of which the company paying the
dividends is a resident through a permanent establishment situated therein and the
holding in respect of which the dividends are paid is effectively connected with such
permanent establishment. In such case the provisions of Article 7 shall apply.

5. Where a company which is a resident of a Contracting State derives profits or income

from the other Contracting State, the other State may not impose any tax on the
dividends paid by the company, except insofar as such dividends are paid to a resident
of that other state or insofar as the holding in respect of which the dividends are paid is

326
 effectively connected with a permanent establishment situated in that other State, nor
subject the company’s undistributed profits to a tax on the company’s undistributed
profits, even if the dividends paid or the undistributed profits consist wholly or partly of
profits or income arising in such other State.

Article 11: Interest

1. Interest arising in a Contracting State and paid to a resident of the other Contracting
State may be taxed in that other State.

2. However, such interest may also be taxed in the Contracting State in which it arises and
according to the laws or that State, but if the beneficial owner of the interest is a
resident of the other Contracting State, the tax so charged shall not exceed 10 per cent
of the gross amount of the interest. The competent authorities of the Contracting States
shall by mutual agreement settle the mode of application of this limitation.

3. The term “interest” as used in this Article means income form debt-claims of every kind,
whether or not secured by mortgage and whether or not carrying a right to participate
in the debtor’s profits, and in particular, income from government securities and income
from bond’s or debentures, including premiums and prizes attaching to such securities,
bonds or debentures. Penalty charges for late payment shall not be regarded as interest
for the purpose of this Article.

4. The provisions of paragraph 1 and 2 shall not apply if the beneficial owner of the
interest, being a resident of a Contracting State, carries on business in the other
Contracting State in which the interest in respect of which the interest is paid is
effectively connected with such permanent establishment. In such case the provisions of
Article 7 shall apply.

5. Interest shall be deemed to arise in a Contracting State when the payer is a resident of
that State. Where, however, the person paying the interest, whether he is a resident of
a Contracting State or not, has in a Contracting State a permanent establishment in
connection with which the indebt ness on which the interest is paid was incurred, and
such interest is borne by such permanent establishment, then such interest shall be
deemed to arise in the State in which the permanent establishment is situated.

6. Where, by reason of a special relationship between the payer and the beneficial owner
or between both of them and some other person, the amount of the interest, having
regard to the debt-claim for which it is paid, exceeds the amount which would have
been agreed upon by the payer and the beneficial owner in the absence of such
327
 relationship, the provisions of this Article shall apply only to the last-mentioned amount.
In such case, the excess part of the payments shall remain taxable according to the laws
of each Contracting State, due regard being had to the other provisions of this
Convention.

Article 12: Royalties

1. Royalties arising in a Contracting State and beneficially owned by a resident of the other
Contracting State shall be taxable only in that other State.

2. The term “royalties” as used in this Article means payments of any kind received as a
consideration for the use of, or the right to use, any copyright of literary, artistic or
scientific work including cinematograph films, any patent, trade design or model, plan,
secret formula or process, or for information concerning industrial, commercial or
scientific experience.

3. The provision of paragraph 1 shall not apply if the beneficial owner of the royalties,
being a resident of a Contracting State, carries on business in the other Contracting
State in which the royalties arise through a permanent establishment situated therein
and the right or property in respect of which the royalties are paid is effectively
connected with such permanent establishment. In such case the provisions of Article 7
shall apply.

4. Where, by reason of a special relationship between the payer are the beneficial owner
or between both of them and some other person, the amount of the royalties, having
regard to the use, right or information for which they are paid, exceeds the amount
which would have been agreed upon by the payer and the beneficial owner in the
absence of such relationship, the provisions of this Article shall apply only to the last-
mentioned amount. In such case, the excuses part of the payments shall remain taxable
according to the laws of each Contracting State, due regard being had to the other
provisions of this Convention.

Article 13: Capital Gains

1. Gains derived by a resident of a Contracting State from the alienation of immovable

property referred to in Article 6 and situated in the other Contracting State may be
taxed in that other state.

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 2. Gains from the alienation of movable property forming part of the business property of
a permanent establishment which an enterprise of Contracting State has in the other
Contracting State, including such gains from the alienation of such a permanent
establishment (alone or with the whole enterprise), may be taxed in that other State.

3. Gains from the alienation of ships or aircraft operated in international traffic, boats
engaged in inland waterways transport or movable property pertaining to the operation
of such ships, aircraft or boats, shall be taxable only in the Contracting State in which
the place of effective management of the enterprise is situated.

4. Gains derived by a resident of a Contracting State from the alienation of shares deriving
more than 50 per cent of their value directly or indirectly from immovable property
situated in the other Contracting State may be taxed in that other State.

5. Gains from the alienation of any property, other than that referred to the paragraphs
1,2, 3 and 4 shall be taxable only in the Contracting State of which the alienator is a
resident.

Article 14: Independent Personal Services (Deleted)

Article 15: Dependent Personal Services

1. Subject to the provisions of Articles 16,18 and 19, salaries, wages and other similar
remuneration derived by a resident of a Contracting State in respect of an employment
shall be taxable only in that State unless the employment is exercised in the other
Contracting State. If the employment is so exercised, such remuneration as is derived
there from may be taxed in that other State.

2. Notwithstanding the provisions of paragraph 1, remuneration derived by a resident of a

Contracting State in respect of an employment exercised in the other Contracting State
shall be taxable only in the first-mentioned State if:

a. The recipient is present in the other State for a period or periods not exceeding in the
aggregate 183 days in any twelve month period commencing or ending in the fiscal year
concerned, and.

b. The remuneration is paid by, or on behave of an employer who is not a resident of the
other State, and

c. The remuneration is not borne by a permanent establishment which the employer has
in the other State.
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 3. Notwithstanding the preceding provisions of this Article, remuneration derived in
respect of an employment exercised aboard a ship or aircraft operated in international
traffic, or aboard a boat engaged in inland waterways transport, may be taxed in the
Contracting State in which the place of effective management of the enterprise is
situated.

Article 16: Directors’ Fees

Directors’ fees and other similar payments derived by a resident of a Contracting State in his
capacity as a member of the board of directors of a company which is a resident of the other
Contracting State may be taxed in that other state.

Article 17: Artistes and Athletes

12. Notwithstanding the provisions of Articles 7 and 15, income derived by a

resident of a Contracting State as an entertainer, such as a theatre, motion
picture, radio or television artiste, or a musician, or as a sportsman, from
his personal activities as such exercised in the other Contracting State, may
be taxed in that other State.

13. Where income in respect of personal activities exercised by an entertainer

or a sportsman in his capacity as such accrues not to the entertainer or
sportsman himself but to another person, that income may,
notwithstanding the provisions of Articles 7 and 15, be taxed in the
Contracting State in which the activities of the entertainer or sportsman
are exercised.

Article 18: Pension

Subject to the provisions of paragraph 2 of Article 19, pensions and other similar remuneration
paid to a resident of a Contracting State in consideration of past employ shall be taxable only in
that state.

Article 19: Government Service

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 1. a. Salaries, wages and other similar remuneration paid by a Contracting State or a
political subdivision or a local authority thereof to an individual in respect of services
rendered to that State or subdivision or authority shall be taxable only in that State.

b. However, such salaries, wages and other similar remuneration shall be taxable only in the
other Contracting State if the services are rendered in that State and the individual is a resident
of that State; or

i. Is a national or that state; or

ii. Did not become a resident of that state solely for the purpose of rendering the services.

2. a. Notwithstanding the provisions of paragraph 1, pensions and other similar

remuneration paid, by, or out of funds created by, a Contracting State or a political
subdivision or a local authority thereof to an individual in respect of services rendered
to that State or subdivision or a local authority shall be taxable only in that state.

b. However, such pension and other similar remuneration shall be taxable only in the other
Contracting State if the individual is a resident of, and a national of, the State.

3. The provisions of Articles 15, 16,17 and 18 shall apply to salaries, wages, pensions, and other
similar remuneration in respect of services rendered in connection with a business carried on
by a Contracting State or a political subdivision or a local authority thereof.

Article 20: Students and Trainees

Payments which a student or business apprentice who is or was immediately before visiting a
Contracting State a resident of the other Contracting State and who is present in the first-
mentioned State solely for the purpose of his education or training receives for the purpose of
his maintenance, education or training shall not be taxed in that State, provided that such
payments arise from sources outside that State.

Article 21: Teachers and Researchers

A professor or teacher who immediately before visiting Nigeria was a resident of UK is

exempted from tax in Nigeria in respect of any remuneration received for teaching or
researcher in a university or any other similarly recognize educational institution in Nigeria for a
period not exceeding two years from the date of arrival in the country for such purpose.
Similarly, the remuneration for a professor or teacher who was resident in Nigeria immediate
before his visit to the UK for the purpose of teaching or research is exempted from the UK tax
for a period of not more than two years.
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This article is applicable to income from research undertaken in the public interest and not
primarily for the benefit of some other private public(s).

Article 22: Elimination of Double Taxation

1. Items of income of a resident of a Contracting State, wherever arising, not dealt with in
the foregoing Article of this Convention shall be taxable only in that state.

2. The provisions of paragraph 1 shall not apply to income, other than income from
immovable property as defined in paragraph 2 of Article 6, if the recipient of such
income, being a resident of a Contracting State, carries on business in the other
Contracting State through a permanent establishment situated therein and the right or
property in respect of which the income is paid is effectively connected with such
permanent establishment. In such case the provisions of Article 7 shall apply.

CHAPTER IV

Taxation of Capital

Article 23: Non-Discrimination

1. Capital represented by immovable property referred to in Article 6, owned by a resident

of a Contracting State and situated in the other Contracting State, may be taxed in that
other state.

2. Capital represented by movable property forming part of the business property of a

permanent establishment which an enterprise of a Contracting State has in the other
Contracting State may be taxed in that State.

3. Capital represented by ships and aircraft operated in international traffic and by boats
engaged in inland waterways transport, and by movable property pertaining to the
operation of such ships, aircraft and boats, shall be taxable only in the Contracting State
in which the place of effective management of the enterprise is situated.

4. All other elements of capital of a resident of a Contracting State shall be taxable only in
that State.

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CHAPTER V

Methods for Elimination for Double Taxation

Article 24: Mutual Agreement Procedure

1. Where a resident of a Contracting State derives income or owns capital which, in

accordance with the provisions of this Convention, may be taxed in the other
Contracting State, the first-mentioned State shall, subject to the provisions of
paragraphs 2 and 3, exempt such income or capital from tax.

2. Where resident of a Contracting State derives items of income which, in accordance

with the provisions of Articles 10 and 11, may be taxed in the other Contracting State,
the first-mentioned State shall allow as a deduction from the tax on the income of that
resident an amount equal to the tax paid in that other State. Such deduction shall not,
however exceed that part of the tax, as computed before the deduction is given, which
is attributable to such items of income derived from that other State.

3. Where in accordance with any provision of the Convention income derived or capital
owned by a resident of a Contracting State is exempt from tax in that State, such State
may nevertheless, in calculating the amount of tax on the remaining income or capital of
such resident, take into account the exempted income or capital.

4. The provision of paragraph 1 shall not apply to income derived or capital owned by a
resident of a contracting State where the other Contracting State applies the provisions
of paragraph 2 of Article 10 or 11 to such income.

Article 25: Exchange of Information

1. Where a resident of a Contracting State derives income or owns capital which, in

accordance with the provisions of this Convention, may be taxed in the other
Contracting State, the first-mentioned State shall allow:

a. As a deduction from the tax on the income of that resident, an amount equal to the
income tax paid in that other State;

b. As a deduction from the tax on the capital of that resident, an amount equal to the
capital tax paid in that other State.

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Such deduction in either case shall not, however, exceed that part of the income tax or capital
tax, as computed before the deduction is given which is attributable as the case may be, to the
income or the capital which may be taxed in that other State.

2. Where in accordance with any provision of the Convention income derived or capital
owned by a resident of a Contracting State I exempt from tax in that State, such State
may nevertheless, in calculating the amount of tax on the remaining income or capital of
such resident, take into account the exempted income or capital.

CHAPTER VI

Special Provisions

Article 26: Diplomatic Agents and Consular Officials

1. Nationals of a Contracting State shall not be subjected in the other Contracting State to
any taxation or any requirement connected therewith, which is other or more
burdensome than the taxation and connected requirements to which nationals of that
other State in the same circumstances, in particular with respect to provisions of Article
1, also apply to persons who are not residents of one or both of the Contracting States.

2. Stateless persons who are residents of a Contracting State shall not be subjected in
either Contracting State to any taxation or any requirement connected therewith, which
is other or more burdensome than the taxation and connected requirements to which
national of the State connected in the same circumstances, in particular with respect to
residence, are or may be subjected.

3. The taxation on a permanent establishment which an enterprise of a Contracting State

has in the other State than the taxation levied on enterprises of that other State
carrying on the same activities. This provision shall not be construed as obliging a
Contracting State to grant to residents of the other Contracting State any personal
allowances, relief and reductions for taxation purpose on account of civil status or
family responsibilities which it grants to its own residents.

4. Except where the provisions of paragraph 1 of Article 9, paragraph 6 of Article 11, or

paragraph 4 of Article 12, apply, interest, royalties, and other disbursements paid by an
enterprise of a Contracting State to a resident of the other Contracting State shall, for
the purpose of determining the taxable profits of such enterprise, be deductible under

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 the same conditions as if they has been paid to a resident of the first-mentioned State.
Similarly, any debts of an enterprise of a Contracting State to a resident of other
Contracting State shall, for the purpose of determining the taxable capital of such
enterprise, be deductible under the same conditions as if they had been contracted to a
resident of the first-mentioned State.

5. Enterprises of a Contracting State, the capital of which is wholly or partly owned or

controlled, directly or indirectly, by one or more residents of the other Contracting
State, shall not be subjected in the first-mentioned State to any taxation or any
requirement connected therewith which is other or more burdensome than the taxation
and connected requirements to which other similar enterprises of the first-mentioned
State are may be subjected.

6. The provisions of this Article shall, notwithstanding the provisions of Article 2, apply to
taxes of every kind and description.

Article 27: Entry into Force

1. Where a person considers that the actions of one or both of the Contracting States
results or will result for him in taxation not in accordance with the provisions of this
Conventions, he may, irrespective of the remedies provided by the domestic the
Contracting State of which he is a national. The case must be presented within three
year from the first notification of the action resulting in taxation not in accordance with
the provisions of the Convention.

2. The competent authority shall endeavour, if the objection appears to it be justified and
if it is not itself able to arrive at a satisfactory solution, to resolve the case by mutual
agreement with the competent authority of the other Contracting State, with a view to
the avoidance of taxation which is not in accordance with the Convention. Any
agreement reached shall be implemented notwithstanding any time limits in the
domestic law of the Contracting States.

3. The competent authorities of the Contracting States shall endeavour to resolve by

mutual agreement and difficulties or doubts arising as to the interpretation or
application of the Convention. They may also consult together for the elimination of
double taxation in cases not provided for in the Convention.

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 4. The competent authorities of the Contracting States may communicates with each other
directly, including through a joint commission consisting of themselves or their
representatives, for the purpose of reaching an agreement in the sense of the preceding
paragraphs.

Article 28: Termination

1. The competent authorities of the Contracting States shall exchange such information as
is foreseeable relevant for carrying out the provisions of the Convention or to the
administration or enforcement of the domestic laws concerning taxes or every kind and
description imposed on behalf of the Contracting States, or of their political subdivisions
or local authorities, insofar as the taxation there under is not contrary to the
Convention. The exchange of information is not restricted by Articles 1 and 2.

2. Any information received under paragraph 1 by a Contracting State shall be treated as

secret in the same manner as information obtained under the domestic laws of that
State and shall be disclosed only to persons or authorities (including courts and
administrative bodies) concerned with the assessment or collection of, the enforcement
or prosecution in respect of, the determination or appeals in relation to the taxes
referred to in paragraph 1, or the oversight of the above. Such persons or authorities
shall use the information only for such purposes. They may disclose the information in
public court proceedings or in judicial decisions.

3. In no case shall the provisions of paragraphs 1 and 2 be construed so as to impose on a

Contracting State the obligation:

a. To carry out administrative measures at variance with the laws and administrative
practice of that or of the other Contracting State;

b. To supply information which is not obtainable under the laws or in the normal course of
the administration of that or of the other Contracting State;

c. To supply information which would disclose any trade, business, industrial, commercial
or professional secret or trade process, or information the disclosure of which would be
contrary to public policy.

4. If information is requested by Contracting State in accordance with this Article, the

other Contracting State shall use it information gathering measures to obtain the
requested information, even though that other State may not need such information for
its own tax purposes. The obligation contained in the preceding sentence is subject to
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 the limitations of paragraph 3 but in no case shall such limitations be constructed to
permit a Contracting State to decline to supply information solely because it has not
domestic interest in such information.

5. In no case shall the provisions of paragraph 3 be constructed to permit a Contracting

State to decline to supply information solely because the information is held by a bank,
other financial institution, nominee or person acting in an agency or a fiduciary capacity
or because it relates to ownership interests in a person.

Article 29: Assistance in the Collection of Taxes

1. The Contracting States shall lend assistance to each other in the collection of revenue
claims. This assistance is not restricted by Articles 1 and 2. The competent authorities of
the Contracting States may by mutual agreement settle the mode of application of this
Article.

2. The term “revenue claim” as used in this Article means an amount owed in respect of
taxes of every kind and description imposed on behalf of the Contracting States, or of
their political subdivisions or local authorities, insofar as the taxation there under is not
contrary to this Convention or any other instrument to which the Contracting States are
parties, as well as interest, administrative penalties and costs of collection or
conservancy related to such amounts.

3. When a revenue claim of a Contracting State is enforceable under the laws of that State
and is owned by a person, at that time, cannot, under the law of that State, prevent its
collection, that revenue claim shall, at the request of the competent authority of that
State, be accepted for purpose of collection by the competent authority of the other
Contracting State. That revenue claim shall be collected by that other State in
accordance with the provisions of its laws applicable to the enforcement and collection
of its own taxes as if the revenue claim were a revenue claim of that other State.

4. When a revenue claim of a Contracting State. That revenue claim shall be collected by
that other State in accordance with the provisions of its laws applicable to the
enforcement and collection of its own taxes as if the revenue were a revenue claim of
that other State.

5. Notwithstanding the provisions of paragraphs 3 and 4, a revenue claim accepted by a

Contracting State for purpose of paragraph 3 or 4 shall not, in that State, be subject to
the time limits or accorded any priority applicable to a revenue claim under the laws of
that State by reason of its nature as such. In addition, a revenue claim accepted by a
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 Contracting State for the purposes of paragraph 3 or 4 shall not, in that State, have any
priority applicable to that revenue claim under the laws of the other Contracting State.

6. Proceedings with respect to the existence, validity or the amount of revenue claim of a
Contracting State shall not be brought before the courts or administrative bodies of the
other Contracting State.

7. Where, at any time after a request has been made by a Contracting State under
paragraph 3 or 4 and before the other Contracting State has collected and remitted the
relevant revenue claim to the first-mentioned State, the relevant revenue claim ceases
to be.

a. In the case of a request under paragraph 3, revenue claim of the first-mentioned State
that is enforceable under the laws of the State and is owed by a person who, at that
time, cannot under the laws of the State, prevent its collection, or.

i. In the case of a request under paragraph 3, revenue claim of the first-mentioned

State that is enforceable under the laws of that State and is owed by a person,
who at that time, cannot, under the laws of that State, prevent its collection.

ii. In the case of a request under paragraph 3, a revenue claim of the first-
mentioned State in respect of which that State may, under its laws, take
measures of conservancy with a view to ensure its collection.

The competent authority of the first-mentioned State shall promptly notify the competent
authority of the other State of that fact and, at the option of the other State; the first-
mentioned State shall either suspected or withdraw its request.

8. In no case shall the provisions of this Article be constructed so as to impose on a

Contracting State the obligation:

a. To carry out administrative measures at variance with the laws and administrative
practice of that or of the other Contracting State.

b. To carry out measures which would be contrary to public policy (ordre public);

c. To provide assistance if the other Contracting State has not pursued all reasonable
measures of collecting or conservancy, as the case may be, available under its laws or
administrative practice;

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 d. To provide assistance in those cases where the administrative burden for that State is
clearly disproportionate to the benefit to be derived by the other Contracting State.

Article 29: Diplomatic and Consular Officials

Nothing in this Convention shall affect the fiscal privileges of members of diplomatic missions
or consular posts under the general rules of international law or under the provisions of special
agreements.

1. This Convention may be extended, either in its entirely or with any necessary
modifications (to any part of the territory of (State A) or of (State B) which is specifically
excluded from the application of the Convention or), to any State or territory for whose
international relations (State A) or (State B) is responsible, which imposes taxes
substantially similar in character to those to which the Convention applies. Any such
extension shall take effect from such date and subject to such modifications and
conditions, including conditions as to termination, as may be specified and agreed
between the Contracting State in notes to be exchanged through diplomatic channels or
in any other manner in accordance with their constitutional procedures.

2. Unless otherwise agreed by both Contracting States, the termination of the Convention
by one of them under Article 30 also terminate, in the manner provided from in that
Article, the application of the Convention (to any part of the territory of (State A) or of
(State B) of) to any State or territory to which it has been extended under this Article.

CHAPTER VII

Final Provisions

Article 30: Entry into Force

1. This Convention shall be ratified and the instruments for ratification shall be exchanged
at………….. as soon as possible.

2. The Convention shall enter into force upon the exchange of instruments for ratification
and its provisions shall have effect:

a. (in State A):……………………………

b. (in Sate B):……………………………..

Article 31: Termination

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This Convention shall remain in force until terminated by a Contracting State. Either Contracting
State may terminate the Convention, through diplomatic channels, by giving notice of
termination at least six months before the end of any calendar year after the year…………….. in
such event, the Convention shall cease to have effect:

a. (in State A):………………………………

b. (in State B):………………………………

11.02.4 Concept of Residency

Rule of Residency and other Applicable Rules

A taxpayer may be liable to Nigeria taxation, either because he is resident in Nigerian or

because the source of his income is located there. A Nigerian resident is liable to tax on his
worldwide income, whereas a non-resident will only be liable for tax on Nigerian sourced
income. It is important to note that Nigerian double taxation relief (either treaty or unilateral
relief) is available only to Nigeria residents.

Residence of an Individual

▪ Residence is the basis of taxation in most countries.

▪ A resident individual is a person who has sufficiently close connections to a country

whereby he will be liable to tax in that country based on his worldwide income.

▪ The Personal Income Tax (PIT) law defines an individual as resident in terms of his physical
presence in Nigeria.

▪ A person, who is in Nigeria for a temporary purpose only, and not with a view to
establishing a residence will not be regarded as resident in Nigeria, provided he stays for
less than 6 months (i.e. 183 days) in any 12 months period 'commencing in a calendar year
and ending either within that same year or the following year'.

▪ Under the Nigerian domestic tax laws, an individual is regarded as resident throughout an
assessment year if he:

1. is domiciled in Nigeria;

2. moves in and out for period in all amounting to 183 days or more within 12 - month; or

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3. serves as a diplomat in a country other than Nigeria.

▪ A Nigerian resident individual is liable to tax on his worldwide income, which may also be
liable to tax in another country.

▪ The laws of each country define who is resident in that country for tax purposes. It follows
therefore that the laws of two countries may regard the same person as resident in their
respective countries.

▪ A taxpayer may be liable to Nigerian taxation, either because he is resident in Nigeria or

because the source of his income is located there. This implies that, an individual may be
deemed resident in more than one country. This creates the problem of "dual residence".

Dual Resident – Individual

Conflict may arise between two Contracting States on who has the taxing right over a tax payer,
who maintains dual residence - that is, where a taxpayer appears to be resident of both
Contracting States.

The following steps are available to the contending tax authorities to determine the status of
the affected tax payer;

1. he shall be deemed to be a resident only of the State in which he has a permanent home
available to him;

2. if he has permanent home available to him in the two States, he shall be deemed to be a
resident only of the State with which his personal and economic interests, are closer
(centre of vital interests);

3. where (a) and (b) above cannot be determined he shall be deemed to be a resident only
of the State in which he has habitual abode;

4. if he has habitual home in both States or in neither of them he shall be deemed to be a

resident only of the State of which he is a national;

5. If he is a national of both States or of neither of them, the competent authorities of the

Contracting States shall settle the question by mutual agreement.

The resolution process listed above is usually referred to as "Tie Breaker Rule".

Domicile

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Under English law, every individual must have a domicile and this is the country where the
individual is considered to have his “permanent home”. While a person must have a domicile,
he may have more than one. At birth, a person acquires automatically, a domicile of origin,
which is generally the domicile of his father and this may be supplanted at the age of 18 years
of later by the individual acquiring a domicile of choice. Acquisition of a domicile of choice
depends essentially on physical presence in a country, combined with an intention to live there
permanently. Where a person loses his domicile of choice, his domicile of origin will revive,
unless or until supplanted by another new domicile of choice. Although domicile has no special
meaning for the purposes of taxation; Person’s domicile is of significance in relation to
remittance, employment income, transfer of assets abroad and capital transfer tax (where
applicable).

Residence of Corporations

Section 105 of CIT Act defines a Nigerian company as - "any company incorporated under the
Companies and Allied matters Act or any Act or any enactment replaced by that Act". However,
based on the UK laws, a company is resident where its real business is carried on, and this is the
place of the company's central management and control. In determining where a company's
central management and control is exercised, the single most important factor is generally the
place where the company's Board of Directors meets and makes decisions. However, if central
management and control is not in fact exercised by the Board, but by others e.g. a Sub-
Committee of the main Board, or even by a single individual such as the managing director,
then the place where they exercise control will be the decisive factor in determining the
company's residence.

The place of central management and control is the sole test of a company's residence, so that
other factors, such as place of incorporation, the residence of directors or shareholders, the
location of shareholders' meetings, are of little significance. Thus, a company may be
incorporated in Nigeria, but be resident in Ghana vice-versa.

Dual Residence – Corporation

The problem of dual residence often occurs with respect to corporations. A company may be
incorporated in one country but may have its management located elsewhere. Under a treaty
situation, the tie breaker provided is the location of the place of effective management,
although this may not be satisfactory for all situations. A company may also experience the

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problem of double taxation where it's Nigerian sourced income/profit is also liable to tax in the
country of residence e.g. Nigeria versus USA.

Residence and Ordinary Residence

The tax implications being resident or ordinary resident in Nigeria by a taxpayer are that:

▪ Tax is chargeable on the “aggregate amount” of his “income from sources inside or outside
Nigeria” PITA, S. 3 (1) (unlike the non-resident who suffers tax only on that part of his
income which is deemed to be derived from Nigeria).

▪ Double tax relief and allowances can be claimed in full by him (but the non-resident can
only claim personal allowance) –PITA S. 33(2).

Residence and Nationality

The Nigerian tax laws apply to a taxpayer on the basis of residence and not on the basis of
nationality. As a taxpayer, you are either a resident or a non-resident, regardless of nationality.
If one is a citizen of Nigeria, but not resident in Nigeria, he enjoys the same status as a foreign
national who is a non-resident. A company meets the requirements for registration and
qualifies to operate in Nigeria; it is regarded as a Nigerian company.

11.03 The Concept of Residence under Tax Treaties

Residence in Tax Treaties

The important of residence in bilateral tax treaties lies in its role as basis of allocating taxing
rights between the two contracting tax jurisdictions -the country of residence and country of
source in order to avoid double taxation. Where the Agreement confers the exclusive right to
tax on the country of residence, the country of source does not tax and double taxation is
thereby eliminated. Where the country of source has the full right to tax, the country of
residence has the right to tax but grants credit for the tax paid at source to avoid double
taxation.

Tie Breaker Rules for Individuals

Where there is an argument over residence, the tie breaker provided under paragraph 2 of
Article 4 of the Nigerian Tax Treaty is the determination of which of two countries A and B, has
a stronger claim on the individual concerned. The first factor to consider is where he has a

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permanent home. Other factors may be are where he has centre of vital interests usual above
and nationality.

Tie-Breaker of a Corporation

The problem of dual residence often occurs with respect to corporation. A company may be
incorporated in one country but may have its management located elsewhere. Paragraph 3 of
Article 4 provides a tie breaker which is the location of the place of effective management
although this may not be satisfactory for all situations.

Comparison between Corporate Resident and Individual Resident

A feature of this comparison lies in the scope of the income liable to tax of a resident individual
and that of a resident corporation. PITA S. 3(1) defines the scope of income chargeable as “the
aggregate amount each of which is the income of every taxable person, for each year, from a
source inside or outside Nigeria. However, section 13 (1) of CITA defines changeable income of
companies as the “total profits of a Nigerian company, wherever they have arisen in Nigeria or
have been brought into Nigeria”. The implications of both provisions are:

(a) A Nigerian resident/individual is chargeable to tax on the global income, comprising of

income from “inside or outside Nigeria”. By contrast, the chargeable income of a
Nigerian company is limited to the Nigerian source of income including those that have
been brought to Nigeria from outside sources. Incomes not brought into Nigeria are
therefore chargeable in the hands of a Nigerian resident/individual, but not chargeable
in the hands of a Nigerian company until these “have been brought into Nigeria”.

(b) A Nigerian company can avoid tax by failing to bring income earned from abroad into
Nigeria.

Taxation of Foreign Companies

Foreign Taxpayers and the Nigerian Tax System

The Companies and Allied Matters Act (CAMA), 1990 requires a foreign company to register in
Nigeria before it can undertake to carry on business in Nigeria. Such foreign companies could
also operate through a subsidiary or Permanent Establishment in Nigeria. The concept of
Permanent Establishment (PE) is central to the jurisdiction of a source country to tax the profits
from foreign trade carried on by a non-resident company within its jurisdiction. The rule is that
there is a threshold beyond which a state of course can only tax the income of a non-resident

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company from sources located within that State; that threshold is the PE by reference to the
income attributable to that PE.

Where a company carries on a trade or business in the other country through a PE located in
that other country, such a company is liable to tax on the income attributable to that PE. The
underlying principle is that a resident company of one country must have a sufficient presence
in another country to be liable to tax in respect of its profits from business operations in the
other country. Where no such presence exists, or where the presence is not sufficient, that
other country from which the income is being derived will have no authority to tax the income
being derived from its jurisdiction. For example, if a UK company carries on business in Nigeria,
Nigeria has no authority to tax the profits from that business, unless Nigeria is able to ascertain,
first that the company has a PE in Nigeria. If it has, then Nigeria has the authority to tax the
profits, but only so much of the profits as may be attributable to the business carried on
through the PE. If it does not have a PE, it is not liable to tax in Nigeria, no matter the amount of
the profit. This principle facilitates the free flow of trade and commerce as well as permits the
movement of capital and persons. The concept also creates certainty in tax planning of a
foreign trader or investor who has to operate across several national frontiers. He knows when
and where he would be subject to tax.

The term ‘PE’ does not feature in the Nigerian domestic laws. The 1993 tax reforms however
introduced the concept of “fixed base” into both CITA and PITA. Although, the terminologies
differ, the new concept of a fixed based is basically the same as the concept of a PE. The areas
of similarities and differences are highlighted when considering the tax status of a business
entity from a treaty country and his counterpart from a non-treaty country. For the company
from a treaty country, the standard to apply is the “PE concept” whereas the “fixed based
concept” will apply to a company from non-treaty country.

Trading by a non-resident in the other country may be conducted through:

(i) A branch;

(ii) An agency; of

(iii) Presence in the country.

Definition of Terms

▪ “Trading in a Country” as Distinct from “Trading with a Country”

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A non-resident who “carries on a trade in a country” will be liable to tax on the income from
that trade, whereas a non-resident who “carries on a trade with a country” will not be liable to
tax on that trade receipts, in order to test or determine established as factors to consider in
making the distinction viz.

(a) Place of Conclusion of Sales’ Contract

The trade is exercised or carried on at the place where the contracts are made.

(b) Place of Payment

The place of payment is usually tied to place of contract

(c) Place of Delivery

Place of delivery also satisfies the test of jurisdiction.

These three tests are forms of operation which relate to merchandise and are therefore not
exhaustive. The substance is where the operations take place from which the profits arise, that
is the jurisdiction that has the right to tax. Section 11(2) of CITA, CAP 60 LFN, 1990 provides a
general principle for the jurisdiction of Nigeria over the “profits of a company, other than a
Nigerian company, from any trade or business”. The law provides certain conditions under
which the profits of a non-resident company would be “deemed” to be Nigerian-source profits.
These are:

(i) If it has a fixed based business in Nigeria.

(ii) If it has a dependent agent in Nigeria.

(iii) If it operates a turkey project in Nigeria; and

(iv) If the transactions between associated members are artificial or fictitious.

The conditions also confirm largely with the universal concept of PE, though reflecting the
Nigerian peculiarities.

11.03.1 Fixed Base Concept under the Domestic Law

The 1990 CITA does not define what constitutes a fixed base, but it states what structures are
to be excluded.

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(a) Facilities used solely for the storage or display of goods or merchandise.

(b) Facilities used solely for the collection of information.

For a company, the fixed based has to be a place of business, but does not state that the
business has to be carried on through that fixed based. The provision in PITA is different in that
the business has to be carried on through the fixed base. The existence of a fixed base is
sufficient for a company to be liable to tax, but business must be carried on through that fixed
base in the case of an individual taxpayer.

Fixed Base Concept under Tax Treaties

Under tax treaty, fixed base does not automatically become a PE. Four conditions must be
satisfied for a fixed base to quality as PE:

▪ It must be a place of business

▪ The business of the company must be carried on though the fixed base and

▪ The fixed base must not be excluded by paragraph 3 of Article 5 of relevant tax treaty
for being activity of auxiliary or preparatory nature.

▪ The tax treaties list examples of a fixed base that would normally qualify as a PE.

These include:

▪ A place of management, a branch, an office, a factory, a workshop

▪ A mine, an oil or gas well, a quarry or any other place of extraction of natural resources.

Dependent Agent

(i) Domestic Laws

Where the non-resident does not have fixed base of business, the profits may still be deemed a
Nigerian profit if he operates through a dependent agent in Nigeria. Section 11(2) (b) of CITA,
1990 provides:

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“If it does not have such fixed based in Nigeria but habitually operates a trade or business
through a person in Nigeria, authorized to conclude contracts on behalf of some other
companies controlled by it or which have controlling interest in it…”

This provision requires that the trade or business of the principle must be operated through the
agent to quality him as a PE to the principal. This has implications for non-resident companies
with multiple agents in Nigeria and which of them would qualify as a PE. This will depend on
two factors:

(a) The agent through whom he operates the business; and

(b) The extent of authority given to that agent.

(ii) Subsidiary Company as a PE

The prevailing business arrangement in Nigeria as prescribed by CAMA is the parent/subsidiary

business arrangement. A non-resident company seeking to establish business presence in
Nigeria should incorporate a subsidiary. The subsidiary in Nigeria may be under the full
ownership of the foreign principal through equality participation, but this alone does not make
the subsidiary a dependent agent of the parent. The Nigerian Law sees the subsidiary as a
separate legal entity. It is not a branch and therefore cannot automatically become a
dependent agent, unless the conditions in Section 11(2) (b) of CITA 1990 hold. In other words, a
subsidiary becomes a dependent agent where he concludes business contracts on behalf of the
parent company or associated member or regularly makes deliveries on behalf of the parent or
head office from merchandise habitually maintained in Nigeria by that parent.

(iii) Dependent Agent and Tax Treaties

In relation to the parent and the subsidiary, even where the law regards them as separate
entities, the taxing authority may still infer dependent agency status by examining the pattern
of transactions between them to see what authority the subsidiary exercises on behalf of the
parent company and whether or not, the subsidiary is acting in the ordinary course of its
business in dealings with the parent company. Conclusively therefore, an agent becomes a
dependent agent and constitutes a PE in Nigeria for the parent company if:

▪ If loses the “separate legal status” in the dealings with the parent;

▪ It is dependent economically on the parent;

▪ It is seen not to be acting in the ordinary course of business in his dealings with the
parent.
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The above conditions will also apply to a subsidiary which performs functions, the types that an
independent agent in similar circumstance would not undertake; in this case, the subsidiary
would not be deemed to be acting in the ordinary course of its business. The control structure
may therefore not be the main issue here. The conditions also conform largely with the
universal concept of PE, though reflecting the Nigerian peculiarities.

From Nigeria perspective, a non-resident company is subject to tax in Nigeria if it has a

Permanent Establishment (PE) in Nigeria. Where a company is registered outside Nigeria but
derives income from Nigeria, such income will be liable to tax in Nigeria. The tax authorities
usually determine whether such company has a Permanent establishment in Nigeria in order to
ascertain the extent to which its income will be liable to tax.

It is important to note that exemption from incorporation does not confer exemption from
payment of tax on any company in Nigeria. Though the Nigerian tax laws do not specifically
mention PE, however, the criteria stated for creating a tax presence in Nigeria largely accord
with that of a PE as defined under the Organization for Economic Cooperation &Development
(OECD) Model Tax Convention.

The bases of determining Nigerian sourced profits are further explained as follows;

Dependent Agent: If a non-resident company does not have a fixed base in Nigeria but
habitually or regularly operates a trade through a person or entity in Nigeria authorised to
conclude contracts on its behalf or on behalf of some companies controlled by it, or which have
controlling interest in it, or habitually maintains a stock of goods or merchandise in Nigeria
from which deliveries are regularly made by a person on behalf of the company, its profit is
deemed taxable to the extent that the profit is attributable to that business or trade or
activities carried on through that person.

Turnkey Project: A turnkey project is defined as a “single contract involving survey, deliveries,
installation or construction", where a single contract covers the supply of equipment or
machinery, and/or the installation and/or commissioning of the supplied equipment, the
contract is construed to be a TURNKEY project. If a non-resident company engages in trade or
activities which could be construed to mean a turnkey project, the profit from that contract is
deemed to be derived from Nigeria.

Taxation of employment income

Employment is different from other types of income in that there is only one tax jurisdiction -
tax authority of the country of residence. Where the employee is on temporary visit and other
conditions hold, the country of residence takes the full right to tax; Where the employee stays
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longer that the 183 days threshold, the host country takes full right to tax. However for
diplomats and civil servants, the home country takes the full right to tax.

Expatriates resident in Nigeria for tax purposes are liable to tax on their employment income
from all sources irrespective of where it is paid.

The gain or profit from an employment shall be deemed to be derived from Nigeria if:

1. The duties of the employment are wholly or partly performed in la, unless the duties are
performed on behalf of an employer who is in a country other than Nigeria, and the employee
is not in Nigeria for a period or periods amounting to 183 days or more in any twelve month
period commencing in a calendar year and ending either within that same year or the following
year, and the remuneration of the employee is liable to tax in that other country.

2. The employer is in Nigeria, unless the duties of the employment are wholly performed,
and the remuneration paid, in a country other than Nigeria except during a temporary visit to
or leave in Nigeria.

Treatment of Foreign Income

Where a Nigeria resident individual or company earns foreign income, such will be included in
its chargeable income or profit for the year and subjected to Nigerian tax. Section 3(1 ) of PITA
defines the scope of income chargeable "The aggregate amounts each of which is the income of
every taxable person, for each year, from a source inside or outside Nigeria”. Section 13(1) of
CITA defines chargeable income of companies as the "Total profits of a Nigerian company,
wherever they have arisen in Nigeria or have been brought into Nigeria ".However, income of
certain professionals earned abroad, brought into Nigeria and warehoused in foreign currency
domiciliary accounts is exempted from tax in Nigeria.

A Nigerian resident individual is chargeable to tax on the global income, comprising of income
from "inside or outside Nigeria". By contrast, the chargeable income of a Nigerian company is
limited to the Nigerian source income, including those that have been brought to Nigeria from
outside sources. This further implies that incomes not brought into Nigeria are therefore
chargeable in the hands of a Nigerian resident individual, but not chargeable in the hands of a
Nigerian company until these "have been brought into Nigeria".

A Nigerian company can avoid tax by failing to bring income earned from abroad into Nigeria.

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 However tax is normally only charged in respect of residents although the income of an
employee even though paid abroad can be assessed to Nigerian tax if the employee is resident
in Nigeria for more than 183 days in any year of assessment.

Relief for Foreign Income Tax

In most cases the amounts that would be received in Nigeria could be taxed twice - first in the
country where the income originated and secondly in Nigeria where it is received. The tax
burden on such income could be unduly high and it may appear as if the resident individual or
Nigerian company receiving the income is being penalized for earning foreign income. To
minimize the tax impact on such income it is only reasonable that some relief from Nigerian
taxation is given to the tax payers concerned.

Relief is given in certain cases where income is liable both to foreign tax and Nigerian income
tax. There are broadly speaking two forms of relief granted:

Relief in respect of Commonwealth Income Tax: This consists of relief in respect of income tax
charged under the laws of commonwealth countries or the Republic of Ireland on income which
is also liable to Nigerian tax. The relief is given by setting of the tax already paid in the
Commonwealth country concerned against the tax due in Nigeria.

The following conditions should be noted:

▪ is only available to residents;

▪ is only given where the other country concerned has reciprocal legislation. Relief is
limited to half the tax applicable.

This form of relief stems from agreements reached with foreign governments whereby certain
classes of income are exempted altogether and foreign tax on other classes of income forms a
credit against tax payable in Nigeria.

It is important to note that Nigerian double taxation relief (either treaty or unilateral relief) is
available only to Nigerian residents.

Inter-Company Transactions not at Arm’s Length

(i) Domestic Laws

The 4th condition specified by CITA for deeming the profit of a non-resident, to be a Nigerian
profit would be.

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“Where the trade or business or activities is between the company and another person
controlled by it or which has controlling interest in it and conditions imposed which in the
opinion of the Board is deemed to be artificial of fictitious”.

The above paragraph covers the situation of internal trading between a Nigerian PE and non-
resident company where one controls the other or both are members of a multinational
enterprise (MNE) and where such transactions are not at arm’s length. The deemed profit in
this situation is what is adjusted to reflect arm’s length transaction. In international taxation,
transfer pricing problem implies re-writing of the accounts for the PE to redress artificial or
fictitious pricing, but under CITA, the duty to determine the arm’s length profits is put on the
Board and cannot be delegated.

(ii) Under Treaties

Under the treaties, the existence of divergence between the transfer prices and the open
market price’s in the transactions within a MNE calls for the re-writing of the books of the PE to
counter the artificial shift of profits from one tax jurisdiction to another.

Enforcement of Foreign Revenue Laws

This topic examines the direct and indirect enforcement of claims by foreign revenue
authorities as well as overseas’ enforcement of claims by Revenue authorities. We should also
be examining administrative cooperation between Revenue authorities and criminal
cooperation in the tax field.

General Rule

There is a general rule of non-enforcement of foreign revenue claims, although there also exist,
a number of significant exceptions to this rule. The degree of cooperation in enforcing foreign
tax claims is already extensive. It is a widely recognized rule of private international law that
one State will not assist in the direct enforcement of a foreign revenue claim. This rule prevents
one State from suing in a foreign court for taxes owed to it. It also prevents a judgement given
by the courts of one State for the payment of taxes from being enforced in the other State.
Thus, judgements relating to “a sum payable in respect of taxes or other charges of a like
nature” are usually excluded from the decided tax cases of countries. Treaty Agreements also
do not cover such tax recoveries.

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The principle has also been extended from direct enforcement of foreign revenue claims to
attempts at indirect enforcement of such claims. The rule is widely recognized between States
of a federation. In Nigeria, the Revenue authority of one State may be seen as being unable to
enforce tax liabilities in another State.

Mutual Administrative Assistance in Enforcement of Tax Claims

Against this background of the general principle of non-enforcement of foreign revenue claims,
many countries have entered into international arrangements for mutual assistance in the
enforcement of tax claims. The primary example of this is the article on exchange of
information incorporated in most double taxation agreements.

Under Article 27 of the Nigeria DTA, the two Revenue authorities shall exchange such
information as is necessary for the implementation of the agreement in the domestic laws of
each country which related to the taxes covered by the Agreement.

One issue which has not been faced by the Nigerian courts is whether information can also be
sought for the revenue authorities of a foreign treaty partner, even where there is no tax
liability. The tax authority’s view is that to see such information solely for the purpose of
exchange is contrary to the existing laws and administrative practices of the law. The general
principle of non-enforcement of foreign revenue claims still remains goods in so far as states
may not seek directly to enforce their tax debts in foreign states. Beyond this proposition,
however, in-roads have been made into the principle, both, by the developing jurisprudence of
the Courts and by international Conventions. It is therefore becoming more difficult to say
categorically that one State will not assist directly or indirectly in the collection of tax revenue
on behalf of a foreign State.

11.04 Double Taxation

This involves the process of taxing a particular source of income twice due to dual residency or
trance border activities. There are two main types of double taxation; economic and juridical.

(i) Economic Double Taxation

This occurs where two different taxpayers suffer tax in respect of the same income, e.g. when a
company and the shareholder are regarded as separate taxpayers with each being required to
pay its tax. The company pays tax on the profits and the shareholder pays tax again on the
distribution from that profit.

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Illustration 1

Yankee Ltd is resident in the UK and supplied goods to its subsidiary, Okoro (Nigeria) Ltd,
resident in Nigeria for N2,500,000. The FIRS in Nigeria determined that the arm’s length price
should be N1,500,000, that is, if Yankee Ltd and Okoro Ltd had transacted with each other as
independent entities, Okoro (Nigeria) Ltd would have paid N1,500,000 for the goods. The
taxable profit of Okoro (Nigeria) Ltd was increased by N1,000,000 because the company would
not have been entitled to deduct this amount if it had transacted on an arm’s length basis with
Yankee Ltd. Okoro (Nigeria) Ltd paid an extra N300,000 tax in Nigeria where the tax rate is 30%.
The assessable profit of Yankee Ltd would have been N1,000,000 less if it had supplied the
goods for arm’s length price of N1,500,000. There would be economic double taxation if the
profit of Okoro (Nigeria) Ltd is adjusted upwards by N1,000,000 without the UK tax authority
granting a corresponding downward adjustment to the profit of Yankee Ltd by N1,000,000.
That would mean that N1,000,000 which had earlier been taxed in the UK as part of Yankee
Ltd’s profit is again subject to tax as additional profit of Okoro (Nigeria) Ltd.

(ii) Juridical Double Taxation

International juridical double taxation occurs where two or more countries impose similar taxes
on the same tax base. This may happen in a situation of dual residence leading to the two
countries exercising rights to tax the taxpayers on worldwide basis in each state, in accordance
with the domestic laws of the respective states.

Illustration II

V Limited is resident in Nigeria. During the year ended 31st December, 2013, it earned a profit
of N3,000,000 from Ghana which is taxable at the rate of 25% by the Internal Revenue Service,
Ghana.

Ghana is the source country (i.e. where the income is derived) and has the first right to tax the
income. Nigeria is the country of residence of the company and has the second right to tax the
income. 25% of the profit, that is, N750,000 is payable as tax in Ghana. When the income is
declared to the Nigerian government, it is again subject to tax at 30%, that is, N900,000 is
payable to the Nigerian tax authority. The profit of N3,000,000 has suffered double taxation in
Ghana and Nigeria. After paying N1,650,000 as tax to the two countries, only a balance of
N1,350,000 is left for the company.
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It can also arise where a taxpayer has dual residence, that is, the taxpayer is deemed to be
resident in two countries under the domestic tax laws of both countries. So both countries will
impose tax on the taxpayer as their resident.

Sisi Limited is a company registered/incorporated in Nigeria but is effectively managed in the

United Kingdom. Under the Nigerian Companies Income Tax Act, the company is resident in
Nigeria because it is registered in Nigeria. Furthermore, under the UK’s tax legislation, the
company is considered to be resident in the UK because that is the seat of central management
and control of the company. The company has dual residence. Assuming that the company’s
profit in 2013 was N15,000,000 and the Nigerian and the UK tax rates were 30% and 28%
respectively, Nigeria would exercise her right to tax the global income of the company, thus,
30% of N10,000,000 = companies income tax of N4,500,000. Similarly, the UK would also
exercise her right to tax the worldwide income of the company, that is, 35% of N15,000,000 =
corporation tax of N3,200,000. The same profit of N15,000,000 has suffered double taxation in
Nigeria and the UK. After paying N4.5 million and N3.2 million as tax, only a balance of N7.3
million is left for the company.

The purposes of treaty negotiation are:

(i) Avoidance of Double Taxation

This refers to the avoidance of double taxation with respect to taxes on income and capital
gains. All countries are inclined to cooperate in the elimination of double taxation because of its
harmful effects on trade, commerce and movement of persons.

(ii) Certainty of Tax Treatment

Tax treaty allows for predictability which creates certainty. A prospective investor relies on the
provisions of the tax treaty for his investment decisions because of the assurance that the
treaty is more durable than the domestic law, which is subject to frequent changes.

(iii) Lowering of Tax rates for some Income

This is part of the benefits of tax treaties; The Nigerian tax treaty rate of 7.5% instead of the
domestic tax rate of 10%. The Nigerian tax treaties also grant zero tax for airlines and shipping
operating in international traffic (where reciprocity exists). For the non-treaty countries, 2%
minimum tax on income applies.

(iv) Availability of Tax Benefits

To obtain the treaty benefits, the following conditions must hold:

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 ▪ The taxpayer must be a resident

▪ The tax must covered by the treaty

▪ The taxpayer must be subject to tax on the income; and

▪ The benefit must not be specially excluded by the provisions of the treaty.

(v) Lowering of Compliance Cost

A tax treaty is advance information to an investor on what rules will apply to the taxation of a
particular income. Compliance is thereby enhanced, thus lowering the cost of compliance.

(vi) Prevention of Fiscal Evasion and Avoidance

Tax treaties also aim at prevention of tax evasion and avoidance, which describe tax planning
practices which have for long been part of schemes to minimize or escape tax liability especially
at the international trade level.

(vii) Cooperation in Tax Matter

Cooperation can be obtained through the following arrangements:

▪ Exchange of information in relation to cross-border financial transactions, tax havens

operations, conduct companies, intro-group transactions and tax avoidance. Transmittal
of information may be routine, on request and automatic.

▪ Non-discrimination which emphasizes that residence and not nationality is the basis of
taxation. This is to ensure that all taxpayers who are not nationals of the country of
residence are not less favourably treated than the nationals for the purpose of taxation.

▪ Mutual Agreement Procedure (MAP) through which disputes between two competent
authorities are resolved. Disputes may arise in the interpretation or application of the
agreement.

Methods of Elimination of Double Taxation

Double Taxation can be avoided under the tax treaties in three different ways.

(i) Through the concession of the exclusive right to tax in the country of residence e.g. with
the use of the words “shall be taxable only”.
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 (ii) Through the exercise of the exclusive right to tax a source of income by the source
country, and

(iii) Through an arrangement for limited right to tax where there is concurrent liability to
tax. This will require a mechanism that would eliminate double taxation where an
item of income “may be taxed” at source and “may be taxed” also at residence.

There are two principal methods by which of double taxation could be eliminated. These are:

(a) Exemption Method

(b) Credit Method

Exemption Method

Here, there are two approaches to the treatment of the exemption, which are full exemption
and exemption with progression. Under the full exemption, the State of residence does not tax
the income which may be taxed at source. In this way, double taxation is avoided by the non-
inclusion of the exempted income in the computation of tax payable at residence. Under the
method of exemption with progression, the State of residence may also exempt from tax the
income which may be taxable at source but will take the exempted income into consideration
in the final determination of the rate applicable to the rest of the Income.

Illustration III

ZAD Ltd is resident in Nigeria. In 2013 its taxable profit was N25,000,000. Included in that
amount was an equivalent of N10,000,000 profit derived from a permanent establishment in
the United Kingdom on which tax equivalent of N3,500,000 was paid.

Under the full exemption method, Nigeria will exempt N10,000,000 from tax since it was taxed
in the United Kingdom. Nigerian company income tax will be imposed on N15,000,000 at the
rate of 30% = N4,500,000.

Although an amount which may be taxed in the source country is exempted from tax in the
country of residence, the latter may still take that exempted income into account when
determining the rate of tax that the resident must pay on its remaining (i.e. non-exempt)
income. This is referred to as “exemption with progression”.

Credit Method

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There are also two types of the credit method:

(a) Full credit method, whereby the country of residence computes tax on the total income,
but allows the tax paid at source as credit against the tax payable.

(b) Ordinary credit method, whereby the country of residence computes tax on the total
income, but allows the tax paid at source as credit against the tax payable.

Illustration IV

Olodo Ltd is resident in Nigeria. In 2014 its taxable profit was N25,000,000. Included in that
amount was an equivalent of N10,000,000 profit derived from a permanent establishment in
the United Kingdom on which tax equivalent to N3,500,000 was paid. The UK’s tax rate is
assumed to be 35%.

Under the “full credit” method, Nigeria computes tax on the total profit and allows a credit for
the whole amount of income tax paid in the source country against its own tax.

Total profit 25,000,000

Companies income tax (25,000,000 x 30%) 7,500,000

Less relief for tax paid in source country (10,000,000 x 35%) 3,500,000

Tax due to Nigerian government 4,000,000

Under the “ordinary credit” method, Nigeria computes tax on the total profit but restrict credit
allowed to the tax computed which is attributable to the income from the source country.

Total profit 25,000,000

Companies income tax (25,000,000 x 30%) 7,500,000

Less maximum relief for tax paid in source country

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(20,000,000 x 30%) 3,000,000

Tax due to Nigerian government 4,500,000

Commonwealth Income Tax Relief

Commonwealth income tax relief is given in a situation that a company which has paid or is
liable to pay tax in Nigeria for any year of assessment on any part of its profits has also paid or
is liable to pay Commonwealth income tax for that year in respect of the same part of its
profits. The relief is used to reduce the tax paid or payable in Nigeria on that part of the
company’s profits which is liable to tax in Nigeria and in any country within the Commonwealth
or in the Republic of Ireland.

Any claim for Commonwealth income tax relief for any year of assessment must be made not
later than six years after the end of the year. For example, if a company wishes to claim the
relief in respect of profits earned in 2014 which were subjected to tax in 2015 year of
assessment, the claim must be made on or before 31st December, 2021. If the claim is
admitted, the amount of tax to be relieved will be paid out of the tax paid for that year of claim
or set off against the tax which the company is liable to pay for the year of claim.

Commonwealth income tax relief is granted at the rate determined as stated below;

Nigerian Company

(a) If the Commonwealth rate of tax does not exceed one-half of the Nigerian rate of tax,
the rate at which relief is to be given shall be the Commonwealth rate of tax.

i.e. if CWR < ½ NR; = CWR

(b) In any other case, the rate at which relief is to be given shall be half the Nigerian rate of
tax. i.e. if CWR > ½ NR; = ½ NR

Illustration

Ti Ltd and Ta Ltd are Nigerian companies. Their profits for 2009 year of assessment are as
follows:

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 Ti Ltd Ta Ltd

N N

Profits from operations in Nigeria 330,000 363,000

Profits from operations in a Commonwealth

country (gross) 142,500 156,750

Nigerian tax 141,750 155,925

Commonwealth tax 19,950 31,350

Required: Compute the Commonwealth income tax relief available to the two companies.

Solution

Ti Ltd.

Computation of Commonwealth Income Tax Relief

for 2009 Year of Assessment

Nigerian rate of tax = Nigerian tax = 141,750 x 100 = 30%

Total profits 472,500 1

Commonwealth rate of tax = Commonwealth tax = 19,950 x 100 = 14%

Commonwealth income 142,500 1

Since the Commonwealth rate of tax does not exceed one-half of the Nigerian rate, the relief
will be given at the Commonwealth rate of tax. Therefore, Commonwealth relief = 14% x
N142,500 = N19,950.

Ta Ltd.

Computation of Commonwealth Income Tax Relief

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For 2009 Yea of Assessment

Nigerian rate of tax = Nigerian tax = 155,925 x 100 = 30%

Total profits 519,750 1

Commonwealth rate of tax = Commonwealth tax = 31,350 x 100 = 20%

Commonwealth income 156,750 1

Since the Commonwealth rate of tax has exceeded one-half of the Nigerian rate, relief will be
given at one-half the Nigerian tax rate. Therefore, Commonwealth relief = 1/2 x 30/100 x
N156,750 = N23,512.50.

Non-Nigerian Company

(a) If the Commonwealth rate of tax does not exceed the Nigerian rate of tax, the rate at
which relief is to be given shall be one-half of the Commonwealth rates of tax.

I.e. if CWR < NR; = ½ CWR

(b) If the Commonwealth rate of tax exceeds the Nigerian rate of tax, the rate at which
relief is to be given shall be equal to the amount by which the Nigerian rate of tax exceeds
one- half of the Commonwealth rate of tax.

i.e. if CWR > NR; = NR – ½ CWR

Illustration

During the year ended 31st December, 2017, Soso Limited, a non-Nigerian company earned a
profit after tax of N1,260,000 from its operations in Nigeria. Assuming that the Nigerian rate
and the Commonwealth rate of tax are 30% and 20% respectively calculate the Commonwealth
income tax relief available to the company.

Solution

Profit before tax = N1,260,000 x 100/70 = N1,800,000

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Since the Commonwealth rate does not exceed the Nigerian rate, relief will be given at the rate
of one-half of the Commonwealth rate of tax. Therefore, Commonwealth relief = 1/2 x 20/100
x N1,800,000 = N180,000.

Illustration

Assuming that the facts are the same as in illustration above except that the Commonwealth
rate is 36%, calculate the Commonwealth income tax relief available to the company.

Solution

Since the Commonwealth rate exceeds the Nigerian rate, the rate at which relief will be given
is:

Nigerian rate 30%

Less one-half of the Commonwealth rate (1/2 x 36%) 18%

Rate of relief 12%

Amount of relief (12/100 x N1,800,000) N216,000

Tax Havens

This is defined as “a country that imposes little or no tax on the profits from the transactions
carried on from that country”. This type of arrangement has often led to accusations and
counter-accusations which country is operating an unfair tax regime. It is therefore not easy to
come into agreement on which country does or does not constitute a tax haven. This fact has
therefore led to the re-definition of what constitutes a tax haven. The new distinctions are:

▪ Whether adjustment to tax rates are aimed at financial capital flows or at real economic
investment.

▪ The level of substantial activities attached to the investment flow; and

▪ Willingness to exchange information with other tax jurisdictions.

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 There is therefore not single definition for a tax haven but rather, there are several
categories of preferential treatments that will be considered as a tax haven.

▪ Where no tax is paid at all;

▪ Where minimal tax is paid; and

▪ Where certain types of activities are granted privileges.

The common feature is that they serve as conduit for investments or transactions that
have their real economic activities elsewhere.

Typically, international transaction between two high-tax rate countries may be routed
through a tax haven company, trust, or other entity so that any resulting profits or
investment income is realized in the tax haven with consequent minimization of tax
payment.

Some of the main types of tax haven operations are:

a. Holding Companies: A taxpayer resident in a non-tax haven country wishing to invest

funds will, instead of doing so directly, transfer those funds to a specially formed tax
haven company. The investments will then be made by the tax haven company so that
the resulting income will be subject to nil or low rates of tax. Similarly, a tax haven
company may be interposed between a parent company in a non-tax haven country and
its overseas subsidiaries which are only subject to the rates of tax (if any) applying in the
tax haven.

b. Captive Insurance Companies: A captive insurance company is one that is formed

specifically by a group of companies to insure their own risks (e.g. cost plus a small
mark-up) and sells to independent purchasers at the full market price, ensuring that
most or all of the profit from the transaction accrues in the tax haven. Similarly, financial
or management services between companies in a multinational group may be routed
through an affiliated tax haven company, so that payments (which may be tax
deductible) accrue in the tax haven.

c. Banking: Virtually, all the major banks have branches in one or more tax havens, and
while genuine financial transactions may be carried on in tax havens, such as Hong Kong
or Singapore, other tax havens, e.g. Bahamas and the Cayman Islands, are regarded as

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 being no more than “booking centre” where the ledgers and formal records are kept but
the actual transactions are carried on elsewhere.

d. Transfer Pricing: Export sales of a company or multinational group may be channelled

through a specially formed tax haven sales or distribution company. The tax haven
company purchases items from affiliated companies at the lowest possible price.

e. Licensing: Patents, trademarks, copyrights etc. of a non-tax haven company or

multinational group may be held by a tax haven company, so that royalties, either from
third parties or even from affiliated companies are received in the tax haven and so
subject to a nil or low rate of tax.

Estimates of the amount of revenue lost through the use of tax havens are extremely difficult to
make by virtue of the secrecy surrounding the subject and the consequent dearth of
information. The premiums paid by the companies in the group will be deductible and if the
captive insurance company is located in a tax haven, any insurance profits or investment
income will be subject to nil or low tax. Bermuda is the principal tax haven for captive insurance
companies, although they are also located in the Cayman Islands and Bahamas.

Tax Sparing

This is a provision in tax treaties that seeks to protect the tax incentives which the government
grants to companies as part of the economic development strategy. The intention of
government is that the benefits would accrue to the targeted investor. Without a tax-sparing
provision in a bilateral agreement, such benefit would be captured by tax policy of the
investor’s country of residence. The income which the government has spared through its
incentive legislations may thereby flow, not to the investor directly, but to the government of
the country of the investor’s residence.

Various tax incentive are offered by the government in other to attract foreign investment into
Nigeria, for instance, certain income derived from Nigeria by foreign companies are granted tax
exemption. If, for example, Samila Ltd which is resident in USA derives a net annual income of
N600,000 from Nigeria and she is granted a tax exemption, a company will not pay Nigeria
income tax which should have been N180,000 (i.e. 30% x N600,000).

Let us assumed that a rate of tax in USA is 40% and USA grants credit of tax paid in the country
from which the income is derived. Since no tax was paid on the income in Nigeria, Samila Ltd
will paid N 240,000 (i.e. 40% x N600,000) tax on the income in USA. As you can see, the
company has not really enjoyed the incentive granted by the Nigeria government because the
income spared from tax in Nigeria has been subjected to tax in the country of resident (USA)
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without any relief being giving. To avoid such situation, some country have a tax sparing
provision in their double taxation agreement.

A tax sparing provision compels a tax jurisdiction to, in addition to credit for tax actually
suffered in the jurisdiction of source of the income; grant a normal credit to a taxpayers whose
foreign income has been spared from tax in the country of source due to tax incentives existing
in the country.

Continuing with the above example, a tax sparing provision in the double taxation agreement
between Nigeria and USA would require USA to grant the company credit for the tax which
ought to have been paid in Nigeria but which was not paid due to the tax incentive. USA will
grant the company a credit of N180,000 (30% x N600,000) so that the company will pay only
N60,000 (i.e. N240,000 - N180,000) in USA.

Nigeria has a tax sparing provision in some of its double taxation agreement. Two examples are
giving below:

(a) Paragraph 3 of article 33 of the DTA between Nigeria and Pakistan state:

For the purposes of allowance as credit against the tax payable in Nigeria or Pakistan, as the
context required, the tax payable in a contracting state shall be deemed to include the tax
which is otherwise payable in that state but has been reduced or exempted by the state in
pursuance of its tax incentive programme.

(b) Paragraph 3 of article 23 of the DTA between Nigeria and Romania state:

For the purpose of paragraph 2 of this article the tax paid in Nigeria shall be deemed to include
any amount which should have been paid or payable as Nigeria tax for any year but for an
exception or deduction of tax granted that year or any part thereof.

Treaty Shopping

Treaty shopping arises where a non-resident of either of the treaty countries establish an entity
in one of the treaty countries in order to obtain treaty benefit that would not be available
directly. This situation can arise where the country in which a person is resident does not have a
tax treaty with the country in which his income is derived (source country) the person may have
to set up an entity in another country which as a tax treaty with the source country in other to
benefit from the provision of the tax treaty.

Treaty shopping is an analysis of tax treaty provision by non-treaty party to structure an

international transaction or operation so as to gain or take advantage of a particular treaty
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benefit. This practice consists in a resident of a state that is not a party to the double taxation
treaty establishing an entity within a state that is party to the treaty in order to take advantage
of is provision.

Consider a situation that there is a double taxation treaty between country A and country B.
Instead of a company resident in country C (which does not have a tax treaty with country A)
investing directly in country A, it establishes a legal entity in country B through which it invests
in country A in order to take advantage of country A/country B tax treaty to minimize its tax
liability. It can be seen from the example that the tax treaty which is intended to benefit the
resident of a non-treaty countries in a way unintended by the treaty partners. On the other
hand, since there is no tax treaty between countries C and the treaty countries (countries A and
B), resident of countries A and B will not receive equal tax treatment with respect to income
derived from country C. Thus, the principle of reciprocity is breached.

The problem of treaty shopping can be tackled in different ways. For example, some countries
now include in their tax treaties specific provision popularly referred to as “limitation on
benefit” or “LOB” provisions that limit the benefit under the treaties in certain circumstances.
Companies which are not bona fide residents of the treaty countries or which are set up for
treaty shopping purpose may be denied the treaty benefits. Some countries rely on anti-treaty
shopping provisions in their domestic laws to tackle the problem.

Tax Treaty Models

The negotiation of bilateral tax treaties is facilitated by models provided by international

conventions, e.g.

▪ Organization for Economic Cooperation and Development (OECD) Model Tax

Convention on income and capital.

▪ United Nations (UN) Model Double Taxation Convention between developed and
developing countries.

(i) OECD Model

This is the model for the negotiation of tax treaties between the OECD members who are
mainly from the capital exporting, advanced economics of the world. The OECD Model focuses
mainly on residence and this makes it difficult for its wholesale acceptability to developing
countries.

(ii) UN Model

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This is the standard for the negotiation of tax treaties between the developed and developing
countries. The main differences between the OECD and UN models are in the areas of:

▪ Determination of PE (Article 5)

▪ Attribution of profits to PE (Article 7)

Article 5 Time threshold of 12 months Adopts a shorter period of six (6)

prescribed for PE months

Activities that constitute PE are Activities constitute PE include

limited to building site and assembly projects and supervisory
construction or installation projects activities.

Article 7 Upholds the principle of force of Upholds the principle of force of

attribution. attraction

Allowance of all expenses attributed Allows only expenses attributable to

to PE reimbursement of actual expenses.

(iii) Nigeria Model

The Nigeria Model takes care of variation of Nigerian peculiar needs from the other two models
earlier discussed.

(a) Concept of Force of Attribution

The principle establishment in Article 5 of both Models is that profit which a non-resident
company makes from its active income is taxable in the source country only if the company has
a PE in that country. Article 7 of the OECD Model goes on to say that the amount of the profit
that can be so taxed is limited to the quantum that is “attributable” to the PE, it the profit
which it might be expected to make, if it were a distinct and separate enterprise engaged in the
same of similar activities under the same or similar conditions and dealing wholly
independently with the enterprise of which it is a permanent establishment. Where there are
several PEs which a company may have in another State, the principal implies the separate
attribution of profits to each of the PE’s.

(b) Concept of Force of Attraction

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This principle is an anti-avoidance provision to counter the split of profits through the creation
of several PEs within a jurisdiction. Under the principles, the profit of these other PEs would be
aggregated for tax purpose in as much as the products or activities are the same as, or similar
to, those effected through the main PE. Once a non-resident company has a PE in the other
State, all the business activities that are “the same or similar” to those carried on through the
PE will be deemed to be carried on through the PE. In the other words, the income from these
other outlets would be attracted to the PE.

Assistance in Tax Collection

Tax collection rules in Nigeria are only in respect of income derived or deemed to be derived
from Nigeria. It does not cover the collection taxes imposed or collectible by another tax
jurisdiction. The statutory authority for the conclusion of tax treaties in Nigeria covers only
assessments and not collection. However, recent developments have shown that treaty
partners are now requesting for the extension of the Mutual Agreement Procedure (MAP) to
cover assistance in tax debt recovery. Some of the limitations here are:

▪ There is need for an authority in the domestic law to confer the right to collect foreign
tax.

▪ Lack of capacity of member countries to initiate action or respond to such requests for
assistance.

▪ Legal institution in the respective countries to recognize the process.

▪ Other considerations, e.g. reciprocity, cost of litigation, administration burden that are
likely to hinder such assistance.

Indiscriminate levy of assessment by SIRB If the banks are presently doing some level
of supporting why asking for more

Pioneer Status for Film Industry. The local The way forward is the goal, not getting
industry needs foreign support loans because of who we know?

Industry has failed to advise their numerous Commission to serve the interest of all
customers. parties; let us learn to trust ourselves.

EIS-Enterprise Investment Scheme Section Tax administration is gradually changing its

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48. poor image to new orientation

11.05 Transfer Pricing

Transfer Pricing is the process of arriving at a price charged for goods or services supplied or
transferred by one subunit of an organization to another subunit or one member of a group to
another.

It is also referred to as the price at which an enterprise transfer physical goods and intangible
property or provides services to associated enterprises. The term transfer price can also be
referred to as the price attached to transactions between divisions, branches or subsidiaries, of
a company.With particular reference to multinational companies or enterprises (MNEs),
transfer pricing is a mechanism used for measuring the value of goods and services transferred
among members within the group.

The practice among MNEs of adjusting prices of goods and services as they move around their
global operations is commonly referred to as transfer pricing and described in the Nigerian tax
laws(CITA,S.22) as “artificial or fictitious” transaction when not at arm’s length (mispricing). A
transfer pricing design may be a scheme to evade or avoid tax. It is very complex, particularly in
relation to multinational companies, although the term can also apply to purely domestic
transfers.

A transfer price may be determined based on the external market price (or open market price)
for a similar product (market-based transfer price) or it may be based on the cost incurred in
making the product (cost-based transfer price) or it may be determined through negotiation
between the subunits or members of a group buying and selling the product (negotiated
transfer price).

The issues of transfer pricing will therefore be of relevance for two reasons:

(i) Adequate adjustment for transfer pricing is a potential source or revenue; and

(ii) Measures to counter transfer pricing is a protection of the revenue base from possible
manipulation of the MNEs to shift profit from source country to elsewhere or to
gain tax advantage through tax avoidance or fraud.

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It also refers to the prices at which the following are transferred between connectable taxable
persons:

(a) Tangible goods (raw materials, spare parts, finished goods, etc.);

(b) Services (marketing, legal, accounting, insurance, management services,

training, etc.);

(c) Intangibles (trademarks, patents, copyright, etc.).

The definitions address direct and indirect control. The laws have not defined what constitutes
control, but Article 9 of the tax treaties is borrowed from OECD to determine control in terms
of:-

(i) Direct or indirect participation in capital

(ii) Direct or indirect participation in control, and

(iii) Direct or indirect participation in Management.

Significance of transfer pricing

Transfer Prices at which goods and services are transferred between entities are significant for
both taxpayers and tax authorities, because they impact on the income and expenses as well as
taxable profits of related companies in different tax jurisdictions in which the enterprises and
multinationals operate. Many companies are interested in maximizing their head office profits,
hence they may adopt transfer pricing mechanism which boost the head office profits at the
detriment of the associated or subsidiary companies which operate in other high tax
jurisdictions. In other words, transfer pricing affects the profits on which the affected
enterprises are subjected to tax. Since associated enterprises transact businesses among
themselves, considerations other than arm’s length conditions sometimes dictate the prices at
which goods and services are transferred within the group. This could result in the shifting of
profit from the tax jurisdictions in which they arise to jurisdictions which are more convenient
and beneficial to the head office or the group company.

Let us consider an example of a multinational company which has its subsidiary in Nigeria and
head office in Senegal. The Nigerian subsidiary charges low prices (below open market prices)
for goods supplied to the parent company in Senegal. On the other hand, the parent company
in Senegal overcharges the Nigerian subsidiary for services rendered to the subsidiary.
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Consequently, the Nigerian subsidiary records low profits and pays less tax to the Nigerian
Government, while the parent company declares more profits and pay more tax to the tax
authority in Senegal. As rightly pointed out by Arogundade (2005), what a country loses
through the shift of profit is a gain to another country to which the profit is shifted.

Relevance of Transfer Pricing

Transfer pricing has linkage with “Global Stability, Revenue Generation, Economic Growth,
Trans Border Activities and International Trade” in the following three ways:

(a) Promotes stable flow of labor, capital, goods and services across national
borders of the world.

(b) Secondly, there is the over-arching issue of the right of each country to
generate the right amount of tax revenue from the economic activities
performed within its boundaries.

(c) Thirdly, transfer pricing would promote economic growth at unilateral, bi-lateral
and multilateral levels.

Importance of Transfer Pricing in Taxation

Transfer Pricing (TP) has gained unprecedented popularity among tax jurisdictions for various
reasons; among which are:

▪ Globalization: Advancement in technology (transportation, information and

communication) has brought distant parts of the world closer than before. National
boundaries are fast disappearing as the flow of labor, capital, goods and services is no
longer restrained by geographical factors. In consequence, goods, services and
intangibles produced by entities of a group in one country can be transferred to
entities of the same base in other countries. The pricing of the resulting transfers
presents a fertile ground for transfer mispricing among tax authorities of receipts
and payments.

▪ Specialization: Business entities are increasingly embracing the principle of division of

labor, specialization and comparative advantage to set up facilities in parts of the world
that offer them maximum yield on one unit of factor of production. This has led to the
development of the concept of shared-services whereby certain services (accounting,
human resource management, etc.) are centralized and sited in different countries. The
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 costs of these centers must be re-billed to all the entities sharing the services; tax
authorities have concerns as to the fairness of the billings.

▪ Mergers and Acquisitions: Increasingly, companies are moving into other countries and
buying up other companies. Costs of central administration or other transfers from one
entity to another in the group must satisfy tax authorities in the respective countries.

In all of the foregoing, the concern of governments is the possibility of revenue being shifted
away from their jurisdictions in the face of increasing pressure to meet the aspirations of its
citizens by providing adequate social infrastructure and as such incidence of revenue losses
would be stoutly contested.

Legal framework for transfer pricing

The institution of a transfer pricing regime took a long time to be in Nigeria. Several statutory
provisions gave powers to Nigerian tax authorities to make adjustment on tax returns if
transactions between connected persons were not done following the arm’s length principle.
General Anti-Avoidance Rules (GAAR) have been in the books in Nigeria for many years.
Specifically, Section 17 of the Personal Income Tax Act, Section 22 of the Companies Income Tax
Act, and Section 15 of the Petroleum Profits Tax Act all provide for FIRS to adjust any
transaction between intercompanies or between related parties which is deemed to produce a
result artificially reducing taxable income in Nigeria. Other statutory provisions include Section
61 of the Federal Inland Revenue (Establishment) Act 2007; and the Income Tax (Transfer
Pricing) Regulation Act of 2012.

In exercise of the powers conferred by section 61 of the Federal Inland Revenue Service
(Establishment) Act, No 13 of 2007 (“the Act”) and all other powers enabling it in that behalf,
the Board of the Federal Inland Revenue Service established under section 3 of the Act (“the
Board”) with the approval of the Minister enacted the Income Tax (Transfer Pricing Regulation)
No.1 of 2012.

Purpose, Objective and Scope of Application of Transfer Pricing Regulations

(a) Purpose

The 2012 Regulations give effect to the provisions of:-

(i) section 17 of the Personal Income Tax Act, CAP P8, Laws of the
Federation of Nigeria, 2004;
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 (ii) section 22 of the Companies Income Tax Act, CAP C21, Laws of the
Federation of Nigeria, 2004 (as amended by the Companies Income Tax
(Amendment) Act 2007; and

(iii) Section 15 of the Petroleum Profits Tax Act, CAP 13, Laws of the
Federation of Nigeria, 2004 (as amended by the Petroleum Profits Tax
(Amendment) Act, 2007.

(b) Objectives

The objectives of the Regulations are to:-

(i) ensure that Nigeria is able to tax on an appropriate taxable basis

corresponding to the economic activities deployed by taxable
persons in Nigeria, including in their transactions and dealings
with associated enterprises;

(ii) provide the Nigerian authorities with the tools to fight tax evasion
through over or under-pricing of controlled transactions between
associated enterprises;

(iii) provide a level playing field between multination enterprises and

independent Enterprises doing business within Nigeria; and

(iv) Provide taxable persons with certainty of transfer pricing treatment in

Nigeria.

(v) Provide certainty of transfer pricing treatment in Nigeria.

(vi) reduce the risk of economic double taxation

(c) Scope

The Regulations shall apply to transactions between connected taxable persons carried on in a
manner not consistent with the arm’s length principle and include:-

sale and purchase of goods and services;

sales, purchase or lease of tangible assets;

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 transfer, purchase, licence or use of intangible assets;

provision of services;

lending or borrowing of money;

manufacturing arrangement: and

Any transaction which may affect profit and loss or any other
matter incidental to, connected with, or pertaining to the transactions
referred to in the regulation.

For purposes of applying these Regulations, Permanent Establishments (“PEs”) are treated as
separate entities, and any transaction between a Permanent Establishment (“PE”) and its head
office or other connected taxable persons shall be considered to be a controlled transaction.

Features of Nigerian Transfer Pricing Regulations

Transfer Pricing Regulation No. 1 of 2012 was signed into law in August 2012 and gazetted in
September 2012. Its commencement date was 2 August 2012, but taxpayers are expected to
commence filing of transfer pricing returns from 2013 year of assessment. Every taxpayer is
therefore expected to develop Transfer pricing policy in regards to transfer pricing and control
transaction, as well as treatment of transactions of Permanent Establishment (PE) and dispute
resolution.

Transfer pricing and multinational companies

Multinational companies are those which have offices, factories, branches, subsidiaries,
business activities and relationship in many different countries. In other words they are large
enterprises which have centres of operation in many countries in contrast to an “international”
firm which does business in many countries but is based in only one country, though the terms
are often used interchangeably. In Nigeria today, oil sector is dominated by multinational
companies such as ExxonMobil, Totalfina Elf, Chevron, Texaco, Agip, Shell Petroleum
Development Company, etc. Other organisations in Nigeria which include Cadbury, Guinness,
PZ, Nestle, Unilever, Procter and Gamble, GlaxoSmithKline, MTN, Airtel, Reckitt Benckiser, etc.
Many multinational companies have subsidiaries, sub subsidiaries, associated companies,
parent companies, joint ventures, etc. that carry out business activities in many countries of the
world. They are therefore subjected to the tax authorities of many different countries.

Most times, activities of multinationals result in the followings:

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 Different pricing of goods / services; Transfers could be done at Cost by multinational group.
One member of the group in one country may supply goods or services to another member in
another country. The prices charged create sales revenue for the company selling the goods or
services and purchase cost for the company buying the goods or services. These will eventually
affect the profits of each company which are accountable to different tax jurisdictions.

Example:

A multinational company has its subsidiary in Nigeria and head office in Malaysia. The Nigerian
subsidiary charge low prices (below open market prices) for goods supplied to the parent
company in Malaysia. On the other hand, the parent company overcharges the Nigerian
subsidiary for services rendered to the subsidiary. Consequently, the Nigerian subsidiary records
low profits and pays less tax to the Nigerian Government, while the parent company declares
more profits and pays more tax to the tax authority in Malaysia. As rightly pointed out by many
authors, what Nigeria loses through the shift of profit is a gain to Malaysia to which the profit is
shifted to.

Tax Fraud: Multinational transfer mispricing can provide an avenue for tax fraud. Companies
within the same group which are under different tax jurisdictions may decide to overprice or
underprice inter-group transactions depending on what they want to achieve. Consider a
foreign company which has a factory in Nigeria where many tax incentives are offered. Because
of these incentives, the foreign company ends up paying lower income tax in Nigeria. The
company is motivated to fix the transfer prices for goods transferred to the parent company in
Singapore as high as possible. Consequently, maximum profits are reported in Nigeria where
the income tax rate is lower and less income reported in Singapore where the income tax rate is
higher.

Custom Duties & Tariff Manipulation: Transfer prices will also affect customs duties paid on
imports and exports. For example, if the transfer prices on imports into a country are lowered,
the import duties and other tariffs on the imports will equally be reduced. It will be high if
transfer prices are high.

Dividend Manipulation: Multinational transfer prices may also be influenced by dividend

considerations. Consider a situation that Nigeria puts a restriction on the amount that a
company can pay out as dividend to parties outside the country. A parent company based in
Germany may decide to overprice goods and services transferred to its subsidiary in Nigeria. In

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 that way, more funds leave the subsidiary company in Nigeria to Germany without appearing to
violate the dividend restriction.

Imposition of Excessive charges: Parent company can also impose excessive charges (e.g.
royalties) on its foreign subsidiaries, associates, etc. in respect of the provision of intangibles
such as patents, licenses, trademarks, etc. and use these avenues to siphon funds to tax
heavens or jurisdictions with favourable tax requirement. Where the head office of the
multinational or a member of the group incurs expenses which are for the benefits of all or
many members of the group, the allocation of the joint costs to members of the group will
certainly affect their profits and taxes.

“In a global economy where multinational enterprises (MNEs) play a prominent role,
governments need to ensure that taxable profits of MNEs are not artificially shifted out of their
jurisdiction and that the tax base reported by MNEs in their country reflects the economic
activity undertaken therein. For taxpayers, it is essential to limit the risks of economic double
taxation that may result from a dispute between two countries on the determination of the
arm’s length remuneration for their cross-border transactions with associated enterprises”
(OECD, 2012).

From the few instances above, there is every justification for Nigerian Government paying close
attention to taxes paid by subsidiaries, branches, associates, etc. of foreign companies
operating in Nigeria.

Form of Transfers

The forms of transfers in MNEs may be classified into four categories:

(a) Transfer of Tangible Goods

This covers inter-company sales and purchase of goods, such as raw materials, intermediate
products, spare parts and finished products. The cost of manufacturing a particular brand of
goods may be borne by the parent, a member or a Cost-center and sold within the group. The
assigned price for the transfer of the goods between members may be higher than the price of
the same or similar goods sold by the MNE to an un-related company.

(b) Transfer of Services

The services centrally provided may include marketing, advertisement, corporate finance, legal,
consultancy, credit and accounting services, overhead services, banking, trading, management
and technical services. The centralization is either in the parent company (head office) itself or

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 in another company formed for that purpose. The costs may be pooled into a base for
allocation to member companies.

(c) Transfer of Research and Development

The MNEs may conduct Research and Development (R&D) centrally. These are costs
contribution arrangements whereby the members have a share in the cost of the R&D, even
though the cost may not have any direct benefit to the member. The problem here is the
matching of costs payable by the Nigerian subsidiary with the nature and quantum of benefits
received. To the area of concern is in the cost-contribution arrangement, where the Nigerian
subsidiary may be able to pay for R&D without any related benefit.

(d) Transfer of Intangibles

Most payment of royalties, copyrights, trademarks, patents, protection costs, corporate logo
costs, intangibles involved in manufacturing, advertisement, marketing, software, the right to
use industrial, commercial or scientific equipment etc. by MNEs, involve payment between
parent firms and their foreign affiliates. The concern of Nigerian authorities is not only with
transfer pricing, but also with the type of technology transferred.

Allocation of Expenses

The taxation of the profits of a Permanent Establishment (PE) is on net basis. To this end, Article
7 of the OECD model provides for the allowance of expenses. Paragraph 3 of Article 7 in all
Nigerian tax treaties follows the UN model. That serves as clarification of paragraph 2 of the
Article, to the effect that the expenses to be allowed must satisfy the following conditions:

(i) That the expenses must be shown to have been incurred for the purpose of the business
of the PE, that is, the burden lies on the head office to prove that the expenses are
“wholly, exclusively, necessarily and reasonably incurred” in earning the profits of
the PE;

(ii) Those expenses actually incurred and related to the activities of the PE are deductible.

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 (iii) That the ordinary expenses which include “executive and general administrative
expenses”, wherever incurred, for the purpose of the PE are to be allowed as
cost.

(iv) That deductions not allowed for the determination of the profits of the PE include inter-
company royalties, rents and interest on loans, other than bank loans.

(v) That transfer between the head office and PE must be at arm’s length; and

(vi) That commission and fees for specific services rendered are allowable at costs.

Transfer pricing methods and evaluation of taxpayer’s controlled transactions

It may however be difficult to determine and fix appropriate transfer prices which will reflect
arm’s length transactions due to unavailability of similar product or services for comparism.

The Nigerian tax legislations have not dealt specifically with the subject of transfer pricing, but
there is a general anti-avoidance provision in the tax Acts which empowered the tax authorities
to set aside the prices charged in related parties’ transactions if such transactions are not made
at arm’s length.

(a) In determining whether the result of a transaction or series of

transactions are consistent with the arm’s length principle, one of the
following transfer pricing methods shall be applied as recommended in the
guidelines issued by OECD:

(i) the Comparable Uncontrolled Price (CUPM) method;

(ii) the Resale Price method;

(iii) the Cost Plus method;

(iv) the Transactional Net Margin method; or

(v) the Transactional Profit Split method; and

(vi) Any other method which may be prescribed by Regulations made by the Service from
time to time.

The first three methods and the last two methods are referred to as traditional transaction
methods and transactional profit methods respectively.
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(b) In each case mentioned above, the most appropriate transfer pricing
method shall be used taking into consideration:-

(i) the respective strengths and weaknesses of the transfer pricing

method in the circumstances of the case;

(ii) the appropriateness of a transfer pricing method having regard to

the nature of the controlled transaction determined, in particular,
through an analysis of the functions performed, assets employed and
risks assumed by each person that is a party to the controlled
transaction;

(iii) the availability of reliable information needed to apply the

transfer pricing method; and

(iv) the degree of comparability between controlled and

uncontrolled transactions, including the reliability of adjustments, if any,
that may be required to eliminate any differences between comparable
transactions.

(c) When examining whether or not the taxable profit resulting from a
taxpayer’s controlled transaction or transactions is consistent with the arm’s
length principle, the Service shall base its review on the transfer pricing
method used by the taxable person if such method is appropriate to the
transaction.

(d) A connected taxable person may apply a transfer pricing method other
than those listed in the Regulations, if the person can establish that:-

(i) none of the listed methods can be reasonably applied to

determine whether a controlled transaction is consistent with
the arm’s length principle; and

(ii) The method used gives rise to a result that is consistent with that
between independent persons engaging in comparable
uncontrolled transactions in comparable circumstances.

(e) Where a taxpayer carries out, under the same or similar circumstances,
two or more controlled transactions that are economically closely linked to one
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 another or that form a continuum such that they cannot reliably be
analysed separately, those transactions may be combined to:

(i) perform the comparability analysis set out in the regulation; and

(ii) Apply the transfer pricing methods set out in the regulation.

Comparable Uncontrolled Price Method (CUPM)

The comparable uncontrolled price method compares the price charged for transactions
between associated enterprises (related parties) with prices charged for similar transactions
between independent enterprises (unrelated parties) in comparable circumstances. If there is
any difference between the two prices, this might be an indication that the transactions
between the associated enterprises are not made at arm’s length.

In the Regulations, unless the context otherwise requires-

(1) “Comparable Uncontrolled Price (CUP) Method” means a method in which the price
charged for property or services transferred in a controlled transaction is
compared with the price charged for property or services transferred in a
comparable uncontrolled transaction.

(2) “Comparable Uncontrolled Transaction” for the purposes of the Regulations, means an
uncontrolled transaction that-

(i) does not differ significantly from a controlled transaction in a way that could
materially affect the financial indicators applicable under the method; or

(ii) Differ, but reasonably accurate adjustments can be made to eliminate the
effects of such differences.

The easiest method of determining an arm’s-length price in any transaction is to compare the
prices paid on a particular transaction with prices which are generally paid on the open market
for similar types of transactions between unconnected persons. The principal difficulty with the
operation of this method is that the likelihood of finding another transaction where all of the
surrounding circumstances, apart from the connection between the parties, coincide with the
circumstances surrounding the relevant transaction is remote. The Organization for Economic
Co-operation and Development (OECD) recognized the difficulties surrounding this method and

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identified a number of factors which may affect comparability of transactions, such as the
nature of the goods, packaging and brand name.

A review of these factors show clearly how difficult in practice is the comparable transactions
method to operate effectively, particularly as the Relevant Tax Authority is likely to be
prevented by confidentiality rules from disclosing information concerning the pricing
arrangements of other companies who are competing with the company whose pricing
arrangements are under investigation. Accordingly, although in theory examination of
comparable transactions is the easiest and fairest method of evaluating any transaction under
investigation, in practice it will usually be very difficult to operate effectively.

Example;

A Ltd and B Ltd are members of the same group. If A Ltd sells a particular product to
independent parties as well as to B Ltd under similar circumstances, the prices charged for A
Ltd’s sales to independent parties can be compared with prices charged for A Ltd’s sales to B Ltd
(internal comparable). Similarly, if an independent party (OBI Ltd) sells to another independent
party (BUY Ltd) the same product sold by A Ltd, the prices charged by OBI Ltd can also be used
as the basis for comparison (external comparable). For tax purposes, the tax authority may
reject the prices for transactions between A Ltd and B Ltd (associated enterprises) and adopt the
prices for transactions between independent enterprises.

However, in applying the CUP method, it should be noted that prices for the same product may
differ not necessarily because of being sold to associated or independent enterprises, but
because the product is not sold under similar terms and circumstances in comparable quantities
and markets. Therefore, it may be necessary to make reasonable comparability adjustments for
such differences.

Although the method appears to be attractive, it requires great attention in order to ensure that
true comparability exists; comparability should exist in the market conditions (i.e. the levels of
demand), the market level (i.e. wholesale or retail), the goods being compared, the volumes of
goods ordered (a large order attracts a discount).

Resale Price Method (RPM)

“Resale Price Method” means a method in which the resale margin that a purchaser of
property in a controlled transaction earns from reselling the property in an uncontrolled
transaction is compared with the resale margin that is earned in a comparable uncontrolled
purchase and resale transaction.

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The critical issue in arriving at an arm’s-length price using this method is the appropriate level
of profit margin for the purchasing company. Factors which frequently are taken into account
include:

(1) The exclusiveness of the purchaser’s marketing rights;

(2) The level of risk assumed by the company which will sell the goods into the open market;
and

(3) The amount of work, if any, performed by the purchasing company on or in respect of the
goods in question.

Determining the level of profit invariably involves comparison with similar transactions
undertaken by other companies. This brings the Federal Inland Revenue Service back to the
practical difficulty of obtaining the necessary information to make this comparison.

Example:

A Ltd and B Ltd are related companies. A Ltd transfers goods to B Ltd which B Ltd sells to
independent parties. Under the resale price method, the arm’s length price of the product
acquired by B Ltd in a non-arm’s length transaction is determined by reducing the price realized
on the resale of the product by B Ltd to independent parties by an appropriate gross margin
(resale price margin). B Ltd’s gross margin may be determined by reference to the gross margin
that B Ltd usually earns in comparable transactions with independent parties ( internal
comparable), or by reference to the gross margin earned by independent enterprises in
comparable transactions (external comparable) within the industry.

Cost-Plus Method (CPM)

Under this approach, the costs incurred by the supplier in making the product transferred or
services provided to an associated enterprise are ascertained and marked-up. An appropriate
mark-up may be determined by reference to other enterprise in similar independent supplier
earns in comparable transactions (internal comparable), or by reference to the mark-up earned
in comparable transactions by entirely independent enterprises (external comparable).

“Cost Plus Method” means a method in which the mark up on the costs directly or indirectly
incurred in the supply of goods, property or services in a controlled transaction is compared
with the mark up on those costs directly or indirectly incurred in the supply of goods, property
or services in a comparable uncontrolled transaction.
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The OECD has acknowledged the difficulties of operating this method in isolation and, in
particular, has identified a number of disadvantages of the method. For example, this method:
(1) overemphasizes historical cost, (2) ignores user demand, (3) fails to reflect competitive
conditions adequately, (4) assumes a guaranteed profit in all circumstances, and (5) ignores
abnormal factors such as increased costs due to poor management. Notwithstanding these
stated difficulties, the method is used particularly in circumstances where the resale prices
method is inappropriate-for example, on a sale of semi-finished products between connected
parties, perhaps involving further processing by the purchaser-or as a method of checking
figures obtained under one of the other methods.

However, regardless of the method adopted, the Federal Inland Revenue Service has stated
that it will be guided by the principles set out by the OECD in arriving at an arm’s-length price.
On this basis the following principles are applied in practice:

(1) The Revenue authorities should not form their own commercial judgment on any
transactions and should rely on real and not hypothetical cases in reaching their
evaluation.

(2) Reasonable and consistently applied pricing arrangements should not, as a general rule,
be challenged, even where on occasions such arrangements give rise, for whatever
reason, to an unusually high or low price.

(3) Subsidies, grants and price controls, other than those imposed between connected
parties, should be taken into account.

(4) All benefits, and not just pure profit or loss accruing to either party must be given
appropriate consideration. For example, under certain circumstances it
should be possible to justify uneconomic pricing policies where such policies are part of
a long-term coordinated strategy within the multinational group involved.

In this way it is hoped that commercial realities can be observed whilst, at the same time, the
aims of the transfer pricing rules, namely, to “ensure that Nigeria is able to tax on an
appropriate taxable basis corresponding to the economic activities deployed by taxable persons
in Nigeria, including in their transactions and dealings with associated enterprises” can be
achieved.

Example:

D Ltd and G Ltd are related companies; D Ltd transferred 10,000 units of its product to G Ltd at
N500 per unit. The direct costs incurred by D Ltd to produce the product amounted to N400 per
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unit. The arm’s length mark-up earned by companies producing / selling similar product to
independent parties is 45%. Therefore, the tax authority will recognize D Ltd.’s sales to G Ltd as
N5,600,000 (i.e. 10,000 units x N400 x 145%) instead of N5,000,000 (i.e. 10,000 units x N500). If
the method uses direct costs as in the example, then, the mark-up should cover indirect costs,
overheads and profit.

Further example; A Ltd and B Ltd are related companies. A Ltd transferred 5,000 units of a
product to B Ltd at N400 per unit. The direct costs incurred by A Ltd to produce the product
amounted to N350 per unit. The arm’s length mark-up earned by companies producing/selling
similar product to independent parties is 40%. Therefore, the tax authority will recognize A Ltd’s
sales to B Ltd as N2,450,000 (i.e. 5,000 units x N350 x 140%) instead of N2,000,000 (i.e. 5,000
units x N400). If the method uses direct costs as in the example, then, the mark-up should cover
indirect costs, overheads and profit.

Transactional Net Margin Method (TNMM)

“Transactional Net Margin Method” means a method in which the net profit margin relative to
the appropriate base, including cost, sales or assets that a person achieves in a controlled
transaction is compared with the net profit margin relative to the same basis achieved in a
comparable uncontrolled transaction.

An appropriate net margin may be determined by reference to the net margin that the
enterprise earns in comparable transactions with independent enterprises (internal
comparable), or by reference to the net margin earned in comparable transactions by
independent enterprises (external comparable). The transactional net margin method operates
in a manner similar to the cost plus and resale price methods. However, the transactional net
margin examines the net profits in relation to an appropriate base (e.g. costs, sales, assets) and
not gross margin on resale or mark-up on costs.

Transactional Profit Split Method (TPSM)

The first step is to determine the combined profit that arises from a business transaction in
which the associated enterprises are engaged. This profit is then split between the associated
enterprises in a manner that reflects the division of profit that would have been expected
between independent enterprises. The combined profit or loss attributed to the transactions in
which the associated enterprises participated is allocated to the associated enterprises in
proportion to their respective contributions to that combined operating profit or loss.

Transaction pricing manipulation

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Transfer pricing has come to stay in Nigeria and would continue to be a tax issue particularly in
view of the motivation for transfer pricing manipulation. It is the over or under invoicing of
transfer price in order to avoid or evade tax regulations and policies. This is done by deliberate
setting of transfer prices either too high or too low in order to avoid or evade tax.

The motivations for transfer price manipulation are:

1. Through under invoicing, the Multinational Enterprises can avoid paying customs duties.

2. By shifting tax-deductible costs to the high-tax country and taxable revenue to the low-tax
country, the Multinational Enterprises can minimize the total tax paid to the two
countries.

3. If the foreign subsidiary cannot directly remit profits to its parent firm because of host
Country’s foreign exchange restrictions, profits can be shifted out of the host country by
over invoicing, intra firm exports to, and under invoicing, exports from, the foreign
affiliate.

It is with this likelihood of manipulation that has led to the provision of penalties to deal
with these transgressors.

Offences, penalties and dispute resolution

A taxable person who contravenes any of the provisions of the Regulations shall be liable to a
penalty as prescribed in the relevant provision of the applicable tax law. The Federal Inland
Revenue Service shall set up a Decision Review Panel (“the Panel”) for the purpose of resolving
any dispute or controversy arising from the application of the provisions of the Regulations. A
taxable person may, within thirty days of the receipt of the assessment on the adjustment refer
the assessment to the Panel.

The panel shall in rendering a decision on a matter presented before it take into consideration-

(i) the adjustment or assessment issued;

(ii) the basis on which the adjustment or assessment was issued;

(iii) the taxable person’s objection; and

(iv) The evidence presented to it by the parties.

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The Panel shall issue a formal adjustment or assessment-

(a) based on the decision rendered by it on matter presented by the parties; or

(b) Where taxable person fails to communicate its decision to refer the assessment or
adjustment to the Panel within thirty days of the receipt by the taxable person of the
assessment or adjustment.

The decision of the Panel on any adjustment or assessment before it shall be final and
conclusive without limiting the right of a taxpayer to refer the matter, where dissatisfied with
the decision of the Panel to a court of competent jurisdiction.

Transfer Pricing Planning

The first planning option is provided by the safe harbor provisions in paragraph 15 of the
Regulations in which a connected person may be exempted from the requirements for
documentation and disclosure where-

(a) the controlled transactions are priced in accordance with the requirement of Nigerian
statutory provisions, or

(b) The prices of the connected transactions have been approved by other Government
regulatory agencies or authorities established under Nigerian law and
satisfactory to the Service to be at arm’s length.

The second option is policy consistency and every multinational group should examine on a
regular basis its intra-group pricing policies to ensure that they are clearly established and able
to stand up to detailed investigation. The polices should, wherever possible, be documented
and should be applied consistently with no exceptions to the stated policies being clearly
justifiable. Where possible, any major transactions between connected entities which may be
vulnerable should be documented individually, and any unusual items or considerations
involved in the transaction highlighted with the thought process behind them made clear.

The third option is the application of UN and OECD Transfer Pricing guidelines. The OECD has
produced a number of reports on transfer pricing which examine the area in some detail and
which throughout give practical information which may provide guidance when seeking to
establish and maintain a transfer pricing policy. The reports provide at least, an invaluable
bench mark against which multinational groups can start to evaluate their own pricing policies.

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It must however be noted that where any inconsistency exists between the provisions of any
applicable law, rules, regulations, the UN Practical Manual on Transfer Pricing, the OECD
documents referred to regulation 11 of the regulations, the provisions of the relevant tax laws
shall prevail. The provision of this regulation shall prevail in the event of inconsistency with the
other regulatory authorities’ approvals.

Power to make Regulations

The power to make regulations and under which the Income Tax (Transfer Pricing) Regulations
of 2012 was enacted is contained in Section 61 of the FIRS (Establishment) Act of 2007 and
provides that the Board may, with approval of the Minister, make rules and regulations as in its
opinion are necessary or expedient for giving full effect to the provisions of this Act and for the
due administration of its provisions and may in particular, make regulations prescribing the-

(a) forms for returns and other information required under this Act or any other enactment
or law; and

(b) Procedure for obtaining any information required under this Act or any other enactment
or law.

The question is, in making these regulations was the Minister of Finance acting within the
powers conferred by section 61 or was the Minister simply making new laws and acting beyond
the powers conferred by the Act?

Nigeria is not alone in making of Transfer Pricing rules by way of Executive or Ministerial
Regulations as countries like Kenya which enacted the Income Tax (Transfer Pricing) Rules of
2006 and Uganda which enacted their own Transfer pricing regulations in 2011 were all made
by Executive Regulations. However, in some Countries the transfer pricing rules are enacted as
part of the Income Tax Code such as South Africa by way of Section 31 of the Income Tax Act 58
of 1962 and Namibia through Section 95 of the Income Tax Act of 2005.

ISSUES IN TRANSFER PRICING

Arm’s Length Principle

The “arm’s length principle” requires that the conditions of a controlled transaction should not
differ from the conditions that would have applied between independent persons in
comparable transactions carried out under comparable circumstances. In effect, the arm’s
length principle would be said to be at play where the relationship (or lack of it), existing
between parties to an economic transaction, have not impacted on the prices chargeable or

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payable by the respective party. Where parties to a transaction are related or otherwise
connected, the transactions must be priced as with those between independent enterprises
conducted in similar circumstances.

An arm’s length price for a transaction is what the price of that transaction would accord with
arm’s length principle. The arm’s length principle provides the basis for taxing income derivable
from transactions between associated enterprises in most countries. This principle is further
captured in Article 9 of the OECD and UN Model Tax Conventions as well as OECD Transfer
Pricing Guidelines for Multinational Enterprises and Tax Administrations.

Every taxpayer is expected to comply with arm’s length principle in dealing with transactions
between related entities. The Enterprise and Multinationals are expected to be guided with the
following principles.

(a) Where a connected taxable person has entered into a transaction or a

series of transactions to which the Regulations apply, the person shall ensure
that the taxable profits resulting from the transaction or transactions is in a
manner that is consistent with the arm’s length principle (TP Regulation,
2012).

(b) Where a connected taxable person fails to comply with the provisions of
the Regulation, the Service shall make adjustments where necessary if it
considers that the conditions imposed by connected taxable persons in
controlled transactions are not in accordance or consistent with the “arm’s
length principle”.

Transfer Mispricing

Transfer mispricing occurs where transfers are priced arbitrarily without regard to the
contributions (assets employed and risk borne) of the respective parties to the transaction.
Entities are tempted not to make use of prices determined based on the arm’s length principles
for the following reasons:

(a) To take advantage of difference in corporate tax rate; especially where tax incentives apply
in certain jurisdiction;

(b) To minimize the effect of high customs duty and other indirect taxes;

(c) To circumvent ownership and profit repatriation restrictions;

Documentation
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It is the responsibility of taxpayers to keep records that are considered adequate for the
purposes of proving that transfer prices conform to the arm’s length principles. Such records
must be kept for a minimum period of 6 years. Documents and analysis must be provided to
FIRS within 21 days of request subject to the discretion of the Service on extension. The burden
of proof of compliance with arm’s length principle is on the taxpayer but discharged upon the
provision of relevant documents. The documents will include:

(a) Transfer Pricing Policy

(b) Transfer Pricing Compliance Report

(c) Transfer Pricing Returns i.e. TP declaration and disclosure forms.

Transfer Pricing Policy

A transfer pricing policy is a document that guides the conduct of related party’s transaction
within a group of companies. There are two types of transfer pricing policy:

(a) Group Transfer Pricing Policy, and

(b) Local Transfer Pricing Policy.

Features of a Transfer Pricing Policy are:

Typically prospective in nature

Typically not updated unless there are significant changes in business

Provides a future view of likely intercompany transactions

Provides guidance on pricing of the transactions and methodology.

Transfer Pricing Disclosure and Submission to FIRS

The Federal Inland Revenue Service expect all taxpayers to develop appropriate transfer pricing
policy and provide relevant information to be stated in a specified manner in the Transfer
Pricing Disclosure and Declaration forms as follows:

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 (a) Particulars of Reporting Company or Entity

(b) Particulars of immediate Parent Companies

(c) Particulars of Directors of Reporting Companies

(d) Particulars of major Shareholders of Reporting Companies and

Related Parties

(e) Ownership, Structure of Reporting Entity and Related Parties

(f) Particulars of Subsidiary and other Connected Persons

(g) Particulars of External Auditors of Reporting Entity

(h) Particulars of Tax Consultant of the Reporting Entity

(i) Particulars of Company Secretary of the Reporting Entity

(j) Particulars of the person making the declaration.

Transfer Pricing Returns i.e. TP declaration and disclosure forms.

Filing Tax Returns

Challenges of Setting Appropriate Transfer Price

Most transfer pricing issues involve significant transactions between related parties where one
or more parties are in low tax jurisdictions (such as Africa) e.g. representative office, sole
dealership etc.

The major problems associated with the process are:

▪ In the event of transfer of intangibles to related enterprises –difficulty in

valuation;

▪ For specific service charges (e.g. interest, insurance premiums, royalties etc.)
to related parties – how to quantify value addition

▪ With respect to shared services – relationship of the service with

resulting income and whether the service provider should charge market prices.

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 If market prices are fixed, can an entity (group) make profit from itself?
How will resultant income tax paid on notional profits be treated?

▪ Business restructurings – determining the appropriate prices for second-hand

assets transferred to associated companies.

▪ Loss making and loss merging – should business not have the liberty of merging
losses within the group?

▪ Effective tax rate – multinational enterprises do set for themselves acceptable

effective tax rate. One way of keeping within this effective rate is to shift
profits from high tax-rate jurisdictions to low tax-rate ones.

▪ Poor/non-existent documentation – globally, transfer pricing documentation is

still a major challenge. Many transfer pricing audits are done years after the
transactions have been closed.

▪ Excessive debt - certain industries rely greatly on debt funding (technology, oil &
gas etc.).

Consequences of Manipulating Transfer Pricing in Nigeria

(a) Distortions in Balance of Payments – overpricing of imports

(b) Inequity of the poor subsidizing the rich

(c) Unintended funding

(d) Market distortions due to unfair competition

(e) Blockade of fresh capital inflow (recycling of internal funds)

Key definition and other issues to be considered in transfer pricing

Controlled Transaction: Transaction which constitutes commercial or financial transaction

between connected taxable persons.

Connected Taxable Persons: Connected Taxable Persons include persons, individuals, entities,
companies, partnerships, joint ventures, trust or associations (collectively referred to as
“Connected Taxable Persons”). Also includes the persons referred to in sections 13,18 and 22
of CITA, section 15 of PPTA, section 17 of PITA, article 9 of OECD Model Tax Convention and
“associated enterprise” in OECD guidelines.

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The following persons will be regarded as Connected Taxable Persons (i.e. related parties)
within the context of the TP Regulation 2012;

(a) Any entity dealing with a related party (associate, subsidiary, joint
venture)

(b) A members of a local group of companies

(c) Members of a conglomerate

(d) Multinationals

(e) An entity in a group located in the free zone

(f) A group entity that has a pioneer status

(g) Intra company profits which is taxable under different regimes

e.g. tax exempt export profits

(h) Loss making entity within a profitable group

(i) Related parties subject to tax at different rates

(j) Permanent establishment.

▪ Inter-company transfers: Transfer of goods, services, intangibles, intellectual property rights

or loans between related entities

▪ Intra-company transfers: Transfer of goods, services, intangibles, intellectual property rights

or loans between responsibility centers within an entity.

▪ Safe Harbor: This refers to exemption from documentation requirements under the
Nigerian TP regulations.

▪ Independent enterprises or persons: Enterprises or persons that are not connected, related
or otherwise associated with one another.

▪ Comparable Uncontrolled Transaction: This refers to a transaction that;

(i) Does not differ significantly from a controlled transaction in a way that could materially
affect the financial indicator applicable under the method; or

(ii) is different from a controlled transaction, but for which reasonable accurate
adjustments can be made to eliminate the effects of such differences.
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Arm’s length comparability factors in transfer pricing

The FIRS, in determining whether a transaction has been conducted at arm’s length will
consider the following on a comparative basis:

(a) The similarity or identical nature of the transaction to that entered into
by an unconnected taxable person;

(b) The facts and circumstances of the transactions per economic relevance;

(c) The characteristics of the goods, property or services transferred or

supplied;

(d) The functions undertaken by the person entering into the transaction per
resources expended and the risks assured;

(e) The contractual terms of the transactions;

(f) The economic circumstances in which the transactions take place; and

(g) The business strategies pursued by the connected taxable persons to the
controlled transaction.

Administration of transfer pricing regulation

The following areas are to be noted and complied with by the taxpayers and tax practitioners in
Nigeria.

Annual Transfer Pricing Returns: A connected taxable person must submit TP documents
annually to FIRS and Transfer Pricing disclosure and declaration forms are to be attached to the
annual tax returns.

(a) Administrative Procedures: Transfer Pricing department of FIRS shall

review all Transfer Pricing documents submitted and carry out a review of
transactions verifying the appropriateness of Transfer Pricing methods
adopted.

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 (b) Burden of Proof: Transfer Pricing document must demonstrate sufficient
information and analysis to verify consistency of the taxable profits derived
from its controlled transactions with the arm’s length principle.

(c) Offences and Penalties: A taxable person who contravenes any of the
provisions of Transfer Pricing Regulation shall be liable to a penalty as
prescribed in the relevant provision of the applicable tax law – CITA, PITA,
PPTA.

Advance Pricing Agreements (APA)

FIRS can enter into APA with taxpayers (for future transactions) on request subject to single
minimum transaction value of N250m (approximately US$1.6million) must be met. Generally,
APAs between the FIRS and CTPs (Connected Taxable Persons) will have a term of three years
unless cancelled under certain circumstances by either the FIRS or the CTPs, or both.

Comparability factors to be used include:

▪ Physical characteristics of the item transferred.

▪ Functions performed based on assets used and risks assumed.

▪ Contractual terms of the transaction.

▪ Economic circumstances under which the transaction was undertaken.

▪ Business strategy pursued by the connected taxable persons.

Penalties

The Regulations do not provide for a unique penalty for transfer pricing relying instead on the
existing Acts noted above. FIRS will establish a Decision Review Panel (DRP) for the purpose of
resolving any dispute or controversy arising from the application of the Regulations. A taxpayer
who disagrees with the ruling of the DRP on any transfer pricing matter has recourse to the
court of competent jurisdiction in the first instance — which includes the tax tribunals.
Taxpayers should note that the provisions related to fraudulent filings are particularly strict in

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Nigeria and that to the extent a taxpayer makes a false declaration on a tax return — including
indicating on the transfer pricing disclosure form that documentation is in place when it is not
—FIRS may impose fines, penalties, and in some cases jail term for company officials.

Responsibilities of Tax payers

With the transfer pricing (TP) regime having been kick-started with the publication of the TP
regulations, multinational enterprises should work on the following issues:

▪ Establish Group TP policy.

▪ Align group TP policies with the Regulations.

▪ Set up internal structures to handle TP policies, documentation and reporting

▪ Design internal control and reporting system for controlled transactions.

▪ Secure services of TP professionals to handle negotiation, documentation, analysis and

filing of activities.

▪ Ensure that the contracts for all intra-group transfers are properly documented

▪ Secure TP compliance personnel.

11.06 Thin Capitalization

According to CITN (2008, p.31), “where a company is heavily financed by debt as against equity,
the company is said to be thin capitalized. This is because the proportion of the company’s
capital is more of debt than equity”. Let us discuss this topic with special emphasis on
multinational enterprises. A company may be financed mostly through equity or debt. For
example, a multinational company which has its head office outside Nigeria may decide to
provide additional funds to its Nigerian subsidiary by way of a loan rather than acquiring
additional shares in the subsidiary. This may lead to the parent company’s debt representing a
higher proportion of the subsidiary’s total capital than would be normal if the debt finance
were provided by an independent party.

Tax Implications of Thin Capitalization

A lender earns interest on the loans granted to a company while a shareholder earns dividend
as a return on its investment. A company has a legal obligation to pay the interest on loan no

395
matter the level of profit or loss. On the other hand, dividends are paid to the shareholders at
the discretion of the management (board of directors). Furthermore, interest on loan is an
allowable deduction in ascertaining assessable profit for tax purposes, whereas dividends are
not. It is, therefore, to the advantage of the parent company to finance a Nigerian subsidiary
with more loan than equity. The parent company can repatriate more of the subsidiary’s profits
by way of interest, thus leaving lower profits to be taxed in Nigeria. Thus the tax charged is
shifted from the jurisdiction where the investment is made to that of the investor. Arogundade
(2005,p.88) remarked that:

Where there are no rules to deal with thin capitalization, as in Nigeria, the choice

of debt finance by the head office of a MNE will lead to the stripping of Nigerian profits and
consequently lead to loss of revenue to government.

Example: A UK company establishes a subsidiary in Nigeria. The subsidiary requires a capital of

N100,000,000 and the market interest rate is 15% a year. The tax rate in Nigeria is 30%. The
subsidiary generates an annual profit before interest and tax of N20,000,000. If the required
fund is provided as share capital, the tax on the subsidiary will be N6,000,000 (i.e. 30% x
N20,000,000). On the other hand, if three-quarter of the required capital is injected by the
parent company as a loan at 15% per annum, the tax on the subsidiary will be reduced to
N2,625,000 as shown below. Of course, the subsidiary will deduct withholding tax of
N1,125,000 from the interest payable to the parent company.
₦

Profit before interest and tax 20,000,000

Less interest (3/4 x 100,000,000 x 15%) 11,250,000

Taxable profit 8,750,000

Income tax (30% x 8,750,000) 2,625,000

We can see the negative effect of the loan on Nigeria. The parent company has been able to
repatriate more of its subsidiary’s profits by way of interest, thus leaving lower profits in Nigeria
for companies’ income tax. This enables the tax charged to be shifted from the jurisdiction
where the investment is made to that of the investor, allowing more flexible tax planning.

Some countries have made specific rules or provision in their tax legislation to reduce the
problem of thin capitalization. Some of these rules are:

(a) Limitation on debt to equity ratio, for example, 3:1, 2:1,1.5:1, etc.
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 (b) Limitation on deductibility of interest, for example, interest allowable for tax purposes is
restricted to 30% of taxable profit before interest and taxes. Interest in excess of the
prescribed level is disallowed as a deduction.

(c) Arm’s length measure for interest rate, for example, interest rate is limited to the
interest rate that the borrower could have obtained from an independent (third-party)
lender or an average of rates charged by lending institutions.

There is no specific rule or provision in the Nigerian tax legislation to combat thin capitalization
except the general provision in section 22 of CITA 2004 which deals with artificial or fictitious
transactions. There is need to introduce thin capitalization rules into our tax laws to ensure that
foreign investors do not finance their Nigerian companies with loans which are in excess of
arm’s length standard by reference to both the amounts and terms of the loans.

11.07 Review Questions

Question 1

Discuss any THREE areas in which the operations of multinational companies in Nigeria could
constitute difficulties in the determination of their tax liabilities to the Nigerian Government;

Question 2

In respect to Transfer Pricing Regulations in Nigeria;

(a) Describe the following:

i. Arm’s Length Price

ii. Items that constitutes Controlled Transactions

(b) Mention any TEN main items that will feature in the disclosure and declaration forms to be
submitted to the Federal Inland Revenue Service.

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Question 3

(a) Briefly explain a transfer pricing document.

(b) State any THREE key transfer pricing

documentation.

(c) State key features of a transfer pricing policy

Question 4

In relation to Transfer Pricing regulations in Nigeria, describe “Connected Persons” and

enumerate what constitute: Connected Persons as stated in provisions of CITA, PPTA, PITA and
OECD Guidelines.

Question 5

UAC incorporated of USA has ABUJA Nigeria Limited as its subsidiary in Nigeria. The foreign
company was awarded a road construction contract by the Federal Government of Nigeria at a
total sum of N15 billion on 1st January, 2009. The company sub-contracted the job to ABUJA
Nigeria Limited at N12 billion. Both companies enter into a technical service agreement under
which the parent company will provide equipment and technical personal for the execution of
the contract.

The contract was successfully executed by ABUJA Nigeria Limited during the year ended 31st
December, 2009 and the Income Statement of the company showed the following:
N

Turnover 12,000,000,000

Less: Cost of Materials 1,510,000,000

Hire of equipment 1,000,000,000

Technical personnel cost 1,355,000,000

Other administration expenses 1,023,000,000

Depreciation 410,000,000

Net profit 6,702,000,000

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 Notes:

i.The equipment hired from the parent company at N795 million could have been hired from another
company at N600 million.

ii.If the parent company did not provide the technical personnel, ABUJA Nigeria limited could have
employed the same personnel at N450 million.

iii.Capital allowances for the year have been agreed at N65,000,000.

iv.The contract fees were subject to withholding tax.

v.The capital requirement of the company is N60,000,000 and 80% was supplied by UAC USA at an
interest rate of 20%. The interest expense is embedded in adm. Expenses.

vi.Assume that FIRS operational guide requires capitalization at a ratio of 1: 2 as in equity to external
funding.

Required:

(a) Compute the income tax payable by Bush Nigeria Limited for the relevant year of
assessment.

(b) Compute the income tax payable by UAC in Nigeria for the relevant year of assessment.

Question 6

The following is a summary of the profit or loss account of Josiah Nigeria limited, a Nigeria
company, for the year ended 31st December, 2013. N N

Gross profit from Nigeria operations 2,500,000

Less expenses from Nigerian operations:

Administration expenses 580,000

Selling and distribution expenses 820,000

Finance charges 350,000

Depreciation 110,000

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Donations to political parties 100,000 1,960,000

Net profit from Nigeria operations 540,000

Profit from branch in Belgium 400,000

Net profit from Nigerian and foreign operations 940,000

Additional information:

(a) Tax paid by the company to the Government of Belgium amounted to N112,000.

(b) There is a double taxation Agreement between Nigeria and Belgium with a standing sum
of N75,000.

(c) Capital allowances for the year of assessment were agreed as:

Head office (Nigeria) 120,000

Foreign branch (Belgium) 80,000

Required:

Compute the income tax liability of Josiah Limited taking into consideration the double taxation
relief.

Question 7

a. The Nigerian Government, worried by the rising incidence of Transfer Pricing abuses
by Multinational and Group Companies, issued, through the Federal Inland Revenue
Service (FIRS), Income Tax (Transfer Pricing Regulations) 2012.

You are required to explain FOUR objectives of the guideline.

b. On 22 August, 2014, your client HYDRO CARBONS OIL & GAS LIMITED, a subsidiary
of a Multinational Company with head office in Germany, received a letter from the
Transfer Pricing office of the Federal Inland Revenue Service (FIRS) requesting the
Company to forward amongst other requirements, the following:

i. The Company’s Transfer Pricing Policy; and

ii. Transfer Pricing Disclosure and Declaration Forms.

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The Managing Director on reading the contents of the letter became worried as he could not
understand the essence of such requests. As the Tax Consultant to the Company, you are
required to:

i. Explain what Transfer Pricing Policy is.

ii. Outline TEN items to be included in the Transfer Pricing Disclosure and Declaration
forms.

Question 8

You are the Tax Manager of Forum Tax Associates and recently represented your firm at a
Workshop organized by the Federal Inland Revenue Service (FIRS), Western Zone, on Transfer
Pricing Regulations in Nigeria. The Workshop was to create awareness on the filing
requirements and compliance with the provisions of “The Income Tax (Transfer Pricing)
Regulations 2012”. The Workshop which was held on the 20th Floor of the Nigeria Stock
Exchange building was fully attended to by Company Auditors, Tax Practitioners, Stock Brokers,
Bankers and other Stakeholders. From the notes you took at the Workshop, you presented a
report to the Managing Partner, Forum Tax Associates, on Wednesday, 3 September 2014. The
Managing Partner thanked you for a good job and highlighted some key areas of the regulations
that will serve as a guide to the staff of the firm.

You are required to prepare a technical briefing for the staff explaining the following key areas
noted by the Managing Partner:

(a) Objectives of the application of Transfer Pricing Regulations.

(b) Treatment of Permanent Establishment.

(c) Contents of a Transfer Pricing Disclosure to be submitted by Companies to the FIRS.

SUGGESTED SOLUTIONS

SOLUTION 1.

The following are some of the areas which could constitute difficulties in the determination of
tax liabilities of multinational companies operations in Nigeria.

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(a) Different Pricing of Goods / Services at Purchase Cost In a multinational group, one
member of the group in one country may supply goods or services to another member
in another country. The prices charged create sales revenue for the company selling the
goods or services and purchase cost for the company buying the goods or services. These will
eventually affect the profits of each company which are accountable to different tax
jurisdictions.

Example:

A multinational company has its subsidiary in Nigeria and head office in Country UK. The
Nigerian subsidiary charges low prices ( below open market prices) for goods supplied to
the parent company in country UK. On the other hand, the parent company overcharges
the Nigerian subsidiary for services rendered to the subsidiary. Consequently, the
Nigerian subsidiary records low profits and pays less tax to the Nigerian Government,
while the parent company declares more profits and pays more tax to the tax authority
in UK. As rightly pointed out by many authors, what Nigeria loses through the shift of
profit is a gain to UK to which the profit is shifted.

(b) Tax Fraud

Transfer prices have serious tax implications and multinational transfer pricing can
provide an avenue for tax fraud. Companies within the same group which are under
different tax jurisdictions may decide to overprice or under-price inter-group
transactions depending on what they want to achieve.

(c) Custom Duties & Tariff Manipulation

Transfer prices will also affect customs duties paid on imports and exports. For example,
if the transfer prices on imports into a country are lowered, the import duties and
other tariffs on the imports will equally be reduced.

(d) Dividends Manipulation

Multinational transfer prices may also be influenced by dividend considerations.

Consider a situation that Nigeria puts a restriction on the amount that a company can
pay out as dividend to parties outside the country. A parent company based in Germany
may decide to overprice goods and services transferred to its subsidiary in Nigeria. In that
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 way, more funds leave the subsidiary company in Nigeria to Germany without appearing
to violate the dividend restriction.

(e) Imposition of Excessive charges

The parent company can also impose excessive charges (e.g. royalties) on its foreign
subsidiaries, associates, etc. in respect of the provision of intangibles such as patents,
licenses, trademarks, etc. and use these avenues to siphon funds to tax heavens or
jurisdictions with favourable tax requirement.

Where the head office of the multinational or a member of the group incurs expenses which
are for the benefits of all or many members of the group; the allocation of the joint costs to
members of the group will certainly affect their profits and taxes.

In a global economy where multinational enterprises (MNEs) play a prominent role,

governments need to ensure that the taxable profits of MNEs are not artificially shifted out of
their jurisdiction and that the tax base reported by MNEs in their country reflects the economic
activity undertaken therein. For taxpayers, it is essential to limit the risks of economic double
taxation that may result from a dispute between two countries on the determination of the
arm’s length remuneration for their cross-border transactions with associated enterprises as
expressed by OECD.

There are provisions in the Nigerian tax laws which give the relevant tax authority power to
make appropriate adjustment to counteract the reduction or would be reduction in tax liability
where transactions between connected persons or related parties are not made at arm’s length
and the tax authority feels that such transactions are made to reduce the tax liability.

SOLUTION 2.

( a) i. Arm’s Length Price is the price charged for the transfer of goods, services or intangible
property between connected taxable persons which corresponds to the price that would
have been charged by independent persons under similar circumstance.

ii. Items that constitute Controlled Transactions are:

Sale and purchase of goods and services

Sale, purchase or lease of tangible assets

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 Purchase, licence of intangibles

Provision of services

Lending and/or borrowing

Manufacturing arrangement

Any other controlled transaction which may affect statement of

comprehensive income such as management and technical services, etc.

(b)

(i) Particulars of Reporting Company or Entity

(ii) Particulars of immediate Parent Companies

(iii) Particulars of Directors of Reporting Companies

(iv) Particulars of major Shareholders of Reporting Companies and related

parties

(v) Ownership, Structure of Reporting entity and related parties

(vi) Particulars of Subsidiary and other connected persons

(vii) Particulars of External Auditors of reporting entity

(viii) Particulars of Tax Consultant of the Reporting Entity

(ix) Particulars of Company Secretary of the Reporting entity Particulars of

the person making the declaration.

SOLUTION 3

(a) A transfer pricing policy is a document that guides the conduct of related parties transaction
within a group of companies. There are two types of transfer pricing policy: (i) Group Transfer
Pricing Policy (i) Local Transfer Pricing Policy.

(b) Transfer Pricing documentations are:

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 (i) Transfer Pricing Policy

(ii) Transfer Pricing Compliance Report

(iii) Transfer Pricing Returns i.e. Transfer Pricing Declaration and Disclosure
form

(c) Key features of a Transfer Pricing Policy are:

(i) Typically prospective in nature

(ii) Typically not updated unless there are significant changes in business

(iii) Provides a future view of likely intercompany transactions

(iv) Provides guidance on pricing of the transactions and methodology.

SOLUTION 4

Connected Taxable Persons include persons, individual, entities, companies, partnerships, join
ventures, trust or associations (collectively referred to as “Connected Taxable Persons”). Also
includes the persons referred to in section 13, section 22 of CITA, section 15 of PPTA, section 17
of PITA, article 9 of OECD Model Tax Convention and “associated enterprise” in OECD
guidelines.

The following persons will be regarded as Connected Taxable Persons (i.e. related parties)
within the context of the TP Regulation 2012.

(a) Any entity dealing with a related party (associate, subsidiary, joint venture)

(b) A members of a local group of companies

(c) Members of a conglomerate

(d) Multinationals

(e) An entity in a group located in the free zone

(f) A group entity has a pioneer status

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(g) Intra company profits is taxable under different regimes e.g. tax exempt export profits

(h) Loss making entity within a profitable group

(i) Related parties subject to tax at different rates

(j) Permanent establishment.

SOLUTION 5

ABUJA Nigeria Limited

Computation of Income Tax Liability for 2010 Year of Assessment

N'm N'm

Net Profit as per account 6,702

Add Disallowable Expenses:

Depreciation 410

Technical personnel cost (1,355 - 450) 905

Hire of Equipment (795 - 600) 195

Excess interest charged 1.6 1,511.6

Adjusted Profit/Assessable Profit 8,213.6

Less Capital Allowance 65

Chargeable Profit 8,148.6

Chargeable Tax at 30% 2,444.58

Less Withholding Tax at 5% 600

Tax Payable N1,844.58

Workings:

1. Interest on Excess Capital at interest rate of 20%.

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 N8,000,000 x 20% = N1,600,000

SOLUTION 6

Josiah Limited

Computation of Tax Liability for the Year 2014

N N

Net Profit as per account 540,000

Add back: Depreciation 110,000

Donations 100,000 210,000

Adjusted Profit 750,000

Profit from Belgium 400,000

Assessable Profit 1,150,000

Less Capital Allowance:

Josiah 120,000

Belgium 80,000 200,000

Taxable Profit 950,000

Chargeable Tax: 30% of Taxable Profit 285,000

Less Double Taxation Relief 75,000

Tax Payable N210,000

SOLUTION 7

(a) The Income Tax (Transfer Pricing Regulations) 2012 issued by the Federal Inland

Revenue Service and gazetted in September 2012 as Income Tax Transfer Pricing

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 Regulations Act of 2012 stated the objectives as:

(i) To ensure that Nigeria is able to tax on an appropriate taxable basis corresponding
to the economic activities deployed by taxable persons in Nigeria, included in their
transactions and dealings with associated enterprises.

(ii) To provide the Nigerian authorities the tools to fight tax evasion through over or
under-pricing of controlled transactions between associated enterprises.

(iii) To reduce the risk of economic double taxation.

(iv) To provide a level playing field between multinational enterprises and

independent enterprises doing business within Nigeria; and

(v) To provide taxable persons with certainty of transfer pricing treatment in Nigeria.

(b) CHIDIEBERE OIL & GAS LIMITED

(i) Transfer Pricing Policy

This is a document required to be filed with the Transfer Pricing Unit of the
FIRS. It contains information that guides the conduct of related parties’
transactions within a group of Companies.

There are two types of Transfer Pricing Policies namely:

(i) Group Transfer Pricing Policy

(ii) Local Transfer Pricing Policy

(ii) Transfer pricing disclosure and declaration forms contents for submission to
the firs

The FIRS also requires affected Companies, in addition to developing appropriate Transfer
Pricing Policies, to provide relevant information in specified manner in Transfer Pricing
Disclosure and Declaration Forms which must contain the following:

· Particulars of Reporting Company or Entity.

· Particulars of immediate Parent Companies.

· Particulars of Directors of Reporting Companies.

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 · Particulars of five major Shareholders of Reporting Companies and Related Parties.

· Ownership Structure of Reporting Entity and Related Parties.

· Particulars of Subsidiary and other connected persons.

· Particulars of External Auditors of reporting entity.

· Particulars of Tax Consultant of the reporting entity.

· Particulars of Company Secretary of the reporting entity.

· Particulars of the person making the declaration.

SOLUTION 8

(a) Objectives

The objectives of the regulations are to:

(i) Ensure that Nigeria is able to tax on an appropriate taxable basis corresponding to the
economic activities deployed by taxable persons in Nigeria, including on their
transactions and dealings with associated enterprises;

(ii) Provide the Nigerian authorities with the tools to fight tax evasion through over or under
pricing of controlled transactions between associated enterprises;

(iii) Provide a level playing field amongst multinational enterprises and independent
enterprises doing business within Nigeria and

(iv) Provide taxable persons with certainty of transfer pricing treatment in Nigeria.

(b) Treatment of Permanent Establishment

i. A fixed base through which the business of an enterprise is wholly or partly carried on is
treated as a permanent establishment.

ii. For the purpose of Transfer Pricing, any transaction between a Permanent
Establishment and its Head Office or other connected taxable persons shall be considered to
be a controlled transaction.
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iii. Such controlled transactions will require the necessary documentation to prove that the
transactions have been carried out at arm’s length.

(c) Contents of a Transfer Pricing

Disclosure to be submitted to Federal Inland Revenue Service (FIRS)

The Federal Inland Revenue Service Transfer Pricing Disclosure and Declaration form contain
the following information:

i. Particulars of Reporting Company or Entity.

ii. Particulars of immediate Parent Company

iii. Particulars of Directors of Reporting Company

iv. Particulars of major Shareholders of Reporting Companies and related parties

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 MODULE 12

12.00 TAXATION OF MERGER AND ACQUISITION

12.01 Learning outcome

On successful completion of this Module, Students should be able:

i. Evaluate the meaning of mergers and acquisitions;

ii. Examine the reasons for mergers and acquisitions;

iii. Critically analyze the tax implications of mergers and acquisitions.

12.01 Introduction

Many people often use such words as merger, acquisition or takeover in their daily
communications, but few have needed to understand how such businesses are actually
structured. For tax purposes, the type of business combination will determine the way
assessment will be made (commencement and cessation rule). Consequently, the students
must have good understanding of tax issues in merger and acquisitions. This module covers;
definition and meaning, reasons and tax complication of merger and acquisitions; shareholders
gain and managerial gains in merger and acquisitions.

12.02 Definition and Meaning of Merger and Acquisition

Merger is ‘‘any amalgamation of the undertakings or any part of the undertakings or interest of
two or companies or the undertakings or part of the undertakings of one or more companies
and one or more bodies corporate’’. Simply put, a merger is a combination or integration of
existing companies to form a single company. For example, entity A and entity B combined their
assets and liabilities to form entity C.

Acquisition is known as take-over. It is the take-over of business entity by one entity of

sufficient share in another entity to give the acquiring entity control over that other company.
For example entity A acquired assets and liabilities of entity B, and entity B cease to exist while
entity A integrate or consolidate the assets and liabilities of entity B in its financial statement.

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12.03 Reason for Merger and Acquisition

In what follows, we classify reason(s) for business combination: The major reason is to increase
shareholders wealth and managerial gains

Shareholder Gains

Shareholders gains refer to the increase in the market value of the firm due to the Merger.
Since the increase in the value of the firm directly benefits its owners (shareholders) it is said
that shareholders gain. A firm may increase its market value by increasing its profits. Increasing
profits, in turn, is possible by decreasing costs, operating more efficiently, implementing
optimal incentives to managers or enhancing market power. The merger rationales that
produce gains to shareholders are:

a. Efficiency Gains

Farrell and Shapiro (1990 & 2001), in distinguishing between efficiency gains in technical
efficiency and synergies; defined technical efficiency as those that could be obtained by other
means than merging, in particular, by internal growth, joint ventures, specialization
agreements, licensing, etc. The author believe that, technical efficiency correspond to changes
within the joint production capabilities of the merging parties. In the short term, they can be
achieved by a reallocation of output across the merging units or scale economies if capital is
mobile. In the longer run, they can be achieved by undertaking investment on a larger scale. In
the view of the authors, synergy is seen as efficiency obtained through the close integration of
the merging firms’ hard-to-trade assets, and are inherently merger-specific since such assets
cannot be acquired otherwise than merging. The following three drivers that generate
efficiency gains belong to the technical efficiencies definition.

• Economies of scale

• Economies of scope

• Economies of vertical integration

b. Synergy Gains

Synergy is efficiency that can only be achieved by merging, that is, they are merger specific.
Synergy is generally associated with a shift on the production possibilities of the merging
parties that go beyond technical efficiency (associated with changes within the joint production
capabilities of the merging parties, i.e., economies of scale or scope). There is a general
recognition that synergy involves either a process of learning, the close integration of specific
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hard-to-trade assets or a transfer of know-how among the merging firms. For example, when a
small firm launches a new product but lacks of large scale sales, marketing and reputation,
merging with a well-established firm will most probably bring it gains that would have not been
possible without merging. The diffusion of know-how, in turn, can be achieved when the
merging firms exchange different R&D activities, patents, human skills, and organizational
culture. Since these assets are in general non-tradable, firms can benefit from their
combination uniquely by merging:

• Diffusion of know-how

• Research and developments (R&D)

c. Cost Savings

Cost savings is a general concept that can be attained in many distinct ways.

What is important for the analysis of merger motives, is to identify the type of cost saving, i.e.,
if it consists on a reduction of average or marginal costs of production, fixed costs or financial
costs. Fixed costs are those that do not vary with production but that are necessary to produce.
They include for instance administrative support, public relationships, maintenance of property
plant and equipment, salaries, advertising, etc. Average costs vary with production, by
definition they are total costs divided by total production. More often employed in the
economic literature is the concept of marginal costs which stands for the increase in costs with
one extra unit of production. Finally, financial costs refer to those costs that only affect the
distribution of costs within the firm’s administration but not the cost of production. Thus,
whereas financial costs savings do not imply a saving of productive resources in the economy,
average or marginal costs savings in the form of economies of scale, scope and vertical
integration do. Acquiring a high R&D target or a target with patents instead of directly
expending on it is another way of saving costs. Transferring more efficient technology from one
firm to another clearly decreases total costs. The elimination of the duplication of fixed costs
when merging will, of course, decrease costs as well. Other examples of cost savings that have
been proposed as merger motives are:

• Rationalization: That is, shifting production from a plant with higher marginal costs to
another with lower marginal costs, without necessarily increasing the joint technological
capabilities, is a mean to save costs.

• Purchasing power

• Creating internal capital markets

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d. Financial Cost Savings

Too high financial costs may be a motive for merger as well. According to Roller,

Stennek and Verboven (2006), believe that financial costs savings do not generate real cost
savings (savings in productions costs); instead, they involve redistributive cost savings. That is,
financial costs do not necessarily imply a value increase in the merging entity; they only reflect
a redistribution of wealth from shareholders to debt holders. Among other ways they can be
attained by saving on:

• Taxes: Mergers before the 1980s were strongly motivated by tax advantages. The
reason is that at the time when an acquisition premium was paid above the values at
which a company’s depreciable assets were recorded in tax accounts, the acquired
assets could benefit of higher depreciation charges, protecting the acquirer from tax
liabilities. Until reforms were passed, acquiring companies making such acquisitions
could normally escape immediate capital gains taxation. Such tax advantages had an
important role in many merger decisions, but not critical enough to determine whether
merger would or would not occur. Nowadays there is a tax rule that differentiates the
tax liability according to the accounting method by which the acquisition is registered
(purchase of assets or pooling of interest).

• Interest rates

• Diversification

e. Enhancement or Strengthen Of Market Power

Market power is defined as the ability of a firm or group of firms to raise prices above the level
that would prevail under competitive conditions. The ability to exclude competitors is also seen
as a result of excessive market power. The scope of enhancement of market power is
associated with industry concentration, product differentiation, entry barriers and cost
advantages. The market power merger motive in horizontal mergers is the most controversial
one. However, as exposed in the following paragraphs, market power is not exclusive to
horizontal mergers.

• Through unilateral effects

• Through coordinated effects (or collusion)

• To raise entry barriers

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 • To spread portfolio

• To obtain multimarket contact

f. Pre-Emptive and Defensive

Fridolfsson and Stennek (2005) propose a merger rational that they call the pre-emptive (or
defensive) motive. They develop a model that shows that if being an insider is better than being
an outsider, firms will acquire to prevent the target being acquired by a competitor. The reason
is that the merged firm will be a more efficient firm (provided cost efficiencies) and will become
a more difficult competitor. This will affect the outsider, so preventing being an outsider, firms
pre-empt the merger by anticipating the takeover. Other motives in mergers have been
interpreted as defensive in the economic literature. The most common of these is the
elimination of a significant competitor (a maverick for instance). Such defensive mergers may
be seeking for market power enhancement, or may simply be responding to tougher price
competition originated from exogenous factors. Defensive mergers have also been proposed as
a result of an endogenous market response to exogenous market shocks such as new
technological opportunities that increase the potential for innovation.

g. Disciplinary Takeovers:

These takeovers are said to play an instrument for ensuring that managers’ actions do not
deviate too far from those that would maximize shareholders value. They are thus inspired on
the principal-agent theory and proposed as discipline devices from owners (principals) to
managers (agents). Motives that pursue managerial gains are also founded in this theory. Their
difference is based on that the ones exposed here seek to increase the firm’s value whereas
those are managers’ strategies seeking to increase their own wealth (at the expense of the
firm’s value).

• Market for corporate control

• Free-cash flow

Managerial Gains

The following proposals of merger motives originate on the theory of the internal inefficiency of
the firm, the so-called X-inefficiency first analyzed by Leibenstein (1966). This theory highlights
that there is a difference between the efficient behavior of firms, as predicted by economic
theory, and what it is observed in practice. The reason is that, in the real world, firms are
complex organizations in which there is a separation between shareholders (ownership) and

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managers (control). In these organizations, the decisions that affect the overall level of
efficiency of the firm are taken by managers who might have objectives other than firm’s value
maximization. This is in turn related to the principal-agent theory that emphasizes the conflicts
between shareholders and managers whenever there is incomplete and asymmetric
information between them (the manager is usually better informed about his plans). These
conflicts arise since shareholders (principal) seek to maximize firm’s value and managers
(agents) seek to maximize their wage (or their ego). That is the reason why these merger
drivers are also known as the agency motive. In the overall, these motives state that the
manager is searching for gains at the expense of shareholders gains.

a. Empire Building

Also called the managerial discretion motive, it states that managers’ objective is to increase
the size of the organization they want to lead. Their goal is to grow and the fastest way to do it
is by acquiring. The reason might be that their compensation is directly related to the size of
the company they manage. This hypothesis has first been formulated by Mueller (1969).

b. Hubris

This merger driver was first proposed by Roll (1986). The hypothesis states that managers
incorrectly believe to be better able to manage other companies. That is, they are
overconfident in their managerial abilities and end up overpaying for a target which makes the
acquiring firm to lose. In fact, it has been argued that the hubris consequence (acquiring firm
losing from the deal) is equivalent to the winner’s curse in common value auctions, namely,
bidders overpay for the auctioned item. Here, the highest bidder has the highest positive
valuation error (reflecting his overconfidence) and wins the target. The result is that
shareholders of the acquiring firm lose from the deal because the market reacts to the mistake
of the acquiring firm’s manager.

c. Risk Spreading Or Diversification

Sometimes the overall investment strategy of the manager to construct an optimal portfolio
includes mergers and acquisitions. According to the portfolio theory this is indeed a mean, to
diversify risk (by spreading a selected portfolio) and to maximize expected returns. However,
sometimes the manager seeks for a personal portfolio rather that an optimal portfolio for the
firm. Since he has the power to select the portfolio, personal diversification might be his goal.
As mentioned above, competition authorities generally consider overall economic welfare as
consumer surplus rather than total surplus and therefore not all the above merger drivers are
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necessarily relevant for them. For purposes of merger enforcement, the issue that matters is
the effect on welfare and not whether the transaction will generate gains to the firm.

We can summarize the reason for merger and acquisition based on the follows theory

• Monopoly Theory: Gaining market power.

• Efficiency Theory: Operating synergies, financial synergies and management synergies.

• Valuation Theory: Bidder managers have better information about the target's financial
performance than the stock market.

• Empire Building Theory: Planned and executed by managers who maximize their own
utility instead of their shareholders value.

• Process Theory: Mangers have only limited information and base decisions on imperfect
information.

• Raider Theory: Managers creating wealth transfers from the stockholders of the
companies they bid for.

• Disturbance Theory: Merger waves are caused by economic disturbances.

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Source: Trautwein, 1990 and Straub 2007

12.05 Tax Implication of Merger and Acquisition

Statutory Requirement under Companies Income Tax Act (CITA)

The CITA in Section 29(12) Cap (21, LFN, 2004) provides that ‘‘no merger, take-over, transfer or
restructuring of the trade or business carried on by a company shall take place without having
obtained the Board’s direction under sub-section 9 of this section and clearance with respect to
any tax that may be due and payable under the Capital Gains Tax Act’’. The implication of this
provision is that the approval of the Federal Board of Inland Revenue is a necessary condition
for the completion of the process in a merger or acquisition bid. Therefore, no merger or
acquisition bids would be fully consummated without the companies involved having obtained
the consent from the FIRS.

Procedure for obtaining the Board’s Approval

From the start, the merging companies are required to submit to the Board, copies of the
scheme of merger and scheme of arrangement on the consolidation request for its study and
proper evaluation in order to ensure that taxes which may result from the companies’
transactions are correctly assessed and collected. Herein lies the relevance of the Board’s
powers under section 29(9)(i) to require either of the companies directly affected by any
direction which is under the consideration of the Board to guarantee or give security to its
satisfaction for payment in full of all tax due or to become due by the company which is selling
or transferring such asset or business.

Emergence of a New Company

a. Rendition of Annual Returns

Where a new company emerges from a merger process, then, the new company is expected to
file its returns, in line with the provisions of Section 55(3)(b) of CITA. The section provides that ‘
‘ every new company shall file with the Board, its audited accounts and returns within eighteen
(18) months from the date of its incorporation or not late than six (6) months after the end of
its first accounting period as defined in section 29(3) of this Act, whichever is earlier’’.

It should however be understood that a mere change of name does not make an existing
business entity a new company. Such companies will continue to be treated as old business on
on-going concern basis.
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b. Basis of Assessment

Commencement rule as provided under Section 29(3) will apply to the new company, except
where any of the under-listed circumstances arise:

➢ Where the merging parties are connected parties, the Board may direct that
commencement rule be set aside, in which case, the new company will file its returns
as an on-going concern and its assessment will be determined on preceding year basis.

➢ Where the new business is a reconstituted company, taking over the trade or business
formerly run by its foreign parent company.

When an old company is taken over by a new company, the old company is deemed to have
ceased business while the new company is deemed to have commenced a new business. The
cessation rule will apply to the old company, while the commencement rules will apply to the
new company.

Illustration 1:

Anambra Ltd has been in business ending its accounting year every 31 st December. The
following relate to the company performance.

Period to 31st Dec 2004 3200

Year to 31st Dec 2005 4,800

Year to 31st Dec 2006 5,600

Year to 31st Dec 2007 15,000

Year to 31st Dec 2008 16,500

Year to 31st Dec 2009 14,820

On 1st July 2007, Delta Ltd. A newly formed company bought over Anambra Ltd. Delta Ltd.
ending its accounting year 31st December.

Note: The Company’s performance is added together (the old and new company)

Required: Calculate the assessable income for the relevant years.

Solution:

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Note: You prepare the assessable income for the old (Anambra Ltd) before the assessable
income for Delta Ltd. ANAMBRA LTD.

Calculation of Assessable Income

Year of Assessment Basis Period Assessable Income

2005 Preceding Year

1/1/2004 – 31/12/2004 3,200

2006 Preceding Year 2005

1/1/2005 – 31/12/2005 4,800

2007 Preceding Year 2006

1/1/2006 – 31/12/2006 5,600

Actual 2007 (Year of Cessation)

1/1/2007 – 30/6/2007 7,500

Delta Ltd. – Calculation of Assessable Income

2008 1/7/2007 – 31/12/2007

(6/ 12 x 15,000) 7,500

2009 First 12 months

1/7/2007 – 30/6/2008

7,500 + ( 6/12 X 16,500)

7500 + 82500 15,750

2010 Preceding Year 2009

1/1/2009 – 31/12/2009 16,500

C. Claim of Allowances

Companies Income Tax Act (CITA) did not categorically address the value at which assets may
be transferred for the purpose of capital allowances claim. However, International Accounting
Standard 22 prescribes that in merger accounting, the assets, liabilities and reserves must be
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recorded at their carrying balances, implying that merger process does not permit the recording
of assets at their fair value in the event of consolidation. The new company will therefore not
be entitled to any investment allowance claim or initial allowance on the transferred assets; it
will only be entitled to claim annual allowance on the Tax Written Down Values (TWDV) of the
transferred assets.

d. Unabsorbed Losses and Un-Utilized Capital Allowances Brought

Forward

The new company may also not be permitted to inherit the unabsorbed losses and capital
allowances of the absorbed companies, except under the following circumstance:

(i) where a reconstituted company is carrying on the same business previously carries on by this
company and it is proved that the losses have not been allowed against any assessable profits
or income of that company for any such year; in that case the amount of unabsorbed losses
shall be deemed to be a loss incurred by the re-constituted company in its trade or business
during the year of assessment in which the business commenced.

e. Taxes and Deductibility of Related Expenses

(i) Stamp Duties

Duty payment will arise on the share capital of the new company, subject to the provisions of
Section 104 of the Stamp Duties Act, in relation to capital and duty relief.

(ii) Consolidated Expenses

Fees paid to statutory bodies such as SEC, NSE, CBN, Land Authorities etc., including
professionals like Accountants, Stockbrokers, Issuing Houses, and Solicitors are regarded as
capital in nature and will therefore not be allowed as deductible expenses by virtue of Section
27(a) of CITS.

(iii) Taxation of Consolidation Fees:

Fees paid to professionals for services rendered in connection with consolidation will be subject
to VAT and WHT at the rates of 5% and 10% respectively.

f. Tax Indemnification

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Section 29(9)(i) of CITA provides that the Board may require the new company to guarantee or
give security for payment in full, for any tax due or that may become due by any of the ceased
companies.

g. Approval for Pension Scheme

The new company will need to obtain a JTB approval for its staff pension scheme.

Status of a Surviving Company in Relation to Taxation

It is a possibility that one of the merging companies survives and its old name or a new name to
inherit the assets, liabilities, reserves and entire operations of the merging parties. Where this
happens, the following points must be noted:

(i) The surviving company must file its returns in line with the provisions of section 55(3)(a)
of CITA.

(ii) Commencement rules under section 29(3) of CITA will not apply to the surviving
company, as it will be regarded as an existing company.

(iii) The surviving company will not be allowed to claim investment allowance on the assets
which were transferred to it and will also not claim initial allowance on such assets.

(iv) The surviving company may however claim annual allowance only on the tax Written
down Values (TWDV) of the assets transferred to it.

(v) The surviving company may not inherit the unabsorbed losses and capital allowances of
the merging companies, except it is proved that the new business is a reconstituted
company.

(vi) All fees payable on merger bids or consolidation will be liable to VAT and WHT just like it
is applicable on the emergence of a new company. Stamp duties will be paid on the
increase in share capital and the company will have to obtain its own staff pension
scheme approval from the joint Tax Board (JTB).

Ceased Businesses

The merger or consolidation exercise may also result in cessation of business for any of the
merging parties. In this case, cessation rule as applicable under section 29(4) of CITA will apply
to any of the merging companies which have now ceased business permanently, except if any
of the following circumstances occur:

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 (i) Where the merging companies are connected. Here, the Board may direct, in line with
its discretionary powers, under section 29(9) of CITA that the cessation rule may not
apply.

(ii) (ii) Where a reconstituted company is formed to take over the trade or business
formerly run by its foreign parent company. (See Section 29(10) of CITA.

a. Trade or business sold or transferred: Section 25(9)

If a trade or business is sold or transferred to a Nigerian company together with any asset
employed therein and the Board is satisfied that one of the companies has control over the
other or that both are controlled by some other person or are members of a recognized group
of companies, the Board may in its discretion direct that:

• the commencement and cessation provisions are not applied;

• for capital allowances purposes, the assets sold or transferred shall be deemed to have
been sold for an amount equal to the residue of qualifying expenditure thereon on the
day following such sale or transfer; and

• the company acquiring the assets shall not be entitled to any initial allowance thereon
and shall be deemed to have received all allowance already granted to the vendor
company up to the date of the sale or transfer.

There is no reference to unutilized losses incurred in the old trade. Thus, such losses cannot be
transferred to the new business and may not be relieved in any other way. Any company
planning a reorganization that will involve transfer of business from one subsidiary to the other
within the group will need to consider this fact that is the unabsorbed losses on the date of the
transfer or sale of the business cannot be transferred to the new business. A way out is to leave
some business in the old trade that will produce small profits annually which will gradually use
up the losses over a number of years before that part of the trade is transferred to the new
trade.

b. Reconstituted Companies: Section 25(10)

Where in pursuance of Part X of the Companies and Allied Matters Act, (1990), a company- "the
reconstituted company" - is incorporated to carry on a trade or business previously carried on
by a foreign company and the assets employed by the foreign company in that trade or
business vest in the reconstituted company, then the following provisions shall apply:

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 • the commencement and cessation provisions shall not apply to the reconstituted
company;

• the assets vested in the reconstituted company shall be deemed to have been sold to it,
on the day of incorporation of that company, for an amount equal to the residue of
qualifying expenditure thereon on the day following the cessation of the foreign
company's trade;

• c) the reconstituted company shall not be entitled to any initial allowance on those
assets and shall be deemed to have received all capital allowance granted the foreign
company on those assets;

• Unrelieved losses of the foreign company on the date of the reconstitution shall be
deemed to have been incurred by the reconstituted company in its trade or business
during the first year of assessment and shall be deductible from its assessable profits.
Losses arising from damages caused by the Nigerian Civil War cannot be so transferred
to the reconstituted company except with the approval of the Federal Executive Council.
it is also to be noted that a claim for the deduction of such losses must be lodged with
the Director of the industrial inspectorate Division of the Federal Ministry of industries
with a copy to the Board within three years of the incorporation of the reconstituted
company;

• Deduction of such losses is to be made from the assessable profits, if any, of the
reconstituted company for the first year of assessment and so far as it cannot be so
made, then from the amount of the assessable profits of the year of assessment and so
on up to the fourth year after the commencement of such business.

The foregoing will only be applicable if the Board is satisfied that the trade or business carried
on by the reconstituted company immediately after its incorporation is not substantially
different in nature from that previously carried on in Nigeria by the foreign company.

Capital Gains Tax on Shares or Cash Received

Section 32A of Capital Gains Tax Act (CGTA) Cap 121LFN 2004 provides that a person shall not
be chargeable to tax under the Act, in respect of any gains arising from the acquisition of the
shares of a company, either merged with, or taken over or absorbed by another company, as a
result of which the acquired company has lose its identity. However, where shareholders are
either wholly or partly paid in cash for surrendering their shares in the ceased business, the
gains arising from the cash payment will be subject to CGT.

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Effect of Taxations on Consolidation Acquiring/Acquired Companies

The tax implications of consolidation on acquiring company or acquired companies are similar
to those of mergers. Acquisition expenses are non-deductible while fees paid to professional
bodies are equally to WHT and VAT.

12.06 Review Questions

1. Distinguish clearly with good examples between takeover, merger, and business
combination.

2. Explain the reason for merger and acquisition in accordance with shareholders gain and
managerial gains.

3. Explain tax treatment of consideration paid in merger and acquisition.

4. What are the tax implications of ceased and surviving business under merger and acquisition.

5. Describe the statutory requirement under Companies Income Tax Act (CITA) for merger and
acquisition.

6. ACN Ltd and CPC Ltd merged on January 2012 to form APC Ltd. The trading results of the
companies as adjusted for income tax purposes were as follows

ACN Ltd

Year to 31 Dec 2009 Profit 350,000

Year to 31 Dec 2010 Profit 190,000

Year to 31 Dec 2011 Profit 250,000

CPC Ltd

Year to 31 Dec 2009 Profit 250,000

Year to 31 Dec 2010 Profit 274,000

Year to 31 Dec 2011 Profit 230,000

APC Ltd

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Year to 31 Dec 2012 Profit 424,000

Year to 31 Dec 2013 Profit 480,000

You are required to:

a) State the bases of assessment of APC Ltd

b) Compute the assessable profit of ACN Ltd, CPC Ltd and APC Ltd for the relevant years of
assessments.

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 MODULE 13

13.00 TAX AUDIT AND INVESTIGATION

13.01 Learning outcome

On successful completion of this Module, Students should be able:

i. Examine the process of reviewing tax payer’s files and returns;

ii. Appraise various types of audit exercises;
iii. Evaluate the concept of Tax investigation and its stages;
iv. Assess the criminal investigation and intelligence unit.

13.02 Introduction

Prior to the introduction of self-assessment, there was no specific provision for tax audit and
investigation under company income tax Act. This was later introduced to assist in verifying the
tax return filed by tax payers through adequate tax audit process.

13.03 Tax Audit and Investigation

Prior to the introduction of self-assessment, there was no specific provision for tax audit and
investigation under company income tax Act. This was later introduced to assist in verifying the
tax return filed by tax payers through adequate tax audit process.

13.04 Definition of Tax Audit

An audit is an examination usually by an independent person, on a set of the accounting books,

records, documents, etc., from which a set of financial statement has been prepared.

Objectives of Statutory Audit

The objectives of an audit are to express an opinion as to whether:

a) Proper books have been kept;

b) The financial statements are in agreement with the books;

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c) The requirements of the applicable legislations, for example, CAMA, 1990 (as amended)
have been complied with;

d) Applicable Accounting Standards (both local and international) have been adhered to;

e) The financial statements give a true and fair view of the state of the financial affairs of
the enterprise as at its balance sheet date; and

f) The financial statements give a true and fair view of the result of the operations of the
enterprise for the period under audit.

Specialized Audits

Specialized audits are normally involved whenever special attention is needed on special issues
that are not part of the objectives of statutory audits. When a specialized audit is carried out,
the auditor would cover in his report the particular objectives that were to be achieved as set
out in the auditor's terms of reference.

Tax Audits

Tax audits similar to special audits. They are additional to statutory audits and are carried out
by tax officials from relevant tax authority (ies). The approach and scope of work would be
slightly different from that to be carried out for audit under CAMA, 1990.

Power of the Revenue Service to Audit

Prior to the introduction of the self-assessment scheme, there was no specific provision in CITA
for tax audit. Subsection 4 of Section 43 was introduced to empower the Inland Revenue to
carry out tax audit. The subsection states: Nothing in the fore going provisions of this Section or
in any other provisions of the Act shall be construed as precluding the Revenue Service from
verifying by tax audit any matter relating to entries in any books, documents, accounts or
returns as the Revenue Service may from time to time specify in any guideline.

An integral part of the self-assessment scheme is the need to periodically verify the tax return
filed by taxpayers through a tax audit process. The tax audit exercise essentially is meant to
enable the Revenue authority to further satisfy itself that audited financial statements and the
related tax computations submitted by the taxpayer agree with the underlying records. This
periodic check is carried out by the tax audit branch.

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13.05 Objectives of Tax Audit

The objectives are to enable the tax auditors determine whether or not:

(a) Adequate accounting books and records exist for the purpose of determine the taxable
profits or loss of the taxpayer and consequently the tax payable;

(b) The tax computations submitted to the tax authority by the taxpayer agree with the
underlying records; and

(c) All applicable tax legislations have been complied with.

Other objectives of tax audit are:

(a) Provision of an avenue to educate taxpayers on various provisions of the tax law;

(b) Discourage tax evasion;

(c) Detect and correct accounting and/or arithmetical errors in tax returns;

(d) Provide feedback to the management on various provisions of the law and recommend
possible changes;

(e) Identify cases involving tax fraud and recommend them for investigation;
(f) Forestall taxable persons' failure to render tax returns;

(g) Forestall taxable persons' rendering incomplete or inaccurate returns in support of the
self-assessment scheme.

Tax audit is usually conducted by a group of experienced support staff of the Revenue
authority.

The Tax Audit Branch

In the past, that is, before the current reform exercise at the FIRS, the Tax Audit Branch was
under the directorate of Assessment, Intelligence, Tax Audit and Special Investigation and
reports to the management through the Director. However, with their form, each of the
Integrated Tax Offices (ITO'S), is expected to have its own resident Tax Audit Unit.

Types of Tax Audit

The two types of tax audit are:

(a) Desk Audit; and

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(b) Field Audit.

a. Desk Audit

As soon as a tax return is received in the Inland Revenue's office, such would be subjected to
examination by the Inspector. This examination is carried out in the tax office. It is carried out
on routine basis, indicating that most, if not all, returns submitted to the tax office, are subject
to this audit.

The focus of the desk audit would be to ensure completeness of the items submitted for tax
purposes. The Inspector earring out a desk audit will also look for apparent errors or mistakes
in the tax computations and/or in the accompanying documents and records. The outcome of a
desk audit may lead to the conduct of a field whenever additional information or documentary
evidence is required to satisfy the Inspector of Taxes carrying out the desk audit.

b. Field Audit

A field audit is more elaborate and comprehensive than a desk audit. It is usually carried out
outside the Inland Revenue's office, in the taxpayer's business premises. The need to carry it
out in the taxpayer's premises is to enable the tax auditors carry out the examination of
applicable documents and also obtain appropriate information directly from the officials of the
business.

The Tax Audit Process Pre Assessment Stage

The tax audit branch carries out audit exercise only on companies that have been referred to it
by the management. The ultimate authority for referral of cases for audit lies with the
Chairman through the Director of Assessment. The usual channels for recommending cases for
audit include:

(a) The Management: The technical committee, the chairman and the directors could refer
cases directly to the branch.

(b) Zonal Coordinator: The Zonal coordinator may also recommend cases for tax audit
through the Director of assessment

(c) Tax Controller: Desk officers through their tax controllers (TC), recommend cases for tax
audit. The TC would then pass such recommendations to the Director of assessment.

(d) Tax Audit Inspectors: Sometimes, in the course of the audit of a company, it might
become imperative to conduct composite audit that is widening the tax audit exercise of a
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company to cover others within the same group or those with substantial transactions with the
company undergoing audit. In such instances, the tax auditor may recommend that ongoing
audit be extended to cover related companies.

Assessment Stage

The stages in the audit process are as follows:

(a) Selection of taxpayer to be audited;

(b) Preliminary review of taxpayer's file;

(c) Notification of Taxpayer;

(d) Pre-audit meeting followed immediately by field audit;

(e) Post audit meeting;

(f) Interim Audit Report;

(g) Post audit review by Regional/Headquarters Audit;

(h) Reconciliation meetings; and

(i) Final Audit Report.

Selection of Taxpayer to be Audited

The guidelines and criteria for selection of files for audit are to be determined by the Audit
Headquarters. The selection of cases for audit is a management function. The criteria which
would vary from one type of business to the other include, but are not limited to, the following:

(a) Self-assessment taxpayers- at least two years since that last audit of the taxpayer.

(b) Taxpayer s with refund claims-especially arising from excess withholding tax credits and,
or other named reasons.

(c) Taxpayers with nil returns or continuous loss situation.

(d) Taxpayers with very low adequacy ratios.

(e) Based on routine industry checks or sectorial audit (project audit).

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(f) Based on lead information received from Intelligence or other FIRS departments or
external sources.

(g) Transfer pricing arrangements.

(h) Tax planning schemes.

(i) Claims under Double Taxation Agreement (DTA)

(j) Secondary files-relationship with another taxpayer by way of holding, subsidiary,

associated or related companies, could be criteria for selecting companies for audit.

(k) Industrial group's compliance evaluation and profitability comparison.

(l) Verification of poor or extraordinary performance.

(m) Referrals resulting from desk examinations.

(n) Information resulting from examination, audit and investigation of other taxpayers.

(o) Random sampling.

(p) Firms making unusual requests or taking extraordinary decisions such as centralizing an
erstwhile decentralized operation.

(q) Information from intelligence unit of the tax authority.

(r) Directive from higher government authority.

Preliminary Review of Taxpayer's File

This is aimed at preparing both the Audit Department and the audit team that will be involved
in the audit exercise for the audit task ahead it involves obtaining basic information about that
taxpayer, analytical review of taxpayer's performances using ratio analysis highlighting risk for
the taxpayer.

This review will also lead to the determinations of the appropriation tax audit strategies to be
adopted, which include, recommendation on the audit approach, number of days/weeks
required, level of experience and technical skills required, number and location of offices to be
assembled for the field audit exercise. This procedure will be reviewed and approved by the
Regional/Headquarters Audit, as appropriate.
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Preliminary Activities

Before audit executives set out, certain preliminary activities must take place. These are:

(a) Gathering of the files and groping them into the number of audit teams to be
established;

(b) Audit teams to acquaint themselves with background information about their cases;

(c) Prepare audit checklist to be used in respect of each company to ensure that all
necessary areas of audit activities are covered;

(d) Design interview format (if necessary) for each company, depending on the problems,
so as to ensure that all grounds are covered;

(e) Assign specific duties to audit team members.

Audit Checklist

The complexities of some business and/or the need for comprehensiveness make the
preparation of audit checklist necessary at the planning stage of a tax audit. The checklist is
used during the audit exercise to ensure that a thorough job is done. It also ensures that the
exercise is undertaken systematically and not in a haphazard manner.
Thus, it makes the audit work to be faster, orderly and properly completed. The activity items
listed in the checklist are ticked off as performed one after the other as the work progresses,
until the audit is completed.

Background Information

The following are basic information to be extracted from the taxpayer's file:
(a) Name of the company;

(b) Registered address;

(c) Business address;

(d) Date of incorporation;

(e) Date of commencement of business;

(f) Tax file number;

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(g) Nature of business;

(h) External auditors/ tax consultants and their addresses;

(i) Bankers/addresses:

(j) Solicitors and secretaries;

(k) Share capital (authorized and issued);

(l) Shareholding structure;

(m) Names of directors/number of shares held;

(n) Associated companies/addresses;

(o) Litigation details, if any;

(p) Period covered during the last audit or investigation exercise; and

(q) Accounting year end.

Analytical Review of Tax Returns: The officer-in-charge will use the following records to
determine the taxpayer's performances and areas of tax audit focus:

(a) Last audit or investigation report (if any)

(b) Financial Statements:

i. Chairman/Directors/Auditors' reports;

ii. Balance Sheet and Profit and Loss Accounts;

iii. Cash flow Statements; and

iv. Notes to the Accounts.

(c) Tax Returns

From the above, a spreadsheet of Balance Sheet, Profit and Loss Accounts and Notes to the
Accounts of the years to be covered is prepared.

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Ratios: The relevant ratios, out of the followings, would be computed and interpreted:
(a) Liquidity/Solvency

These are ratios designed to measure taxpayer's ability to meet his obligations.

i) Current (or working capital] Ratio

ii) Acid Test (or Quick) Ratio

iii) Working Capital Turnover

iv) Assets Turnover

(b) Efficiency (Activity)

These are ratios that measure effectiveness of taxpayer in using his assets.

i) Account Receivable to Turnover Ratio

ii) Age of Accounts receivable

iii) Investor Turnover

iv) Working Capital Turnover

v) Asset Turnover

(c) Equity Position and Coverage

These are ratios that measure that balance between the resources provided by the creditors
and owners of the company.

i) Debt Equity Ratio

ii) Debt to Total Assets Ratio

iii) Book Value per ordinary share

(d) Profitability

These are ratios that measure the ability of the taxpayer to generate an excess over turnover.

i) Profit Margins on sales

ii) Return on Investment

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* Return on Total Assets

* Return Oil Owners equity

iii) Ratio of Tax already lessened to Net Profits

iv) Ratio of Cost of Sales to Turnover

The tax auditor should bear the following tax evasion tendencies in mind;

(a) Understatement of income.

(b) Overstatement of expenses.

(c) Undervaluation of stocks.

(d) Creation and maintenance of secret reserves.

(e) Postdating sales (what happens to the related costs when income is postdated).

(f) Omission of income.

Proper interpretation of these ratios will lead to determination of the risk areas for tax audit
focus.

Notification of Taxpayer: On completion and approval of the preliminary review by the Head of
the unit, the taxpayer or his tax consultants will be notified of the field audit, which will then be
carried out in the company's premises.

The notification letter will state the following:

(a) Period (years) that the audit exercise will cover

(b) List of records/documents to be made available for the audit.

The company should be notified that this list is not exhaustive.

(c) Date and time of commencement of audit exercise.

(d) Names of the Inland Revenue officials that will carry out the audit.

Members of the audit team are expected to carry their identify cards. The identify cards should
neither be taken away from the auditors nor allowed to be photocopied.

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Pre-Audit Meeting followed by Field Audit:

(a) The field audit exercise must commence with a preliminary meeting with the
management of the company usually represented by the Managing Director and/or Financial
Director or their representatives.

The Company's Tax Consultants where necessary are also expected to be in

attendance at this meeting.

(b) The meeting is aimed at:

(i) Informing the taxpayer of the purpose of the audit.

(ii) Confirming background information of the taxpayer earlier obtained in the assessment
file.

(iii) Getting other relevant information that are not available in the file.

(iv) Familiarizations with the company's accounting and operational systems which include,
but not limited to, the following:

* Whether the company operates manual or computerized accounting system.

* Whether the accounting system is on cash or accrual basis.

* The invoicing system in place for sales and purchases.

* Whether all cash received are banked intact before expending there from.

(v) Giving the taxpayers the opportunity to express their views on the audit.

(vi) Seeking the cooperation of the taxpayer in terms of providing books and records and
explanation where necessary.

(c) The team leader is expected to chair the meeting while a member of the audit team is
expected to take minutes of the meeting.

(d) Part of the functions of the team leader is to approve the draft of the minutes ensure
that the final copy is produced and signed on the field by the officer that prepared it, the team
leader and the company's representative, as well as the tax consultant where necessary. A copy
of the signed minutes must be given to the representatives of parties concerned.

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Post Audit Meeting:

A post audit meeting should be held immediately after the end of the field audit, between the
tax auditors and the taxpayers and their representatives at the taxpayer’s premises the purpose
of this meeting is to obtain any further outstanding information/document that may be
available only from the taxpayer’s management and to answer outstanding questions that
arose during the field audit work.

Minutes of the meeting should be documented in writing, signed by both parties and a copy
given to both parties. This marks the end of the field audit and departure from the taxpayer’s
premises.

Audit Reports:

Preliminary Report: Sometimes, the scheduled officer of a case would come across material
issues, in the course of the preliminary review of the assessment file that should be brought to
the notice of the management. In such an instance, a preliminary report would be prepared and
sent to the chairman detailing such issues.

Interim Report: After the field audit, exercise, progress reports could be called for by
management. The team leader should collate the individual reports of all the team members
and write the Interim Audit Report. The report should highlight details of all the findings that
may result in additional tax assessment as well as areas of possible dispute with the taxpayer
and suggestions on how to resolve them.

The report should be addressed to and reach Regional audit or Headquarters as appropriate
within one week of the post audit meeting.

Post Audit Review by Regional/Headquarters Audit: The Regional/Headquarters Audit will

review the Interim Audit Report as soon as it is received, by giving clear directives on all
reported matters, after due consideration of the technical issues involved based on the
prevailing tax laws, as well as the generally accepted accounting principles. This will form the
basis for the reconciliation meetings.

Reconciliation Meetings:

This is a meeting between the tax auditors (with representatives of Regional/Headquarters

Audit present as appropriate) on the one hand and the taxpayers (and their representatives and
tax consultants) on the other hand. The purpose of the meeting is to resolve all outstanding
438
issues arising from the field tax audit exercise with a view to determining the additional tax due
and resolving all disputes in accordance with the tax laws of Nigeria.

After the reconciliation meeting, additional assessment may be issued as appropriate with
notices, while outstanding matters treated to a logical conclusion.

However, in the case of any formal objection by the taxpayer, the reasons for the objection will
be considered and notice of amended assessments or notice of refusal to amend the
assessment will be issued as appropriate.

Objections by the tax payer to the additional assessment should be made within reasonable
time, otherwise the additional assessment become final and conclusive. Where notice of refusal
to amend is issued, the tax auditor should ensure that due process is strictly adhered to in
documentation, record keeping and correspondences as these may affect the success of FIRS'
defense against any appeal filed by the taxpayer before the Body of Appeal Commissioners.

It should be noted that all further appeals lie with the High Courts, Court of Appeal and
Supreme Court. All that transpired at the reconciliation meeting should be documented in form
of minutes, which will be signed and distributed to all parties.

Final Audit Report: The audit report is very important and should be rendered immediately an
audit is completed. It contains all important items about the company and the audit work done.

Audit reports tend to expose system's weaknesses and shoddy audit job is also easily revealed.
The reports will state the findings and details of tax liabilities, if any. An audit report should
always be completed with the auditors’ recommendation. Such recommendations may include
the need for extended audit, special investigation and even prosecution.

Based on the minutes and outcome of the reconciliation meetings, the final audit report will be
written by the Audit team leader. The report which should be addressed to the
Regional/Headquarters Audit, will state in detail, the additional assessments agreed at the
reconciliation meeting as well as those disputed.

The additional assessments agreed should be separated from those disputed. Both should be
analyzed in tabular form under various taxes (eIT, WHT, CGT, VAT,PAYE etc.) for each year of
assessment concerned. The report should indicate details of how each additional assessment
was arrived at. The Regional/Headquarters audit will consider the report within a reasonable
time of its receipt and issue clear directives for issuance of notices of additional assessments,
amended assessments and notice of refusal to amend assessment, as appropriate. The report
will also form the basis of FIRS defense in case of an appeal to the Body of Appeal
439
Commissioners, in which case, a copy of the report will be sent to the Legal Adviser for follow-
up.

13.06 Types of Audit Exercise:

(a) Routine Sector Audit

This audit covers companies operating within a specific industry, for example, banking,
construction, Oil servicing, shipping. The objective is primarily to ascertain and assess the
overall compliance level in particular industry.

(b) Routine Zonal Audit

The tax audit branch is located within the Lagos zone and thus operates more actively within
the zone. However, periodic audit tours of other zones are carried out. Companies within such
zones irrespective of industry are visited and audited. The new dispensation makes the audit
unit reside in the Tax Office that has jurisdiction over the taxpayer's file.

(c) Special Purpose Audit

Apart from routine audits, sometimes management would direct the branch to carryout audit
to achieve a specified purpose. Such instances include:

(i) Verification of taxpayer's claims for tax refunds;

(ii) Dispute between taxpayers and the Area Office on specific issues;

(iii) Suspected cases of tax evasion;

(iv) Value Added Tax audit; and

(v) Management's directives.

Technical Procedures

Technical procedures refer to the process of earring out tax audit. It involves planning,
organizing and executing all activities required to effectively carry out the audit. The process
could be grouped as follows:

(a) Allocation of Audit Cases: All referred cases 'must be allocated to individual inspectors
who would be the schedule officer for each case. The criteria for allocating cases are mainly the
440
level of competence of an inspector considering the urgency attached to the audit, the
technically involved, size of the company and other relevant factors.

(b) Pre-Audit Visit Activities: The schedule officers' first task would be to obtain the
company's assessment file (and sometimes, the collection file) from the Area Office for the
purpose of extracting relevant financial data. After the extractions, a comprehensive file review
would be done and a report written. The report will show the background information of the
company, the tax history, relevant performance ratios, and comments on tax queries raised by
the Area Office, areas of potential audit risks and recommendation as to outcome of the audit.

(c) Circularization letters: These may be set to identify third parties for independent
confirmation of certain information.

(d) The Field Audit: An audit team comprising Inspectors and a team leader would visit the
company to carry out the field examination of the company’s records. The duration of the field
work depends on the volume and complexity of the company's it operations.

(e) Reconciliation Process: After the field audit, the summary of the audit findings would be
sent to the company and its tax consultants for their reaction and a date is then fixed for
reconciliation. The reconciliation involving the review of additional, written representations,
interviews and meetings would then begin until after all contentious issues have been resolved.
Thereafter, a final letter of intent detailing the Revenue's position on the unresolved issues and
computation of any additional tax would be sent to the taxpayer.

(f) Assessment: The relevant notices of additional/revised assessment are raised after the
letter of intent has been sent. Also, the withholding tax Section would be advised to pursue
collection of any withholding tax that may become due as a result of the exercise.

(g) Objectives: Objections to the additional assessment could be raised either immediately
after the letter of intent has been received by the taxpayer or after notices of additional
assessment have been raised. In either case, a review of the working papers or whole file would
be initiated with a view to ascertaining the validity of the company's objection. Sometimes a
revisit would be made to the company to verify any new documents available. Having
confirmed that the position adopted by the Tax Audit is right, notices of refusal to amend the
assessments would be raised after obtaining the headquarters' authority to do so. The case
could then be referred to the legal Section for litigation.

(h) The final Report: Once all objections, it any, have been disposed of, a final report of the
tax audit exercise would be made to the management. The major elements of the report would
include: the background information of the company, the pre-and post, audit tax adequacy
441
ratio, the audit work performed, major audit findings, tax yield, recommendations and
conclusions

13.07 Audit Programme

This is a schedule of audit work expected to be performed on each item of the accounts such as
income/turnover, expenditures, assets and liabilities.

Benefits of the Audit Programme

The audit programme would be useful in the following areas:

(a) It will provide details of the work, which the team leader requires individual members of
the team to perform.

(b) It will provide information as to how much of the audit work has been completed as at a
particular date, and how much is outstanding.

(c) Provides a record of audit responsibility by providing a record of the audit members
responsible for each part of the completed work.

(d) Facilitates audit supervision and control, giving senior members of the audit team
information and knowledge regarding the progress of the work done to date.

(e) Ensure continuity in the audit work, should there be a change in the personnel
constituting the audit team, with new members being able to see at a glance the outstanding
work to date, thus providing a basis for planning and staffing the audit team.

(f) Provides an avenue for the team leader to allocate his available staff in the most
productive and efficient manner possible.

(g) It is a time management tool.

The thrust of a tax audit will be that of verification of the figures and other information
submitted by the taxpayer for tax purposes.

The primary purpose of tax audit has been expanded to monitor and maintain the confidence in
the integrity of the newly introduced self-assessment system. It helps to improve voluntary
compliance by detecting and brining into account those who do not pay the correct amount of
tax.

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Tax audit is a routine exercise and the outcome usually leads to reassessment or referral for
special investigation if tax evasion is suspected.

13.08 Tax Investigations

Investigations, as distinct from tax audits, are called for when there are problems in, for
example, an organization either affecting the whole or particular segment of the organization.
Such could be required when a large fraud is suspected or when evidence of mismanagement
abounds and an interested party requires that the effect on the enterprise be quantified for
management decision-making purpose.

In an investigation, the scope of work is wider than that of a tax audit. The details of checking
and depth of the work will also likely be more than that required for an audit exercise.

Tax investigation, is similar to any other form of investigation. It is not carried out on routine
basis as that of an audit. For example, a statutory audit of the accounts of a company must be
carried out every year, whereas investigation may not be carried out in the same company for
several years.

Tax investigation would be carried out when a taxpayer is suspected to have committed fraud.
Suspected cases of tax evasion could lead to investigation. These could be due to: failure to file
tax returns; filing of incomplete or inaccurate returns; failure to register for tax purposes etc.

Special Investigation results from suspicion or actual knowledge of the existence of tax evasion
or tax fraud. It is conducted by tax inspectors who have special training and competence
in investigation techniques. They can request for assistance of police investigators and
enforces, if necessary.

The principal aim of investigation is to expose all the circumstances of the fraud or tax evasion
and to obtain evidence for possible prosecution. Tax investigators have been given greater
power than tax auditors. They can seal up J business premises to facilitate their work and
obtain all the documents needed to substantiate the evidence of tax evasion and fraud.

Stages of Tax Investigation

Actual investigation of tax cases involves the following stages:

(a) Surveillance or Pre-Investigation Activities: This involves checking and cross checking,
obtaining more information on the alleged tax fraud. It involves discrete analysis of data,
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reports and complaints. These have to be done speedily or the offence could become
compounded.

(b) Evidential Audit or Investigation: At this stage, the investigators move into the business
premises of the suspected party to conduct in-depth tax audit, take charge of any evidence
discovered, secure a warrant of arrest ad have the suspect arrested if necessary. At this stage,
any individual may be invited for investigation. Also, thorough searchers of individuals, offices
and apartments may be conducted to obtain relevant evidence that might be useful in
prosecuting the case.

(c) Case Preparation: This involves the collation of evidence, the interrogation of suspects,
and careful examination and analysis of seized documents to assess their relevance to the case
and potency in the law courts. At this stage, the case can still be dropped if the evidence is
weak.

(d) Arraignment: This is the stage where the case goes to court for criminal prosecution. All
the evidence collected and witnesses secured are made available to the prosecutor who is
thoroughly briefed on the case.

(e) Termination of Investigation: Investigation in a case of criminal tax fraud or tax

evasion can be terminated at any stage, if the following conditions obtain:

(i) Insufficient evidence.

(ii) Criminality is not involved; may be what happened was tax avoidance and not tax
evasion or fraud.

(iii) There can be termination by law where continuation can no longer be sustained under
the provisions of the law. An example is where such a case becomes statute-barred.

(iv) If the suspect dies or becomes medically or legally in same.

Functions of Investigation/Intelligence

The Investigation/Intelligence Unit of the Federal Inland Revenue Service is in charge of all
investigations and intelligence activities of Inland Revenue.

The roles and responsibilities of the Head of the Division are as follows:

(a) Articulate and direct policies and programmes aimed at achieving the objectives of the
division;

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(b) Define key operating/guiding principles;

(c) Design strategies for deterring violations of tax laws and hence ensuring tax compliance;

(d) Set up procedures for case referrals from Tax Offices;

(e) Set lip proactive processes and define parameters for identifying potential cases of
violations;

(f) Address emerging areas of fraud for example, e-commerce, fraudulent financial
reporting;

(g) Collate and maintain reliable statistics of investigations/intelligence work;

(h) Coordinate the activities of all the units in the division;

(i) Allege purchase of foreign assets at inflated amounts, which results in excess capital
allowances claim.

(i) The use of tax havens and its detrimental impact on the tax system could be significant,
both in terms-of revenue and compliance.

(vii) Income splitting arrangements.

(b) Investigate cases for tax refunds

(c) Review cases for mergers and acquisitions.

(d) Issue warrants for search and seizure under Section 45A.

(e) Refer cases to criminal investigations unit where there are indications of deliberate
intention to evade tax or commit fraud etc.

(f) Identify areas for amendments to tax laws in order to plug all areas of tax leakages.

13.09 Responsibilities of Criminal Investigation Unit

The criminal investigation unit is responsible to:

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(a) Investigate, penalize and recommend prosecution in cases of tax evasion. With tax
evasion, you have fraud with “menswear”, the amounts are clearly taxable (suppression of
income, fictitious expenses) and does not require an amendment to the tax law. Evasion
transactions are done knowing that it was unlawful to do. Normally criminal charges are laid
which could result in fines and/or a jail term in addition to the tax and penalties. Examples are:

(i) Arrangements premeditated to reduce tax payable;

(ii) Understatement or non-disclosure of income;

(iii) Overstatement of expenses;

(iv) Creation of fictitious assets and expenses;

(v) Disproportionate share of expenses and income between offshore and onshore entities;

(vi) Complex management structure and associated entities that would result in tax evasion;

(vii) Non filing of tax returns or filing of incorrect returns; and

(viii) Denial of Federal Inland Revenue Service access to records.

(b) Investigate and liaise with relevant agencies for prosecution in cases of:

(i) Fraudulent diversion of Federal Inland Revenue Service taxes such as Withholding tax,
Value Added Tax, etc.;

(ii) Fraudulent payment of income tax and other taxes through use of falsified withholding
tax receipts;

(iii) Abuses by companies and Government agencies in Value Added Tax/Withholding Tax
deduction and remittance; and

(iv) Fraudulent procurement of Tax Clearance Certificate, revenue receipts, Withholding Tax
Credit notes.

(c) Carry out search and seizure where such would result in obtaining relevant document
for an investigation.

(d) Analyze and evaluate evidences obtained to establish criminal violation, follow up with
assessment, penalties and prepare case for prosecution.

(e) Identify the areas for amendments to tax laws in order to plug all tax leakages.
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(f) Assist in preparing evidence for prosecution of violators.

(g) Liaise with the National Drug Law Enforcement Agency (NDLEA),Economic and Financial
Crimes Commission (EFCC), Nigeria Deposit Insurance Corporation(NDIC) and Central Bank of
Nigeria (CBN) to investigate violation of tax laws in cases of white-collar crimes such as money
laundering.

Intelligence Unit

The main function of this unit will be to gather and analyses information and thus maintain a
database of information for civil/criminal investigation and the Federal Inland Revenue Service
in general. Specifically, the unit will:

(a) Liaise with Tax Offices to obtain information on returns filed, Stop-taxpayers, late tax
payers, etc. for database;

(b) Liaise, on a regular basis, with banks and the Corporate Affairs Commission to obtain
information on new accounts (Section 44), new companies, that is, non-filers;

(c) Liaise with Ministries/Government parastatals on contracts for current and prior years,
for cross-checking the returns filed by the companies.

(d) Gather and review information in newspapers, magazines, journals, radio and television
for signs of potential civil or criminal violations:

(e) Use intelligence techniques (for example, surveillance techniques and computer
database searches) to gather information on a company's businesses, financial activities, etc.

(f) Carry out special enforcement programs on suspected targets:

(g) General intelligence collection;

(h) Refer cases to the civil or criminal investigation unit after carrying out relevant analysis;

(i) Obtain information from third parties; and

(j) Obtain and review published financial statements of offshore companies,

Assessment of Investigation/Intelligence Division

(a) Strengths
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(i) To management support:

(ii) Quality staffing with Inspectors of high integrity and professional, competence
preferably chartered accountants, economists and lawyers;

(iii) Enforcement powers in the tax laws such as power to seal up company premises, to
issue warrants after due consultation with the management in the case of resistance; and

(iv) FIRS legal unit's continued assistance in the prosecution of tax offenders and advising on
legal issues,

(b) Weaknesses

(i) Internal and external interference

(ii) Obstruction of investigation through abuse of the judicial process,

(iii) Conf1icts between Tax Audit Section in Tax offices and civil provision of necessary
documents and records,

(iv) Inadequate funding due to budgetary constraints,

(v) Inadequate experience in criminal investigation,

(vi) Reliance on external bodies such as the Nigeria Police, Economic and Financial Crimes
Commission, etc.

(vii) Inadequate infrastructure-Computers and Equipment to perform necessary duties

and unstable power supply.

13.10 Review Questions

a. Comment on the Objectives of Tax Audit

b. ‘The tax audit branch carries out audit exercise only on companies that have been
referred to it by the management’. Discuss the usual channels for recommending cases
for audit include

c. Identify the differences and similarities between the different types of audit exercise:

d. What are Benefits of the Audit Programme?

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 MODULE 14

14.00 TAX PRACTICE

14.01 Learning outcome

On successful completion of this Module, Students should be able:

i. Examine the meaning and procedures for tax audit and investigations;
ii. Evaluate the fundamentals of clients documentation and records;
iii. Develop the strategies for communication and registration with tax authorities;
iv. Prepare self-assessment for individuals;
v. Disintegrate between tax avoidance and tax evasion.

14.02 Tax Audit and Investigations

The entire process of tax practice involves matters relating to appointment and acceptance of
offer by the tax consultant to act as a tax consultant.

Activities to be conducted to achieve the Designed Outcomes

Practical demonstration by a practicing certified member should be carried out, ethical issues
need to be stressed for proper adherence.

Communication with Clients

There is always the need for timely communication with Clients on matters relating to
appointment and acceptance of offer to act as Tax Consultant, as well as updates on
representation to the Tax Authorities. Tax Payers are of two categories:

(a) Individual Tax Payers, and

(b) Corporate Tax Payers

Individual Tax Payers file tax returns to State Internal Revenue Service, while Corporate Tax
Payers (usually Companies) file returns with the Federal Inland Revenue Service.

It is, therefore that when appointing Tax Consultants, Clients must specify the scope of
assignment in the Letter of Engagement. The Tax Consultants must also be guided in accepting
any job and understand their obligations as Tax Agents, Liaising between the Clients, Tax
Authorities and other third parties.

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Appointment of Tax Consultant

Appointment of Tax Consultant is usually communicated vide Letter of engagement emanating

from the Tax Payer to the Tax Consultant.

A typical Letter of Appointment is shown below:

Illustration I

Letter of Appointment as Tax Consultant written

On the letterhead of CNA NIGERIA LTD

25thAugust, 2014.

The Managing Partner

Crest Consult

20 Gyangoad

Bokkos, Jos

Dear Sir,

Appointment as Tax Consultants

We refer to the discussion held recently with our Directors on Tax and related matters and
hereby confirm that management has today approved your firm's appointment Tax Consultants
to our company with immediate effect.

Please note that the services to be rendered include Employees Directors and Company Tax
matters.

You are to please liaise with our Financial Controller, who will provide you with all necessary
information and financial statements/records which you might require in the course of carrying
out the assignment.

We propose a meeting with you for next Wednesday August 30, 2014 by 2 pm at out head
office to finalize the details.

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We look forward to mutually beneficial relationship between our company and your
organisation.

Thank you.

Yours faithfully,

For: CNA NIGERIA LTD

(Signed)

(MANAGING DIRECTOR)

Cc: The Tax Controller

Federal Inland Revenue Service

Integrated Tax Office, Jos.

Acceptance of Offer as Tax Consultant

The Acceptance of offer as Tax Consultant to a Tax Payer is the indication of the readiness 'of
the Tax Consultant to render the specific services requested and to provide other special
assignments to the Client(s) from time to time.

The Consultant from inception should understand the nature and scope of the assignment in
order to provide adequate services to the Client(s) issues relating to Professional Fees should
be fully discussed at the inception of the contract of service.

Solution

5th May, 2009.

The Managing Director

CNA Nigeria Limited

4, Miango Way

451
Kwall, Jos.

Dear Sir,

Acceptance of Offer as Tax Consultants

Your letter of 25th August, 2014 on the above subject matter refers.

We confirm our firm's acceptance of your offer to act as Tax Consultants to your organisation.

From the contents of your offer letter, we understand that we shall provide tax related and
advisory services to your company, its Directors as well as Employees. We will also only
represent your interest with the relevant Tax Authorities from time to time.

We shall be pleased to meet with you as scheduled.

Yours faithfully,

(Signed)

Managing Consultant

For: CNA Consult

14.03 Clients Documentation and Records

After accepting the offer to act as Tax Consultant to any Taxpayer, necessary documentation
and information, should be put in place.

Documentation/and information to be maintained/provided by Clients.

The company's (client's) officers should have maintained the following document/records.

(a) Certificate of Incorporation

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(b) Certified True Copies (CTC) of Memorandum and Articles of Association (MEMAT).

(c) CTC of Forms on Directors (CAC 7), Allotment of Shares (CAC 2),Appointment of
Secretary lCAC 2.1) and Notice of Registered office (CAC 3).

(d) Certificate of Increase in Share Capital including Stamp Duties, Registration etc.

(e) Contracts, Rents and other Agreements.

(f) Financial matters

(i) Signed Audited Financial Statements.

(ii) Books of Account, Ledgers, Trial Balance (Hard &Soft copies)

(iii) Fixed Assets Register and Title documents

(iv) Accounts and Procedural Manual

(v) Payment Vouchers, Receipts, etc.

(vi) Banking& Cash transaction documents.

(vii) Monthly Payroll and Directors' Emolument.

(g) Correspondences with Tax Authorities and other third parties.

(h) Minutes of Board of Directors' and Annual General Meetings (AGM).

(i) Tax and other payment receipts, assessments, forms, Tax Clearance Certificates etc.

(j) Other Financial and Non-Financial documents including appointment letters.

The above should be kept intact in a safe place, because they may be required sighting by the
Revenue Authorities, during registration, filing of assessments and tax examinations.

Documents/data to be maintained by the Tax Consultant

The following documentation/data, among others, will be maintained by the Tax Consultants in
respect of each Client. The documents which will either he kept in the permanent file or
forwarded to the relevant tax office will include the following:

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(a) CTC of Incorporation documents i.e. Certificate of Incorporation, MEMAL Directors,
Shareholders, Secretary, and Share Capital details. Etc.

(b) Engagement Letters.

(c) Company Auditors' details if different from that of Tax Consultant.

(d) Audited Financial Statements, Capital Allowances, Income Tax, Education and other
Computations.

(e) Trial Balance, detailed Analysis and Schedules on the Financial Statements.
(f) Correspondences with the Client tax authorities and third parties.

(g) Registration documents in respect of Income Tax, Value Added Tax (VAT), PAYE,
Withholding Tax and other Levies.

(h) Records of Billings and out standings.

(i) Other documents, financials and non-financials.

14.04 Communication with Tax Authorities

The Tax Authorities rely on documents and first-hand information provided by any Tax payer
(or the tax Consultant), in determining the possible tax liabilities of the Tax Payer.

Additional information from third parties such as Banks, Insurers, Landlords, Tenants, Suppliers,
Customers, Shareholders, Registrar of companies and other Stakeholders may be required by
the tax authorities for assessment purposes.

Under the provision of the Federal Inland Revenue Service (Amendment) Act, 2007 and other
Tax Legislations, Relevant Tax Authorities have rights to receive or demand for additional
information from Tax Payers and third parties, on matters affecting any Tax Payer.

Communications with Tax Officials will usually cover the following:

(a) Registration with Tax Authorities for Income and other Taxes using Standard
questionnaire.

(b) Filing of Tax Returns time limits provided by the Tax Laws.

(c) Self Assessments and Objections to Best of Judgment (BOI) assessments.

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(d) Tax Queries and Replies.

14.05 Registration with Tax Authorities

The FIRS and SIRS have a Standard Questionnaire which is expected to be followed by
Taxpayers for the registration under the provisions of CIT A, PITA, PPTA and other Tax
Legislation/Acts.

The folioing details together with CTC of Incorporation documents (Originals to be submitted
for verification), will be provided in a formal letter addressed to the Chairman of the relevant
tax authority, in respect of every prospective Tax Payers:

(a) Name, Registration Number and Date of Incorporation/Registration.

(b) The Registration or Home address (as applicable)

(c) The Business address.

(d) Names and addresses of the Directors.

(e) Names and addresses of the Shareholders together with their shareholders.

(f) Any other Directorship held by the Directors.

(g) The precise Nature of business.

(h) Whether or not the business has any predecessor(s)

(i) The Date of commencement of business

(j) The Accounting year end.

(k) Details of Company Secretary (Where applicable).

(l) Details of the appointed Auditors and Tax Consultants.

(m) Details of appointed Bankers.

(n) Any other Information which may help the tax authority in this regard.

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 VAT Registration

A VAT-able Person or VAT Agent is required to also file application for VAT registration at the
nearest FIRS office. The application will be supported with CTC of the registration documents.

Filing of Tax Returns

Any company registered in Nigeria must submit relevant information to the tax authority within
six months of existence or at commencement of operations (whichever is earlier). An Individual
must also provide relevant information in the specified format (Form A) at the beginning of
every 'assessment year.

Filing of Tax Returns for Individuals and Corporate persons are done using prescribed self-
assessment year end (whichever is earlier):

(a) Signed Audited Financial Statement together with a covering letter from the Tax
Consultant.

(b) Capital Allowances and Income Tax Computation.

(c) Self-Assessment Forms for Income and Education Tax.

14.06 Self-Assessment for Individuals

Tax Returns for Individuals are submitted at the beginning of every assessment year. The Self-
Assessment Form (Form A) is completed, stating various sources of Income and
Allowances/Reliefs claimable. The Assessment forms must be signed and dated by the Tax
Payer.

It is relevant to note here that, tax payments to both FIRS and SIRS are now made vide E-
Payment at designated banks. The E-payment has therefore reduced the level of written
communication with the Tax Authorities.

Best of Judgment (BOJ) Assessment

Where the Tax Payer fails to file Self-assessment forms and pay the normal tax within the time
limit specified under the law, BOJ assessment is raised on the affected Tax Payer.

A valid objection must be raised within 30 days of service of such notice, stating valid ground of
objection.

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Tax Queries and Replies

Tax queries emanate from desk examinations of tax, returns by Tax Officials. Returns are
examined, asking for supporting documents in order to ascertain whether or not the tax payers
income has not been understated, reliefs not overstated or that the expenses deducted from
the Income the period were “wholly, exclusively, necessarily and reasonably incurred” in the
production of those incomes.

Tax Queries may not follow any specific pattern, but Tax Practitioners must have a better
understanding of the Tax payer's operations, and possess adequate technical knowhow, with
relevant field experience.

The following issues may be raised from related documents, collected or verified by tax
officials, in order to eliminate any private or capital expenditure from the tax returns and also
guide against tax avoidance shares to some reasonable extent.

(a) Whether there exists, supporting documents for Assets, Liabilities Income and
Expenditures in the name of the Tax payer.

(b) Whether private expenses were included in the Accounts.

(c) Whether relevant documents such as certificate of Acceptance, Input VAT, Invoices,
supporting invoices, Premium Claims, invoices on administrative and operating
expenses, etc. agreed with amounts stated in the Accounts.

(d) Whether PAYE deducted from salaries and Withholding Taxes from Supplies or
Professional fees were promptly remitted.

(e) Whether Capital expenditures in form of cost of increase in Capital or Incorporation

expenses, general Bad Debts and Depreciation have been written back to profit.

(f) Whether losses and carry forward rules have been adequately observed.

Replies

When replying to tax queries, tax practitioners should Endeavour to be more ethical and use
subtle language as much as practicable the Consultant should avoid quoting decided cases or
tax laws when one is not too sure that circumstances or scenarios are similar.

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Apart from the above, the Consultant should make use of relevant supporting documents from
both the client's office and his working papers. Third party documents not relevant to the
queries raised should not be forwarded as an attachment.

Finally, the Tax Consultant should not be seen to be involved in any practices which could be
construed to be Tax Evasion, fraud or outright criminality.

Communication with Other Stakeholders

Communication with other stakeholders is specifically required to gather additional information

on the clients' business.

Communication with Former Tax Consultant and Auditors

To satisfy professional ethics, an Incoming tax consultant is required to liaise with the former
Consultant and/or Auditors previously in charge of the Client's tax matters.

In these circumstances, the Incoming Consultant needs to:

(a) Confirm whether or not there exists any professional reason(s) why they should not
accept the appointment.

(b) Obtain relevant documents, Audited Accounts, tax computations and background
information on the new assignment.

(c) Plan the assignment very well.

Communication with others

The Tax Consultant may also need to obtain further information in respect of the Client, from
the following:

(a) Bankers-for Bank Statements in support of bank charges and to vouch certain entries.

(b) Insurers- For premium paid.

(c) Pension Fund Administrator- For pension Fund Certificate, to support exemptions.

(d) Other Professionals, that is, Lawyers for Legal advice.

The Tax Consultant must obtain written permission from the Client, in support of third parties
evidence. One should exercise the duty of reasonable care in making use of any third parties'
evidence.
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14.07 Tax Avoidance and Tax Evasion

Every assesse (taxpayer) wants to escape from paying taxes, which encourages them to use
various means to avoid such payment. Obviously, when it is about savings the taxes, the two
most common practices that can be seen all around the world are tax avoidance and tax
evasion. Tax avoidance is an exercise in which the tax payer legally tries to defeat the basic
intention of the law, by taking advantage of the shortcomings in the legislature (surbhi, 2015:1).

On the contrary, tax evasion is a practice of reducing tax liability through illegal means, i.e. by
suppressing income or inflating expenses or by showing lower income. In other words, Tax
Avoidance is completely lawful because only those means are employed which are legal, while
Tax Evasion is considered as a crime in the whole world, as it resorts to various kinds of
deliberate manipulations. To learn more differences, on the given topics, read the article
provided below. Definition of Tax Avoidance

An arrangement made to beat the intent of the law by taking unfair advantage of the
shortcomings in the tax rules is known as Tax Avoidance. It refers to finding out new methods
or tools to avoid the payment of taxes which are within the limits of the law.

This can be done by adjusting the accounts in a manner that it will not violate any tax rules as
well as the tax incurrence will also be minimized. Formerly tax avoidance is considered as
lawful, but now it comes to the category of crime in some special cases.

The only purpose of tax avoidance is to postpone or shift or eliminate the tax liability. This can
be done investing in government schemes and offers like the tax credit, tax privileges,
deductions, exemptions, etc., which will result in the reduction in the tax liability without
making any offence or breach of law.

Definition of Tax Evasion

An illegal act, made to escape from paying taxes is known as Tax Evasion. Such illegal practices
can be deliberate concealment of income, manipulation in accounts, disclosure of unreal
expenses for deductions, showing personal expenditure as business expenses, overstatement
of tax credit or exemptions suppression of profits and capital gains, etc. This will result in the
disclosure of income which is not the actual income earned by the entity.

Tax Evasion is a criminal activity for which the particular taxpayer is subject to punishment
under the law. It involves acts like:

• Deliberate misrepresentation of material facts.

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 • Hiding relevant documents.

• Not maintaining complete records of all the transactions.

• Making false statements.

Key Differences between Tax Avoidance and Tax Evasion

The following are the major differences between Tax Avoidance and Tax Evasion:

1. A planning made to reduce the tax burden without infringement of the legislature is
known as Tax Avoidance. An unlawful act, done to avoid tax payment is known as Tax
Evasion.

2. Tax avoidance refers to hedging of tax, but tax evasion implies the suppression of tax.

3. Tax avoidance is immoral that tends to bend the law without causing any damage to it.
Unlike tax evasion, this is illegal and objectionable both according to law and morality.

4. Tax avoidance aims at minimizing the tax burden by applying the script of law. However,
tax evasion minimizes the tax liability by exercising unfair means.

5. Tax Avoidance involves taking benefit of the loopholes in the law. Conversely, Tax
Evasion includes the deliberate concealment of material facts.

6. The arrangement for tax avoidance is made prior to the occurrence of tax liability.
Unlike Tax Evasion, where the arrangements for it, are made after the occurrence of the
tax liability.

7. Tax avoidance is completely legal however Tax Evasion is a criminal activity.

8. The result of tax avoidance is the postponement of tax, whereas the consequence of tax
evasion if the individual is found guilty of doing so is either imprisonment or penalty or
both.

Note:

Tax Avoidance and Tax Evasion both are meant to reduce the tax liability ultimately but what
makes the difference is that the former is justified in the eyes of the law as it does not make
any offence or breaks any law. However, it is biased as the honest tax payers are not fools, but
they can also make arrangements for postponing unnecessary tax. If we talk about the latter, it

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is completely unjustified because it is a fraudulent activity, because it involves the acts which
are forbidden by the law and hence it is punishable.

14.08 Review Questions

a. Identify the documents required for clients’ documentation and records

b. Discuss the scope of communications with tax officials

c. Comment on the key differences between tax avoidance and tax evasion

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 Recommended Futher Readings

Aroh J. C. and Nwadialor E. O. (2009) Nigeria Companies Taxations for Tertiary Institutions.
Onitsha,Nigeria: Adson Educational Publishers.

Arowomole, S.A and Oluwakayode E.F. (2006), Company Income Tax Laws and Administration in
Nigeria. Lagos, Nigeria:King Julius Publishers

Bassey, O. U (2013), Companies Taxation in Nigeria. Lagos, Nigeria:The CIBN Press Ltd,

Bassey, O.U. (2013), Petroleum Profit Tax in Nigeria. Lagos, Nigeria:The CIBN Press Ltd,

Ewoma D. K (2013) IFRS and Tax. Second Edition

Federal Inland Revenue Service (2006), Tax Implication of Mergers and Acquisitions. Abuja,
Nigera: Information circular

Motis J (2007), Mergers and Acquisitions Motives. Toulouse School of Economics - EHESS
GREMAQ and University of Crete

Ndan, J. D. (2007). Public Finance: A Nigerian Perspective. Faith Printers

Omoregie, A.E.N (No Date), Taxation a Pragmatic Approach. Benin City: Mobel D’ Excel Nig.

Ltd

Oriakhi, E.O. (2012), Introduction to Public Finance. Benin City, Nigeria: Mindex Publishers

Osemeke, M.O (2010), Practical Approach to Taxation and Tax Management. Benin City,
Nigeria: Ethiope Publishing Company.

Seyi Ojo (2003). Fundamental Principles of Nigeria Tax. Lagos, Nigeria: ABC Ventures

Soyode, L. and Kajola, S.O. (2006). Taxation: Principles and Practice in Nigeria. Lagos, Nigeria:
Silicon Publishing Company.

Spaeth, S and Garriga H, (2010) Corporate Strategy Mergers & Acquisitions. Zurich,
Switzerland: Swiss federal institute of technology.

Zubairu, D. A. (2012). Understanding Nigerian Taxation. Garki- Abuja, Nigeria: Husaab Glboal
Press Concept Ltd.

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