Accounting for Companies Income Tax (CIT), including issues relating to Deferred Taxation

Transcription

1 MBA & CO (CHARTERED ACCOUNTANTS) WORKSHOP ON ACCOUNTING FOR TAXES UNDER NIGERIA TAX LAWS AND IAS by IFEANYI MBA (Practising Chartered Accountant) This Workshop will cover: Accounting for Companies Income Tax (CIT), including issues relating to Deferred Taxation 1 M B A & C O ( C h a r t e r e d A c c o u n t a n t s )

2 Accounting for Companies Income Tax (CIT) including issues relating to Deferred Taxation Legislation: Applicable Principal Law is the: Companies Income Tax Act, No.28, 1979, as amended, and can be referred to with its amendments as Companies Tax Act, CAP. C21, LFN 2004 or (CITA). Applicable Accounting Standard: International Accounting Standard No. 12 IAS 12: Income Taxes Features: The following will feature in this Workshop: A Brief on Fiscal Federalism and Taxation Computation and Accounting Entries in the Ledger Returns to Federal Inland Revenue Service (FIRS) including use of Official Government Forms. Payments and e-tickets. Procurement of Tax Clearance Certificate (TCC). 2 M B A & C O ( C h a r t e r e d A c c o u n t a n t s )

3 I. A Brief on Fiscal Federalism and Taxation in Nigeria Fiscal Federalism in Nigerian dates back to 1954 when the country which had until then been governed as a unitary state by the British, adopted a Federal Constitution. Nigeria, thence, became a Federation, which means the amalgam of sub-units of a national sovereign government that operate independently to defined limits within a constitutionally agreed sphere of functional competence (Oates, 1972), and where such sub-units are the Federating Units in what is now called a Federal System and which individually, and voluntarily give up their respective independent sovereignty in several aspects of their operations in order to achieve the benefits of national unity in some areas of government activities, while retaining a measure of autonomy in others. Federalism (cum Federation), may also be as a compromise solution, in a multinational state (like Nigeria) between two types of self-determination, i.e the framework of government which guarantees security for all in a nation state on the one hand, and the self-determination of subnational units to retain some degrees of their respective identities on the other hand. Now Fiscal Federalism can be described as the division of Taxation and Expenditure functions amongst the tiers of government in a Federation and sustained by fiscal decentralization amongst the federating units. Fiscal decentralization means the devolution of fiscal responsibility among the federating units (i.e States and Local Governments, including Federal Capital Territory of Nigeria), whilst the Federal Government oversees and controls some. The arrangement which ensures that each level of government is free to take decisions and allocate resources according to the priorities set in its respective areas of jurisdiction. This position is guaranteed under Section 4 and the Second Schedule of the 1999 Constitution of the Federal Republic of Nigeria (as amended), which expresses items lying on Exclusive Legislative List (Part 1, 2 nd Schedule) and those on Concurrent Legislative List (Part II, 2 nd Schedule). On the basis of the components of what may be called the broad trilogy of a government contract with the citizens, i.e Allocation, Re-distribution and Stabilization, it would seem that while the lower levels of government are assigned the allocative functions, the functions of redistribution and macro economic stabilization are more appropriately assigned to the central government via politico-socio economic policies and Tax Laws and Financial Instruments. Taxation is based on Tax Laws; and may be expressed as those techniques designed and harnessed by experts in Tax Laws and Accounting and which are aimed at ascertaining (ref: Assessments) what demands a government of any Sovereign jurisdiction or country makes from her Citizens, Corporate establishments and other Institutions for compulsory payment of money (taxes ).Thus taxes cannot be paid in Kind. Thus tax laws essentially draw from the Legal System of a country. In Nigeria, we have The Nigerian Legal System which comprises: Customary laws, and different Legislations, Law courts, Law 3 M B A & C O ( C h a r t e r e d A c c o u n t a n t s )

4 Professional Personnel, Judicial Precedents,Law books and authoritative law releases, etc. Thus, the Nigerian Tax system is a product of this legal system and accordingly comprises some pieces of legislations, professional accounting and tax processes and including judiciary precedents, as above mentioned. The practice of taxation in Nigeria is enhanced by a blend of strict adherence to these legislations and Courts Common Law Rules and Judicial Decisions.The term Common Law is used in several senses but as a division of Nigerian Law, it means the Law developed by the old Common Law of England, namely, the King s Bench, the court of common pleas and the court of exchequer. Under the guise of enforcing the customs of the land, the common law judges developed a system of Law known as the Common Law of England. Rules of the common Laws are therefore found in judicial decisions. These naturally came to Nigeria through Colonial Masters.Thus a decision reached by the Supreme Court of Nigeria is the Law of the Land until changed by the Legislative Assemblies - The National Assembly of Nigeria, through production of Legislations for fiscal discipline and taxation administration and enforcement. I (a) Administration and Collection of Taxes in Nigeria The administrative machineries currently in existence in Nigeria for assessment and collection of Companies Income taxes include the following: (i) The Joint Tax Board (JTB) (ii) The Federal Board of Inland Revenue (FBIR) (through Federal Inland Revenue Service, FIRS). (a) The Joint Tax Board (JTB) JTB is established by Section 86(1) of the Personal Income Tax Act, Cap. P8.LFN,2004. The JTB has over these years to date continued to contribute to the advancement of the Tax Administration in Nigeria, especially in the areas of harmonization f taxes. Members of JTB To achieve and benefit from the harmonization mentioned above, members of JTB are drawn to include all the government revenue generating agencies and bodies and they comprise:- (i ) The Executive Chairman of the FIRS as the chairman (ii) One member from each state being a Person experienced in Income Tax Matters and nominated by respective state (ref: SBIR) (iii) Co-opted as members are the representatives of the following bodies :- 4 M B A & C O ( C h a r t e r e d A c c o u n t a n t s )

5 Federal Road Safety Commission (FRSC) Revenue Mobilization and Fiscal Commission (RMAFC) Federal Capital Territory Administration Federal Ministry of Finance Federal Inland Revenue Service (iv) A secretary being a Person experienced in Income Tax Matters appointed by the Federal Civil Service Commission. (v) A Legal Adviser who is also the Legal Adviser to the FIRS. Functions and Operations of the JTB JTB carries out her functions (below mentioned)by meeting every quarter to appraise the performance of same functions and effectiveness of the members and to deliberate on Tax issues of National importance and to develop new Strategies to continuously give efficacy in discharge of the functions which includes;- (i) (ii) (ii) (iii) (v) Advising all tiers of Governments on Tax Matters so as to evolve an efficient tax administration System in our country Nigeria. Resolving areas of Conflict on Tax Jurisdiction among Member States Using its best endeavors to Promote in both application of the Tax Laws and in the incidence of Tax on individuals through out Nigeria Imposing its decision on matters of procedure and interpretation on Income Tax Matters on members States. Advising the Federal Government of Nigeria in respect of Double Taxation Arrangements, Rates of Capital Allowances and Taxes Payable, etc (vi) Making Proposals for necessary amendments on PITA, CITA, etc (vii) Other allied and incidental matters. (viii) Monitors operations under Taxes and Levies (Approved List for collection) Act, No.21, For efficient Management of self, JTB, apart from Quarterly General Meeting (QGM), and Committee Meetings, also organizes Retreats regularly for members.the retreat is used as an avenue to discuss other vital matters that cannot be accommodated during the normal meetings. All members of the Board are usually mandated to attend all Meetings and Retreats and representation by proxy is discouraged. 5 M B A & C O ( C h a r t e r e d A c c o u n t a n t s )

6 It should be noted that the Board operates through Committees and these Committees report to the Board accordingly. Members are assigned to these committees and at present each to a minimum of two committees. Members are expected to be actively involved in the activities of these committees and be always ready to contribute meaningfully. (b) Federal Board of Inland Revenue (FBIR) This is a creation of section 3 of Federal Inland Revenue Services Act, The FBIR has executive arm called Federal Inland Revenue Service (FIRS) established by section 1 of the same FIRS Act, 2007 (1) Composition of FBIR: - Executive Chairman of the FIRS, who shall be experienced in taxation as a chairman to be appointed by the President and subject to the confirmation of the Senate. - Six Members with relevant qualifications and expertise who shall be appointed by the President to represent each of the six geo- political zones; - A representative of the Attorney General of the Federation; - The Governor of the Central Bank of Nigeria (CBN) or his representative: - A representative of the Minister of Finance not below the rank of a Director; - The Chairman of the Revenue Mobilization, Allocation, and Fiscal Commission (RMAFC) or his representative who shall be any of his commissioners representing the 36 states of the Federation. - The GMD of the NNPC or his representative who shall not be below the rank of GED of NNPC or equivalent ; - The Controller General of the NCS or his representative not below the rank of a Deputy Controller General. - The Registrar General of the CAC or his representative who shall not be below the rank of a Director and - The Chief Executive officer of the National Planning Commission (NPC) or his representative who shall not be below the rank of a Director. Functions and Powers of the FBIR Section 7, FIRS(Establishment) Act, 2007, provides:- - Provide the general Policy Guidelines relating to the Functions of the Service(FIRS) - 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 other enactment or Law; - Review and approve the Strategic plans of the Services; - Employ and determine the terms and conditions of the service including disciplinary measures of the employees of the service; 6 M B A & C O ( C h a r t e r e d A c c o u n t a n t s )

7 - Stipulate remuneration, allowances, benefits and Pension of staff and employees in consultation with the National Salaries, Incomes and Wages Commission (NSIWC)and - Do such other things which in its opinion are necessary to ensure the efficient performance of the functions of the service under this Act. Functions of FIRS - Assessment of Persons, Companies other Organizations. - Collection of Taxes from above mentioned - Enforcement of Collection including legal action in collaboration with Law enforcement Agencies - In collaboration with relevant Ministries and Agencies, review tax regimes, and promote the Application of tax revenues to stimulates economic activities and development - Carry out back duty (short and long term) audit on self assessment, including examinations and investigation in respect thereof; - Determining from time to time, the extent of financial losses by government arising from tax fraud or evasion and such losses of revenue owing to tax waivers, etc - Adopt measures to identify, trace, freeze, confiscate or seize proceeds derived from tax fraud or evasion - Collaborate and facilitate rapid exchange of information with relevant National and International agencies or bodies on tax matters - Establish and maintain data base of statistics and records of Persons, Companies and Organizations etc, that are subject of taxation in all it forms and continuously update for efficient admin and avoidance of tax evasion and fraud. - Issue Tax Payer Identification Number (TIN) to every taxable persons in Nigeria and integrate same with VAT No and in collaboration with SBIR and Local Government Tax Authorities. - carry out and explain vigorous public awareness and enlightenment campaign on the benefits of tax compliance within and outside Nigeria. - Accounting for all revenues collected from different taxes through collaboration with Financial Institutions and ensuring they are fully receipted into the Federation Account. - To carry out the above functions by reference to - FIRS (Establishment) Act 2007, - CITA PITA Taxes and Levies (Establishment) Act Petroleum Profit Tax - Other relevant Laws - Undertake exchange of Personnel or other experts with Complementary agencies for purpose of comparative experience and human capacity building. - Carry out such other duties as are necessary or expedients for the full discharge of all or any of the functions under this Act and other relevant Laws or enactments. 7 M B A & C O ( C h a r t e r e d A c c o u n t a n t s )

8 Technical Committee of FBIR This comprises :- - Executive Chairman of FBIR as Technical Committee Chairman - All Directors and Heads of Departments of FIRS - The Legal Adviser to the Board. - The Board Secretary Note: From time to time, and as exigencies may require, other members of staff might be coopted into the committee for efficacious performance of its functions. Functions of the Technical committee - Considers all Matters that require Professional and technical expertise and make recommendation to the Board. - Advise the Board on scope and limitations of its Powers and Duties. - Attend to such other matters as may be referred to it from time to time. Tax Payer Identification Number (TIN) This is an initiative of JTB, and is basically an electronic system of tax registration, which will be unique to an identified taxpayer for life and integrated in National Nigerian Network for tax services across FIRS,SIBR,LOCAL GOVERNMENT Revenue Committee, etc. TIN is also integrated with the banking system in Nigeria and makes it possible for any tax payer to pay taxes in any bank that is a collecting agent in any State of the Federation. TIN Makes operation and issuance of e-ticket by banks (as evidence of tax payment and receipt) practicable for operating online banking Service. Being a Brain child of JTB, TIN is administratively and operationally managed and superintended by the Joint Tax Board for the benefits of all allied Partners-viz FIRS, SIRS, LG Revenue Committees, Collecting or Receiving Banks, Tax Payer of all description and also facilitates forensic accounting and investigation by extended third party consultants. Design and Operation of TIN in Nigeria - Design and Implementation of Infrastructure and system to support TIN assignment to taxpayers. - Deployment of 5 Fixed Biometric registration equipments at the FIRS and SIRS, through out the Federation - Deployment of 3 Mobile Biometrics registration equipments at each of the tax authorities. - Deployment of 2 Personalization Machines at each of the tax authorities - Format and continuous Modification and improvement on Same. 8 M B A & C O ( C h a r t e r e d A c c o u n t a n t s )

9 - Securing Provision of Working Capitals for Maintenance and Logistics. - Changed Management for Successful phased roll out. - Capacity building for the Personnel of the tax authorities. - -Setting up of Contact Management Centre (CMC) for support of TIN Program. TIN and VAT No Today these numbers are one and same. COMPANIES INCOME TAX RATES Charge of Tax: S.40 For periods 1996 todate: For Small Manufacturing Company 20% For Coys in Agricultural Trade/Business 20% For All Other Companies 30% Small Companies are those with a Turnover of Less than or equal to N2 million, And Net Assets of Less than or equal to N1 million to be charged on the profits of any Company accruing in, derived from, brought into, or received in Nigeria, in respect of ( see details in S.9, CITA), and noting that: OTHER HINTS on CITA S.11, contains exempted income on certain agric loans S.23, contains exempted profits of ecclesiastical, educational, etc, companies. a) Identification of a Company: S. 10 See Certificate of Incorporation, CTCs of MEMART, CAC Form 2.5, etc b) On WHT, see Ss. 78 to 80 c) Ascertainment of Profits: - Deductions Allowed, S.24 - Donations Allowed, S.25, subject to 10% max. on total profit - Deductions of R & D Exp., S.26 - Deduction not Allowed, S.27 d) Computation of Assessable Profit/ Basis Period, S.29 e) Total Profit or Taxable Profit, S.31 f) Claim of Capital Allowance: Assets must qualify for this( i.e N500,000 and above) and Acceptance Certificate obtained from Inspectorate Division of Federal Ministry of Industries, Trade and Investment. 9 M B A & C O ( C h a r t e r e d A c c o u n t a n t s )

10 g) Filing of Returns, S.55, and use of FIRS Form IR3C 4Coy - A New Company: a grace period of 18 months from date on incorporation - Other existing Companies: not later than 6 months after the end of the Accounting Year. - S.55 (1) says, Every Company shall at least once a year without notice or demand therefrom, file a return in the prescribed Form, plus a: ---- Forwarding Letter from The Company, attaching viz Audited Accounts (if any) Tax Comps Capital Allowance Comps Acceptance Certificate for qualifying expenditures h) Penalties: Failure to comply with 11.above N25,000 in the first month of failure N5000 for each subsequent months in which failure continues i) Notice of Assessments, S.65. If at the expiry of self-assessment period in S.55, and a tax payer fails to file a Return, then FIRS shall raise assessment using prescribed form, see Form 4D Coy, attached. Under this the FIRS shall apply BOJ or may accept or make additional assessments even if Audited Accounts are submitted later. j) Handling disputes, 1 st : Tax Appeal Tribunal ( which replaced Body of Appeal Commissioners) 2 nd : Federal High Court 3 rd : Appeal Court Final: Supreme Court k) Tax Clearance Certificate (TCC). 10 M B A & C O ( C h a r t e r e d A c c o u n t a n t s )

11 CITA, Amendments and Subsidiary Legislationss Principal Law in Nigeria Companies Income Tax Act, No.28, W. e. f: 1st April, Repealed: CITA 1961 Reference Today (2014): CITA, Chapter C.21, LFN, 2004 Amendments to CITA, 1979: Companies Income Tax (Amendment) Act, No.3, 1993 Companies Income Tax (Amendment) Act, No.30, 1996 Companies Income Tax (Amendment) Act, No.21, 1991 Companies Income Tax (Amendment) Act, No.63, 1991 Companies Income Tax (Amendment) Act, No.32, 1996 Companies Income Tax (Amendment) Act, No.31,1996 Companies Income Tax (Amendment) Act, No.98, 1999 Companies Income Tax (Amendment) Act, No.18, 1998 Companies Income Tax (Amendment) Act, No.30, 1999 Companies Income Tax (Amendment) Act, No.19, 1998 Companies Income Tax (Amendment) Act, 2007 Subsidiary Legislation: 1. Double Taxation Relief (Between the Federal Republic of Nigeria and the Government of the Kingdom of Belgium) Order, Wef: 1 st January Double Taxation Relief (Between the Federal Government of Nigeria and the Government of the French Republic) Order, Wef: 1 st January Double Taxation Relief (Between the Federal Government of Nigeria and the Government of Canada) Order, Wef: 1 st January Double Taxation Relief (Between the Federal Government of Nigeria and the Government of Romania) Order, Wef: 1 st January Double Taxation Relief (Between the Federal Republic of Nigeria and the Government of the Kingdom of Netherlands) Order, Wef: 1 st January Companies Income Tax (Rates, etc, of Tax Deducted at Source (Withholding Tax) Regulations, Wef: 1 st January M B A & C O ( C h a r t e r e d A c c o u n t a n t s )

12 (i) Computation and Accounting Entries in the Books of the Company (or Company Ledger) The following simple example will be useful in appreciating matters under this heading: Mesioye Plc is a medium sized Company that produces and sales household kitchenwares. For the year ended December 31, The Company made a pre-tax profit of =N=100 million. It is projected that the annual profit will remain same amount for each year for the next four years. In same period, on Jan 1, 2014, the company purchased a set of plant and machinery for replacement of old worn out ones, at a total all- in costs of =N= 30 million. In same month, Acceptance Certificate of qualifying capital expenditure was procured from the Federal Ministry of Industries, Trade and Investment, and a one off (95:5) % capital allowance (under CITA) applied in the year of purchase. The Plant Machinery is expected to have a useful life of five years and will have nil residual value. Accounting Policy of the Company permits straight line method of depreciation. Applicable Companies Income Tax Rate is 30%. Required: As Chief Accountant of Mesioye Plc, carry out a corporate tax self assessment observance and compute Companies Income Tax (CIT) payable each year for five years (as projected) and show treatment in the books of accounts of the organization as stipulated by CITA / IAS 12. Practice Procedures and Notes a) CIT is based on Taxable Profit. b) There is need to determine Accounting Profit which expresses economic ability of Company to pay taxes, in accordance with igaap/ifrs. c) Taxable Profit is an expression of law and means difference between Adjusted/Assessable profit on one hand and claims of Capital allowances on qualifying capital expenditure on the other. 12 M B A & C O ( C h a r t e r e d A c c o u n t a n t s )

13 d) Relationship between Carrying Value of Non-Current Assets (i.e. difference between NCA and depreciation) on one hand and Tax Written Down Value (i.e. differences between Qualifying Capital Expenditure and Capital Allowances); thus where Depreciation is lower than Capital allowance for any, year of assessment, then tax payable to FIRS will be lower, and differential called Deferred tax liability (will exist), and vice versa. e) Being a replacement of assets, CITA permits a one off relief of Capital allowance in year of purchase of 95% and 5% kept in the books till asset is sold. Tax Comps and Accounting Entries 2015 Year of Assessment or Tax Year Mesioye Plc is an on going business aged over three years; thus CIT based on profit for 2014 accounting year will be paid in 2015 Tax year ( to avoid penalties, on or before June 30, 2015 if financial year end is December 31). Now tax payable as computed in 2015 Tax year (on Self assessment basis) will appear in 2014 Audited Accounts as Income Tax Expenses (meaning CIT that would be paid based on financial results of 2014), as follows: Accounting Method =N= Non Current cost 30,000,000 Less Depreciation 6,000,000 A. Carrying 31/12/14 24,000,000 Taxation Method =N= Qualifying Capital Expenditure 30,000,000 Less Capital Allowance (95%) 28,500,000 B. Tax Written Down Value 1,500,000 Temporal Difference A less B 22,500,000 Deferred Tax Liability ( 30%) 6,750,000 Timing Difference: Accounting method assumed the NCA will have life of five years, whereas 13 M B A & C O ( C h a r t e r e d A c c o u n t a n t s )

14 Taxation method to considered useful life of one year. Deferred Tax liability Account: =N= 6,750,000 IAS 12 requires that this account be opened as a Non Current Liability Acct showing tax saved today (2015), which will be payable to FIRS in the next four years (hence Non Current Liability).Thus, owing to timing differences above stated, Accounting Method would show a deduction of =N= 6,000,000 against Profit, whereas Taxation method would show a deduction of 28,500.00; and since Tax method will be used, it means that Tax Cheque to FIRS will be less by =N= 6,750,000 (i.e. 30% (28,500,00 less 6,000,000). And since tax is based on Profit made, or Company economic achievement, CIT chargeable in 2014 Statement of Profit or Loss will be (computed in 2015) as: Pre-tax Profit 100,000,000 Add back Depreciation 6,000,000 Adjusted Profit 106,000,000 Less Capital Allowance (28,500,000) Taxable Profit 77,500,000 CIT ( 30%) 23,250,000 Income Tax Expense for Statement of Profit or Loss CIT as computed 23,250,000 Add Deferred Tax Liability 6,750,000 30,000,000 Now, IAS 12 holds that Income Tax charge to Statement of Profit or Loss and Other Comprehensive Income, should be equal to what should have been charged had tax law not brought a varying capital allowance rates different from depreciation rate. Thus, Pretax Profit 100,000,000 30% CIT, as above. 30,000, M B A & C O ( C h a r t e r e d A c c o u n t a n t s )

15 Now from 2016 Tax year, depreciation charge will be higher than Capital Allowance charge (which will be zero till end of asset life), so deferred tax asset will apply reducing or absorbing deferred tax Liability. Accounting entries: 2014 Accts Dr Statement of Profit or Loss 30,000,000 Cr FIRS CIT (Current Liability) Acct 23,250,000 Cr FIRS Defined Tax Liability Acct 6,750,000 CIT Tax Cheque for 2015 Tax year 23,250,000 IAS 12 maintains that what belongs to Caesar should be given, that different Companies accounting policies do normally adopt varying types of Depreciation/rates that suit their respective nature of operation for best profit result: that should be maintained; whilst at same time crediting to government what is their rightful dues based on tax laws that uniform rates of capital allowances not withstanding varying operating structure Tax year Accounting Method cost 30,000,000 Less Accumulated Dep 12,000,000 Carrying Amount 18,000,000 Taxation Method TWDV 1,500,000 Less Capital Allowance 0 TWDV cfwd 1,500,000 Temporal Diff 16,500,000 Def. Tax ( 30%) 4,950, M B A & C O ( C h a r t e r e d A c c o u n t a n t s )

16 Deferred Tax Asset Opening Deferred Tax Liability 6,750,000 Closing Deferred Tax Liability 4,950,000 Reduction in Liability (Asset) 1,800,000 Tax Payable in 2016 Tax year Pre tax Profit 100,000,000 Add back Depreciation 6,000,000 Adjusted Profit 106,000,000 Less Capital Allowance 0 Taxable Profit 106,000,000 CIT at 30% 31,800,000 Amt. that should have been paid Based n Year Profit (100m 30%) 30,000,000 Reduction (as above) 1,800,000 Accounting Entries Dr SP or L 30,000,000 Dr FIRS Def. Tax 1,800,000 Cr FIRS CIT A/C (tax law) 31,800,000 CIT Tax Cheque in ,800,000 Accordingly, taxes must be paid per Tax law (=N=31,800,000 for 2016); and charge of tax against Income based on economic substance (Profit achieved) and adjusted by deferred tax changes. 16 M B A & C O ( C h a r t e r e d A c c o u n t a n t s )

17 Noting that in 2015, CIT was underpaid by 6,750,000. Now this under payment which amounted to savings in 2015, is incrementally paid by additional =N=1.8M to tax based on accounting profit Tax Year Accounting Method NCA at cost 30,000,000 Less Acc. Dep 18,000,000 CV 12,000,000 Taxation Method TWDV 1,500,000 Less Cap. Allowance 0 TWDV 1,500,000 Temporal Difference 10,500,000 Def Tax ( 30 %) 3,150,000 Changes in Deferred Tax Opening Balance 4,950,000 Closing Balance 3,150,000 Reduction in Liability 1,800,000 Tax Payable: 2017 Pre tax Profit 100,000,000 Add back Depreciation 6,000,000 Adjusted Profit 106,000,000 Less Capital Allowance 0 Taxable Profit 106,000, M B A & C O ( C h a r t e r e d A c c o u n t a n t s )

18 CIT at 30% 31,800,000 Amount that should have been paid in absence of tax law 30,000,000 Reduction as above 1,800,000 Accounting Entries in Ledger Dr SP or L 30,000,000 Dr FIRS Def Tax 1,800,000 Cr FIRS CIT a/c 31,800,000 CIT Tax Cheque in ,800, Tax Year Accounting Method NCA at cost 30,000,000 Less Acc. Dep 24,000,000 CA 6,000,000 Taxation Method TWDV b/fwd 1,500,000 Less Capital Allowance 0 TWDV fwd 1,500,000 Temporal Diff: 4,500,000 Def Tax 1,350,000 Changes in Def. Taxation Opening Balance 3,150,000 Closing Balance 1,350,000 1,800, M B A & C O ( C h a r t e r e d A c c o u n t a n t s )

19 Taxable Payable: 2018 Pre tax profit 100,000,000 add back depreciation for a year 6,000,000 adjusted profit 106,000,000 Less Capital Allowance 0 Taxable profit 106,000,000 CIT at 30% 31,800,000 Accounting Entries Dr SP or L 30,000,000 Dr FIRS Def Tax a/c 1,800,000 Cr FIRS CIT a/c 31,800,000 CIT Cheque 31,800, Tax Year NCA at cost 30,000,000 Less Acc. Depreciation 30,000,000 CA 0 Taxation Method TWDV b/fwd 1, Less Capital Allowance 0 TWDV c/fwd 1,500,000 Temporal Difference (1,500,000) Deferred Tax Asset ( 30%) (450,000) Changes in Def. Taxation 19 M B A & C O ( C h a r t e r e d A c c o u n t a n t s )

20 Opening Balance 1,350,000 Closing Balance (450,000) (i.e. 1,350, ,000) = 1,800,000 Tax Payable: 2019 Pre tax profit 100,000,000 add Depreciation for year 6,000,000 adjusted profit 106,000,000 Less Capital Allowance 0 Taxable Profit 106,000,000 CIT at 30% 31,800,000 Income tax as it should have been based on Accounting profit 30,000,000 1,800,000 Accounting Entries Dr SP or L 30,000,000 Dr FIRS Deferred Tax Liability 1,800,000 Cr FIRS CIT a/c 31,800,000 Dr FIRS Def. Tax Asset a/c 450,000 Cr FIRS Def. Tax Liability 450,000 CIT Cheque 31,800,000 Deferred tax asset a/c of 450,000 remains in the Ledger until the assets whose TWDV is sold. END OF WORKSHOP 20 M B A & C O ( C h a r t e r e d A c c o u n t a n t s )

21 THANKS FOR PARTICIPATING MBA & CO CHARTERED ACCOUNTANTS 21 M B A & C O ( C h a r t e r e d A c c o u n t a n t s )