MODULE 9 TAXATION OF SPECIAL COMPANIES OR TRANSACTIONS

Transcription

1 MODULE 9 TAXATION OF SPECIAL COMPANIES OR TRANSACTIONS

2 OUTLINES Introduction. Taxation of air/sea transportation. Taxation of Insurance Companies (Foreign/Local). Taxation of Banks. Taxation of Unit Trust Schemes. Taxation of Gambling Betting or Lottery Winnings.

3 Introduction Taxation of special businesses includes, banks, insurance companies, air, sea and telecommunication companies and also unit trusts scheme. Each of the businesses has its own unique way of incurring expenditures, therefore, special applications are given for tax purposes. This module take a detail view at each of the business.

4 Taxation of air/sea transportation Special provisions of CITA regarding the taxation of foreign shipping or airline Companies: The profit or loss of a non-nigeria company engaged in shipping or air transport business which is deemed to be derived from Nigeria is the full is the full profit or loss arising from the carriage of passengers, mail, livestock or goods shipped or loaded into an aircraft in Nigeria. This does not include the profit or loss derived from passengers, mails or livestock or goods which are brought to Nigeria solely for transshipment or for transfer from one aircraft to another or in either direction between an aircraft and a ship. Methods of Ascertaining Profit Derived from Nigeria: The Companies Income Tax Act. Cap. C21, LFN 2004 prescribes two methods which may be used to ascertain the profits or loss derived from Nigeria as follows: i. Adjusted Profit/depreciation ratio basis This method id used if the FIRS is satisfied that the tax authority of the country in which the shipping or airline company is registered computes and assesses profits or loss on a basis not materially different from that prescribed by CITA and the foreign tax authority certifies both the adjusted profit ratio and the depreciation ratio.

5 The adjusted profit ratio is the ratio of profit or loss before depreciation of an accounting period to the total sums receivable in respect of the carriage of passengers, mails livestock or goods The depreciation ratio of depreciation for an accounting period to the total sums receivable in respect of the carriage of passengers, mails. Livestock or goods. The profits or loss of the foreign shipping or airline company liable to tax in Nigeria is computed by applying the adjusted profit ratio to the total sums receivable in respect of the carriage of passengers, mails, livestock or goods shipped or loaded in Nigeria. An allowance is granted in lieu of capital allowance and this is computed by applying the depreciation ratio to the total sums receivable in respect of the passengers, mails, livestock or goods shipped or loaded in Nigeria.

6 ii. Fair percentage of sum receivable in Nigeria The FIRS may compute the profits deemed to be derived from Nigeria by applying a fair percentage to the full sum receivable in Nigeria in respect of the carriage of passengers, mails, livestock or goods shipped or loaded in Nigeria. This method can be applied if at the time of assessment the FIRS is not satisfied with the foreign tax authority s on the basis of computing the assessing profits or loss and the foreign tax authority s certification of the profit or loss ratio and the depreciation ratio.

7 Illustration The following is the profit or loss account of a foreign airline, Arik Airways Ltd, for the year ended 31 st December, N N Income from passenger freight into Nigeria 15,000,000 Income from passenger freight out of Nigeria 22,500,000 Income from passenger/cargo freight on other routes 18,000,000 Income from cargo freight into Nigeria 25,000,000 Income from cargo freight out of Nigeria 10,500,000 91,000,000 Less: Wages and salaries 4,000,000 Depreciation 1,800,000 Other expenses 2,130,000 7,930,000 Net profit 83,070,000

8 Additional information: 1. Other expenses include: (i) N125,000 for hotel accommodation of airline crew; (ii) N800,000 for use of airport facilities, (iii) hotel accommodation for first class passengers N55,000 (iv) other disallowable expenses N75, Capital allowances have been agreed with the relevant tax authority as 140% of depreciation charged. Required: Determine the total profit of Arik Ltd for Nigerian tax purposes and the tax liability of the company for the relevant year of assessment assuming the rate of income tax to be 30%

9 Solution ARIK AIRWAYS LTD Computation of Total Profit and Income Tax Liability for 2012 Year of Assessment Global income 91,000,000 Nigerian income: Income from passenger freight out of Nigeria 22,500,000 Income from cargo freight out of Nigeria 10,500,000 Global adjusted profit: N N 33,000,000 Net profit 83,070,000 Add disallowable expenses: Depreciation 1,800,000 Other disallowable expenses 75,000 1,875,000 Global adjusted profit 84,945,000

10 Adjusted profit ratio = Global adjusted profit x 100 = N84,945,000 x 100 Global income N91,000,000 = 93% Total profits liable to tax in Nigeria: N Adjusted assessable profit (93% x N33,000,000) 30,690,000 Less: Capital Allowance (140% x N1,800,000) 2,520,000 Chargeable profit 28,170,000 Income tax liability at 30% 8,451,000 Minimum tax (2% N33,000,000) 660,000 Note: The income tax liability of the company is N8,451,000 since the amount is higher than the minimum tax of N660,000.

11 Taxation of Insurance Companies (Foreign/Local) 1. Non-Life Insurance Business: Non- Nigerian Company: The companies Income Tax (Amendment) Act, 2007 provides that the profit on which tax may be imposed in the case of a non-nigerian insurance company which carries on a non-life insurance business and whose profit accrues in part outside Nigeria shall be ascertained by taking the gross premium, interest and other income receivable in Nigeria less reinsurance and deducting from the balance so arrived at, a reserve for unexpired risks at the percentage consistently adopted by the company in relation to its operations as a whole for such risks at the end of the period for which the profits are being ascertained, but subject to the restriction imposed by section 14(8)(a) of CITA. The restriction is that reserve for unexpired risks should not exceed 45% of the total premium for general insurance business other than marine insurance business and the 25% of the total premium in the case of marine cargo insurance.

12 2. Life Assurance Business: I. Non-Nigerian company: For a non-nigerian insurance company which carries on a life insurance business through a permanent establishment in Nigeria and whose profit arise wholly in Nigeria, the profit on which tax may be imposed shall be the investment income less management expenses, including commission, subject to the limitation imposed by section 14(9) of CITA. Section 14(9) of the CITA provides that an insurance company shall be allowed the following deductions from its investment incomes and other incomes: a) An amount which makes a general reserve and fund equal to the net liabilities on policies in force at the time of an actuarial valuation. b) An amount which is equal to 1% of gross premium or 10% of profits (whichever is greater) to a special reserve fund and accumulated until it becomes the amount of the statutory minimum paid-up-capital;

13 c) All normal allowable business outgoing, except that after allowing all the outgoing and capital allowances as may be restricted under the provision of this Act for any year of assessment, not less than an amount equal to 20% of the gross income shall be available as total profit of the company for tax purposes. ii. Nigerian company: The profit on which tax may be imposed in the case of a Nigerian life insurance company is ascertained in the same way as the non- Nigerian life insurance company as though the whole investment income and other incomes were received in Nigeria and all the expenses and other outgoings of the company were incurred in Nigeria.

14 Furthermore, in determining the profits of a non-life insurance company, section14(8)(b) allows a deduction from its premium of an amount equal to 25% of the total premium. This deduction is for other reserves, claims and outgoings of the company. The section also provides that after the deduction of reserves and the capital allowances in any year of assessment, not less than an amount equal to 15% of the total profit of the company shall be payable as income tax. Nigerian Company The profits on which tax may be imposed in the case of a general Nigeria insurance company is ascertained in the same way as the non-nigerian insurance company as though the whole premium income and investment income of the company were derived in Nigeria and all the expenses were incurred in Nigeria.

15 Illustration Big Risk Insurance Company is a Nigeria company which is carries on a Non-life insurance business. The following figures were extracted from the company s financial statements for the year ended 31 st December, 2012: N Gross premium 6,500,000 Dividend received (gross) 500,000 Interest (gross) 1,000,000 Premium paid on reinsurance 500,000 Premium returned to the insured 100,000 Claims paid 3,500,000 Claims recovered under reinsurance 400,000 Profit on sale of fixed asset 80,000 Reserved for unexpired risks as at 1/01/2012 2,990,000 Reserved for unexpired risks as at 31/12/2012 2,950,000 Management expenses 975,000 Agency expenses 241,000 Capital allowances brought forward 2,322,000 Capital allowances for the year 140,000 Balancing charge on fixed assets sold 34,000

16 Required: Compute the income tax payable by the company for 2013 year of assessment based on the provisions of CITAA 2007 and the provisions before Ignore information technology levy.

17 Solution BIG RISK INSURANCE COMPANY Computation of Income Tax Payable for 2013 Year of Assessment Before CITAA 2007 Based on CITAA 2007 N N N N Gross premium 6,500,000 6,500,000 Dividend received (gross) 500, ,000 Interest (gross) 1,000,000 1,000,000 Less dividend (Frank Investment) 8,000,000 8,000, , ,000 7,500,000 7,500,000 Less: Premium paid on reinsurance 500, ,000 Premium returned to the insured 100, , , ,000 6,900,000 6,900,000

18 Reserved for unexpired risks: Add Reserved as at 1/1/12 2,990,000 Reserved as at 31/12/12 (2,950,000) 40,000 (2,925,000) Other reserves, claims: 25% of total premium (1,625,000) Claims paid/recovered: Less Claims paid (3,500,000) Add Claims recovered 400,000 (3,100,000) Management expenses (975,000) Agency expenses (241,000) Assessable Profit 2,624,000 2,350,000 Add balancing charge 34,000 34,000 2,658,000 2,384,000

19 Less: Capital allowances b/f 2,322,000 2,322,000 Current Capital allowances 140, ,000 2,462,000 2,462,000 Restriction to 2/3 of assessable Profit (1,749,333) 1,749,333 (1,566,667) 1,566,667 Capital allowance c/f Total profit 712, , , ,333 Income tax at 30% 272, ,200 Less Withholding Tax on Interest (100,000) (100,000) Net income tax due 172, ,200 Minimum income tax payable At 15% of total profit 136, ,600 Withholding Tax on Interest (100,000) (100,000) Net income tax due 36,300 22,600 Note: 1. Dividend received is a frank investment income. It is not subject to further tax and must therefore be excluded from the total profit of the Big Risk Insurance Ltd before the computation of income tax liability. 2. Under the CITAA 2007, the reserved for unexpired risks at the end of the accounting period must not exceed 45% of the total premium for the general insurance business (i.e. 45% N6,500,000 = N2,925,000). There was no such restriction before 2007

20 Taxation of Banks Banking institutions are subject to tax at the rate of 30% and an excess profit tax of 15% Calculation of Normal Profit Calculation of Excess profit It should be noted that the excess tax for banks has be abolished (discontinued).

21 Illustration Lion Bank Plc has presented the following financial summary Net profit before tax 120,000,000 The profit was arrived at after the charging the following i. Depreciation 50,000 ii. Management expenses 3,000,000 iii. Donations 300,000 iv. provisions for bad debts 150,000 v. Loss on investment 200,000 vi. Other administrative expenses 520,000 The following additional information is relevant: a) The donations are made up of the following: i. Nigerian Institute of Internal Affairs 80,000 ii. All Progressive Congress (APC) 120,000 iii. Abuja Community Dance Group 50,000 iv. Federal University of Abuja 50,000 b) The provisions for bad debts includes bad debts for: i. Bank customers 60,000 ii. General outstanding debt 30,000 iii. Bank Staff 60,000 c) The loss on the investment includes specific investment loss of N120,000; general provision for investment loss of N80,000 N

22 d) The administrative expenses include the sum of N450,000 expensed to install network to connect the branch office with the head office through the computer. e) Included in the operating result of the bank is profit from sale of assets amounted to N120,000. f) The financial position of the bank as disclosed by the Statement of Financial Position prepared as at 31 st December 2013 is shown below: N Total Noncurrent Assets 180,000,000 Total current assets 120,000,000 Total assets 300,000,000 Paid-up capital 110,000,000 Long Term Loan 35,000,000 Current Liability 5,000,000 General Reserves 80,000,000 Statutory Reserves 70,000,000 Total liability and reserves 300,000,000 g) The capital allowance includes: i. Initial Allowance 150,000 ii. Annual Allowance 250,000 Required: You are required to compute the tax liability of Lion Bank Plc including the excess profit tax.

23 Solution LION BANK PLC Computation of Tax Liability for 2006 Year of Assessment N N Net Profit before tax 120,000,000 Add: Depreciation 50,000 All Progressive Congress (APC) 120,000 Abuja Community Dance Group 50,000 General provision for investment loss 80,000 Installation of computer network 450, , ,750,000 Less: profit from sale of fixed assets 120,000 Adjusted profit 120,630,000 Less: Capital Allowance: Initial Allowance 150,000 Annual Allowance 250, ,000 Taxable profit 120,230,000 Tax Liability at 30% 36,069,000

24 Calculation of Normal Profit: 40% of Paid-up Capital (40% x N110,000,000) 44,000,000 20% of capital reserves (20% x N70,000,000) 14,000,000 20% of general reserves (20% x N80,000,000) 16,000,000 20% of long-terms loans (20% x N35,000,000) 7,000,000 Normal profit 81,000,000 Calculation of Excess profit Taxable profit 120,230,000 Normal Profit Computed (81,000,000) Excess profit 39,230,000 15% tax as excess tax 5,884,500 Note: It should be noted that the excess tax for banks has be abolished (discontinued).

25 Taxation of Unit Trust Schemes Authorized unit trust: This means in respect of a year of assessment a unit trust scheme that is authorized by the Commission under section 125 of the Investment and Securities Act to carry on the business of dealing in unit trust scheme. Unit trust scheme: This means any arrangement made 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 of any other property whatsoever. Unit holder: This means any investor, beneficiary or person who acquired units in a unit trust scheme and who is entitled to a share of the investment subject to the trusts of a unit trust scheme. Trustee: Under a unit trust scheme means the person in whom the property for the time being subject to any trust created in pursuance of the scheme is or may be invested in accordance with the terms of the trust.

26 Special provisions of CITA in respect to taxation of authorized unit trust In respect of the income arising to the trustees of an authorized unit trust, CITA shall have effect: As if the trustees were a company whose business consist mainly in the making of investment As if the rights of the unit holders were shares in the company, and As if so much of the income accruing to the trustees as is available for payment to the unit holders were dividends on such shares.

27 Illustration Monument Bank Limited received approval from the Securities and Exchange Commission to float a Unit Trust Scheme in September, The Unit Trust Scheme was subsequently registered and commenced business on 1 st January, 2010 in the name and First Unit Trust Scheme. The following records were disclosed for the year ended 31 st December, 2011: N N Investment Income 8,500,000 Less: Management expenses 1,550,000 Remuneration of managers 759,000 Other Expenses 2,251,000 Depreciation 722,000 (5,282,000) Net profit 3,218,000 Additional information: a) Management expenses include: i. Loss on investment disposed 450,000 ii. Fine for late filing of returns 43,000 iii. Preliminary expenses 222,000 iv. Donation to ANAN building fund 300,000 v. Subscription to Association of Unit 75,000

28 b) Other expenses include: i. New computer software 450,000 ii. Special reserve for future investment 640,000 c) Capital allowance on assets was agreed at N865,000 and N1,987,000 for the first two years respectively. Required: Compute the company tax liability for the first two years of assessments.

29 Solution FIRST UNIT TRUST SCHEME Computation of Tax Liability for 2011 and 2012 Year of Assessment 2011 Year of Assessment N N Adjusted profit 5,745,000 Less: Capital allowance 865,000 Relieved (865,000) (865,000) Capital allowance c/f Nil Taxable profit 4,880,000 Tax liability at 30% 1,464,000 Education tax at 2% of adjusted profit 114, Year of Assessment Adjusted profit 5,745,000 Less: Capital allowance 1,987,000 Relieved (1,987,000) 1,987,000) Capital allowance c/f Taxable profit 3,758,000 Tax liability at 30% 1,127,400 Education tax at 2% of adjusted profit 114,900 Nil

30 Notes: N Net profit 3,218,000 Add: Depreciation 722,000 Loss on investment disposed 450,000 Fine for late filing of returns 43,000 Preliminary expenses 222,000 New computer software 450,000 Special reserve for future investment 640,000 2,527,000 Adjusted Profit 5,745,000

31 Review Questions 1. Summarize the special provisions of CITA regarding the taxation of foreign shipping or airline Companies and explain the two methods use to ascertain profit or loss derived in Nigeria. 2. State the provisions of CITA regarding the taxation of an authorized unit trust scheme. 3. Mtel Telecommunications Ltd is based in Berlin, Germany but has a representative office in Nigeria. During the year ended 31s December, 2013, the records of transactions recorded were as follows: a) Number of minute of telecommunication of transactions: Minutes Berlin to other parts of the world 500,000 Berlin to Nigeria 70,000 Nigeria to Berlin 87,300 Nigeria to United State of America 120,000 Berlin to the United State through Nigeria 155, ,000 b) The average charge for messages applicable during the year under review is DM0.55 per minute. The applicable rate exchange is N35,25 to a DM.

32 c) The global expenses incurred include: N Depreciation 1,645,000 Administrative expenses 766,000 Refurbishment of generator 1,220,000 Salaries and wages 630,000 Other non-allowable expenses 1,835,000 Rent 202,000 Required: You are required to compute the tax payable in Nigeria by Mtel Telecommunications Limited.

33 References Adejola, P. A (2015): Revision Pack on Taxation for Professional, Conversion and Undergraduate Students, Arogbodo Press, Abuja. Bassey U. O (2013): : Companies Taxation in Nigeria, the CIBN Press Ltd, Lagos. Seyi Ojo (2006): Fundamental Principles of Nigerian Tax, Sagribra Tax Publications, Lagos 2003.