ADVANCE TAXATION FOR 2016 MAY DIET PROFESSIONAL LEVEL

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1 PREPARED BY: STARRYGOLD ACADEMY MID DIET MOCK SOLUTION ON ADVANCE TAXATION FOR 2016 MAY DIET PROFESSIONAL LEVEL JOHNSON J.O , STARRY GOLD ACADEMY , , Page 1

2 SOLUTION TO QUESTION1 The Chairman Fed. Inland Revenue Services Tax Drive Victoria Island, Lagos state Nigeria. GOD DEY & CO. (Chartered Tax Practitioners) 235, Tax Avenue Ikoyi, Lagos State. Date Dear Sir/Madam: Attention: Manager (Assessment) RE: FSA NIGERIA LIMITED NOTICE OF NON-FILLING OF RETURNS We refer to your letter of referenced FIRS/FSA/ on the subject matter. Our firm has been retained as the tax consultants to FSA Nigeria Limited and we shall be dealing with your office on their behalf and on issues relating to taxes. You will find attached herewith our engagement letter to this effect. We are taking liberty to attach a copy of your referenced letter and wish to respectfully request for your magnanimity of extending the 30 days ultimatum by another 60 days on the following grounds. - Our client commenced operations in 2010 and not 2008 as contained in your demand letter under reference. Attached is the certificate of incorporation. - Our client s financial statements from 2010 to date are currently being audited and the auditor confirmed the exercise will take minimum of 4 weeks to complete. - After completion, the board will have to meet and ratify/approve the financial statements; which will form the basis of tax assessment of our client. Our client have demonstrated good faith by deligently engaging in payment of taxes due based on self assessment, just as you attested to in your letter. STARRY GOLD ACADEMY , , info@starrygoldacademy.com, Page 2

3 May we plead with you that you use your good office to grant the extension of time request of our client and put on hold your Administrative Assessment of N100m based on VAT/annual turnovers figures. Many thanks for your kind consideration of our request and we look forward to bringing to a happy conclusion of all outstanding tax issues of FSA Nigeria Limited. Yours faithfully, (Beloved Iyanda) For: GOD DEY & CO. Cc: The Managing Director/CEO FSA Nigeria Limited. SOLUTION TO QUESTION b i. FSA NIGERIA LIMITED COMPUTATION OF ADJUSTED PROFITS Year of Assessment N N N Net Profit/Loss as per the Accounts (300,000) 1,800,000 9,000,000 Add back: Depreciation 275, , ,000 STARRY GOLD ACADEMY , , info@starrygoldacademy.com, Page 3

4 Donations ,000 Adjusted Profit/(Loss) (25,000) 2,180,000 9,580,000 Less:Loss Relief (if any) Assessable Profit (25,000) 2,180,000 9,580,000 Commencement Rule: YOA Basis period 1 st Year: /7/ /12/2010 (N25,000) Loss 2 nd Year: /7/ /6/2011 (N25,000)+(6/12 x 2,180,000) = N1,065,000 3 rd Year: /1/ /12/2011 = N 2,180,000 4 th Year /1/ /12/2012 = N 9,580,000 FSA NIGERIA LIMITED CAPITAL ALLOWANCE COMPUTATION Motor Vehicle Equipment Furniture & Fittings Total Acquisitions 02/6/2011 1,850,000 1,850,000 03/11/ , ,000 25/06/ , ,650 Total costs 1,850, , ,650 2,735,650 IA 50% 50% 25% STARRY GOLD ACADEMY , , info@starrygoldacademy.com, Page 4

5 AA 25% 25% 20% 2011 CA IA 925, , ,258, AA 134,895 9,375 32, ,944 Total CA 1,059, , , ,435, TWDV 790, , , ,299, CA IA AA 231,250 56,250 65, , Total CA 231,250 56,250 65, , TWDV 558, , , , CA IA AA 231,250 56,250 65, , Total CA 231,250 56,250 65, , TWDV 327, , , , STARRY GOLD ACADEMY , , info@starrygoldacademy.com, Page 5

6 FSA NIGERIA LIMITED COMPUTATION OF TAX PAYABLE N N N Assessable Profit/(Loss) (25,000) 1,065,000 2,180,000 Less Capital Allowances Brought forward - NIL 725, CA for the year - 1,435, , Total C/Allowances - 1,435, ,079,704 Restricted to 66 2/3% - 710,000 N/A Unabsorbed CA C/Forward - 725, N/A CA charged in the year 710,000 1,079,704 Chargeable Profit - 355,000 1,100,296 C. I. 30% of Chargeable Profit NIL 106, , Education of Assessable Profit - 21,300 43,600 Total Tax liability NIL 127, , iii. FSA Nigeria Limited has overpaid its taxes by (N23,500, ,488.80) N22,998, because tax payable is made up of: STARRY GOLD ACADEMY , , info@starrygoldacademy.com, Page 6

7 YOA Company Tax Education Tax Total ,500 21, , , , , Totals 436, , , The threat of N100 million Administrative Assessment was meant to get FSA Limited to file the right returns by finalizing the accounts and have them audited. The threat cannot be sustained. SOLUTION TO QUESTION 2 a. Audit quality control is the means by which a reasonable assurance is obtained that the audit opinion arrived at reflect compliance with approved standards and applicable regulations. The following issues must be addressed to effectively ensure quality control of a tax audit engagement: i. Effective work allocation to staff taking into account their qualifications, experience and competence. ii. Explaining the audit objective and audit test and procedures to be carried out. iii. Maintaining a proper record of audit evidence by compiling good quality audit records. iv. Effective review of the working papers by a more experienced professionals. v. Consultations within and outside to gain more knowledgeable advice vi. Attendance of conferences, workshops and seminars. b. CIRCUMSTANCES THAT CAN LEAD TO TERMINATION OF TAX INVESTIGATION i. Where there is insufficient evidence to proceed further with the case ii. Where it is discovered that criminality is not involved. STARRY GOLD ACADEMY , , info@starrygoldacademy.com, Page 7

8 iii. Termination by law. c. POWER TO DISTRAIN FOR NON-PAYMENT OF TAX Power to distrain is power to seize the properties of a tax debtor to enforce tax collection. Power to distrain is an effective weapon for enforcing owed taxes. Where payment of tax due is not made within the time limited by the demand note, the relevant tax authority is empowered for the purpose of enforcing the payment of the outstanding taxes, distrain the taxpayer by his goods or other chattels, bonds or other securities. The relevant tax authority is also empowered to:- (i) distrain upon any land or premises in other to recover the taxes owed (ii) keep the items for 14days or sell the distrained items at the expiration of time (iii) if necessary, break open anybuilding or place in the day time (iv) call for the assistance of police officers in the execution of distraint. CONTENTS OF FORM OF DISTRAINT i. The name of the officer of the Revenue Board who is authorised to execute the warrant of distress ii. Name of the company/taxpayer and place of business iii. Amount of tax to be levied by distress iv. Details about arrears of tax due for the relevant assessment years v. Year of assessment vi. Amount of tax due vii. Signature of Execute Chairman of FIRS/SIRS viii. Date of signing ix. Amount of tax outstanding against the company and which amount is to be levied by distress SOLUTION TO QUESTION 3 STARRY GOLD ACADEMY , , info@starrygoldacademy.com, Page 8

9 (a) Constraints being faced by tax authorities in assessing and collecting taxes from self-employed taxpayers include: (i) Lack of Taxpayers Data / Information There is no detailed information on or database for the selfemployed in Nigeria, thus bringing them into the tax net is difficult. (ii) Inefficient Utilization of Tax Revenue There is a general apathy to voluntary compliance with the provisions of the tax laws because of the level of decay in basic infrastructure which has always called to question the need for continued payment of tax in Nigeria. (iii) Tax Evasion and Avoidance It is easier for self-employed persons to evade tax than employees whose incomes are taxed at source. Also selfemployed persons have evolved several tax avoidance strategies which require anti-avoidance provisions. (iv) Lack of Experience and Suitable Qualified Personnel There is the dearth of experienced tax personnel, hence the difficulty in ascertaining the correct assessments for self employed taxpayers. (v) Inadequate Penalties / Absence of Enforcement In Nigeria the penalties for non-compliance with relevant tax provisions are too lenient to compel the self-employed to pay tax. There is also a general lack of enforcement of existing penalties. (vi) Inadequate Records STARRY GOLD ACADEMY , , info@starrygoldacademy.com, Page 9

10 Most self-employed persons do not maintain records of their Income and Expenditure. Some also mix their business activities with their private affairs, thus making it difficult to determine the income taxable. (vii) Lack of Public Enlightenment Most taxpayers do not know what tax to pay, when to pay, who to pay to, where to pay and what reliefs and allowances they are entitled to. A good tax system should be certain and easy to administer. The public should be educated on their responsibility with respect to tax at all times. (viii) Level of Corruption Some tax officials collude with would-be taxpayers to defraud the government of taxes. (ix) Level of Poverty Several self-employed persons are struggling to survive due to the unconducive operating environment. The society has been impoverished by the elite so much that paying tax will further impoverish the low income earners. (x) The over-dependence on oil revenue for a very long time has led to the neglect of all other non-oil revenue sources. (b) Strategies for expanding the Nigerian Tax net to improve tax collection drive covering the self-employed. Having enumerated the constraints facing the tax authorities in assessing and collection of taxes from the selfemployed taxpayers, the following strategies can be adopted to enhance compliance by self-employed taxpayers. STARRY GOLD ACADEMY , , info@starrygoldacademy.com, Page 10

11 (i) Public Enlightenment and Education The Revenue should embark on aggressive publicity and education of taxpayers on the various taxes payable by all self-employed individuals. (ii) Enforcement of Withholding Tax Provision By further encouraging companies to implement the withholding tax provision, more self-employed persons who render various services to companies can be brought into the tax net. (iii) Requirement for Presentation of Tax Clearance Certificate (TCC) By providing and insisting that TCC be produced for any form of transaction with government, more self-employed persons will be compelled to pay their taxes. (iv) Stiffer Penalties for Non-Compliance If the consequences of failure to comply with the provisions of the tax laws are made stiffer, more taxpayers will willingly comply with the tax laws. (v) Encouragement of Cooperative Unions By encouraging artisans in particular, to form associations through which government can reach the members, improvement in tax revenue generation from that category of self-employed persons will be achieved. (vi) Effective Utilization of Tax Revenue Improvement in the level of basic infrastructural facilities will encourage voluntary compliance with provisions of the tax laws as they will show that the tax Revenue is being utilized effectively. (vii) Promulgation of Anti-Avoidance Provision Making provisions to block the several loop holes in the tax laws will enhance further compliance with the tax laws and increase tax revenue. (viii) Use of Information Technology The use of appropriate information technology that will make it difficult to evade tax will enhance tax revenue from selfemployed taxpayers. (ix) Investigation and Intelligence Unit The investigation and intelligence units of the Revenue should be vibrant and effective. It is the responsibility of these units to trace self-employed persons in the society who have not been paying their taxes. This can be done by going through the Land Registry STARRY GOLD ACADEMY , , Page 11

12 and Vehicle Licencing Offices. Information can also be obtained from banks by insisting that they should file returns of all their new customers with the Revenue. (x) Engagement of Experienced and Qualified Personnel Employing qualified personnel and paying competitive remuneration will further enhance dedication to duty and ultimately increase tax revenue. (xi) Regular Amendment to the Tax Laws The tax laws should be regularly updated and the provisions should be such that are reasonable and easy to comply with. Most of the provisions of the Nigerian tax laws are out-dated and make it difficult to comply with. Some of those provisions encourage tax evasion. SOLUTION TO QUESTION 4 a. (i) stamp duties are specific or advalorem taxes imposed upon instrument otherwise called wrotten documents. Simply put, stamp duties are taxes paid in perfecting documents. (ii) Ten categories of instruments subject to stamp duties in Nigeria. The following are the categories of Instruments subject to stamp duties. a. Agreements b. Appraisement c. Instrument of Apprenticeship d. Bank notes, bills of exchange and promissory notes e. Bills of Lading f. Conveyances on sale g. Other conveyances h. Duplicates and Counterparts i. Exchange, Partition or Division j. Leases k. Letters of powers of Attorney on voting Papers l. Marketable Security m. Mortgages STARRY GOLD ACADEMY , , info@starrygoldacademy.com, Page 12

13 n. National Acts o. Policies of Insurance p. Receipts q. Settlements r. Share Warrant s. Warrants for goods and t. Capital of Companies (iii) List of item exempted from stamp duties. The following are exempted from stamps duties payment: i. Liquidation sales/ transaction. Where liquidation is under a compulsory winding up order by court or a creditors voluntary winding up. Any assurance, mortgage charge on property forming parts of the assets of the company in liquidation. A property sold by a liquidator is exempted. ii. Treaties and Agreements. Treaties / agreement made between the Federal Government and other foreign governments. iii. Company reconstitution and amalgamation. This include such instrument as a conveyance or transfer of sale assigning debts whether secured or unsecured. b. (i) Appointment of Commissioner of Stamp duties. In Nigeria, all the Federating units (i.e. States) as well as the central government are empowered by law to establish their own stamp duties offices and appoint their own commissioners. The commissioner of stamp duties is to be appointed by the relevant Civil Service Commission at the Federal and State levels (Section 6 SDA Cap 411 LFN 1990). (ii) Functions of Commissioner for Stamp Duties:- Commissioner for Stamp Duties performs both administrative as well as technical functions. 1. Administrative Functions: Administrative Functions of stamp duties office, e.g. ensure proper functioning of - Stamping room where documents are embossed. STARRY GOLD ACADEMY , , info@starrygoldacademy.com, Page 13

14 - Cash Office where duties are paid and books are balanced on daily basis. - The archives where copies of stamp document are kept for future use. 2. Technical Function: of the commissioner for stamp duties can be divided into four viz; a. Assessments: He / She have the duty of assessing documents at appropriate duties. b. Stamping or Embossments: This can be by way of embossment with dies, affixing adhesive stamps, affixing postage stamps in lieu of adhesive stamps and printing on the Instrument. c. The custody of dies and stamps. Dies and adhesive stamps used in stamping instrument are security materials and should therefore be securely kept by the commissioner to avoid misuse or loss. d. Adjudication: Sometimes, a commissioner may be required to express opinion on the amount of duty to be paid on any executed instrument. Where this happens it will be required by the commissioner to endorse a certificate on the instrument under the hand of the commissioner stating whether certain amount is chargeable on the instrument as duty or not. SOLUTION TO Q5 a. Tax Incentives applicable to Free Trade Zone operations in Nigeria are: - Profits arising from the operations in the free trade zone is exempted from tax - Plants, machinery and other equipment s imported into the country for the use of free Trade Zone is exempted from VAT - Dividends received from the profits of the operation carried out in the free trade zone is also exempted from tax - There is also exemption from paying state and local government levies and taxes - Fixed asset brought into the country operation in the free Trade zone enjoys accelerated capital allowance. STARRY GOLD ACADEMY , , info@starrygoldacademy.com, Page 14

15 - Profits or gains of 100% export oriented undertaking established within and outside an export free zone shall be exempted from tax for the first three (3) consecutive assessment years provided that: 1. the undertaking is 100% export oriented; 2. the undertaking is not formed by splitting or breaking up or reconstructing a business already in existence, 3. It manufactures, produces and exports articles during the relevant year and the exports proceeds form 75% of its turnover; 4. The undertaking is not formed by transfer of machinery or plant previously used for any purpose to the new undertaking or where machinery or plants previously used for any purpose is transferred does not exceed 25% of the total value of the machinery or the undertaking 5. The undertaking repatriates at least 75% of the export earnings to Nigeria and replaces it in a domiciliary account in any registered and licensed bank in Nigeria b. The benefits of tax incentives offered by the relevant tax laws in Nigeria include: - Stimulation of production- Acceleration of rate of economic development - Improvement on the standard of living - Diversification of revenue base - Enhancement of income redistribution - Encouragement of foreign investors - Encouragement of tax compliance - Increase in revenue base STARRY GOLD ACADEMY , , info@starrygoldacademy.com, Page 15

16 - Serving as a tool for tax planning - Aids tax management SOLUTION TO Q6 The Relevant Tax Authority is Federal Inland Revenue Service a. (i) Chargeable Assets- For the purpose of Capital Gain Tax, all asset shall be Chargeable Assets i.e. assets chargeable to capital gain tax, except those exempted in the ACT. Chargeable Assets include all properties, land, building, plant, machineries, equipment, furniture, fittings and fixtures, motor vehicle etc. (ii) (iii) Disposal- Assets are said to be disposed where any capital sum is derived at sale, lease, transfer, an assignment, compulsory acquisition or any to other disposition of assets. Disposal is deemed to have taken place even where no asset was acquired by the person paying such capital sum. A Chargeable gain will arise where upon disposal of a chargeable asset, the sales proceed exceeds the cost of acquiring the Chargeable Assets disposed and all other incidental expenses to the disposal. b. Exemption from Capital Gains Tax Includes: (i) (ii) (iii) (iv) (v) (vi) Capital Gain arising from disposal of Government Security. Capital Gain arising from disposal of shares and securities Capital Gain arising from disposal of medal won for honour and gallant performance. Capital Gain arising from disposal of motor vehicle for private use. Any capital gain accruing to diplomatic body. Capital Gain arising from disposal of a personal dwelling house etc. STARRY GOLD ACADEMY , , info@starrygoldacademy.com, Page 16

17 TANKO NIGERIA LIMITED COMPUTATION OF CAPITAL GAINS TAX PAYABLE FOR 2008 TAX YEAR N N Sales Proceeds 50,000,000 Less:- Advert on disposal 200,000 - Agents Fees 200,000 - Lawyer s Fees 500, ,000 Net Sales Proceeds 4,910,000 Deduct: - Renovation of the Property 1,000,000 - Fencing of the Property 5,000,000 - Advert in Daily newspaper 200,000 - Legal Fees 500,000 - Agency Commission 350,000 - Advertisement on Local TV 200,000 - Cost of Acquisition 35,000,000 42,250,000 - Capital Gains 6,850,000 Capital Gain 685,000 SOLUTION TO QUESTION 7 (a) BELL VIEW AIRLINE LIMITED (i) COMPUTATION OF TOTAL PROFITS OF THE NON-RESIDENT COMPANY Income Derived in Nigeria N STARRY GOLD ACADEMY , , info@starrygoldacademy.com, Page 17

18 Passengers flight from Nigeria 12,800,300 Cargo loaded into aircraft from Nigeria 11,750,160 Total 24,550,460 Computation of Global Adjusted Profit of the Company N N Net Profit 122,151,800 Add Back: Depreciation 464,500 General Provision 50,600 Disallowable expenses 100, ,100 Adjusted Profit 122,766,900 Note: Adjusted Profit Ratio = 122,766,900 x 100 = 97.3% 126,185,460 (ii) Calculation of Tax Liability Assessable profit = 97.3% of 24,550,460 = 23,887,598 Less: capital allowance = 110% of 464,500 = (510,950) Total Income 23,376,648 Income Tax Liability at 30% 7,012,994 (iii) Calculation of Education Tax Education Tax NIL Education Tax Being a non-resident company, it is not liable to education tax. Education tax is payable only by companies registered in Nigeria according to Section 1(2) of the Education Tax Act 2004 CAP E4 LFN as amended. STARRY GOLD ACADEMY , , info@starrygoldacademy.com, Page 18

19 (b) (i) Small Companies: Small companies with turnover of not more than N1 million in the first three years shall be taxed at reduced corporate tax rate of 20%. Also, dividends received from small companies in the first five years shall be exempted from tax. (ii)wholly Export Business: Dividends from investments in wholly export oriented businesses are exempted from tax. Also, the profits of a company whose products are exclusive input for the manufacturing of goods for export are exempted from tax. (iii)unit Trust: Dividends received from a Unit trust are exempted from tax. Also, gains on disposal of investments in a unit trust are exempted from Capital Gains Tax, provided the proceeds are reinvested. (c) Powers and functions of the Federal Inland Revenue Service Board are to: i. Provide the general policy guidelines relating to the functions of the Service; ii. Manage and superintend the policies of the Service on matters relating to the administration of the revenue assessment, collection and accounting system under the Act or any enactment of the law; iii. Review and approve the strategic plans of the Service; iv. Employ and determine the terms and conditions of service including disciplinary measures of the employees of the Service; v. Stipulate remuneration, allowances, benefits and pensions of staff and employees in consultation with the National Salaries, Income and Wages Commission; and Do such other things, which in its opinion, are necessary to ensure the efficient performance of the functions of the service under the Act. STARRY GOLD ACADEMY , , info@starrygoldacademy.com, Page 19