- 20 Marks
Question
XYZ Limited was incorporated on August 31, 2012, and it commenced business on May 31, 2013. Diki (Malaysia) Limited is its subsidiary in Malaysia. An extract of the financial statements of XYZ Limited for the year ended December 31, 2020, revealed the following:
Assessable profit: N2,000,000
Interests and depreciation deducted before arriving at the assessable profit are:
- Interest on loan paid to Diki (Malaysia) Limited: N1,050,000
- Interest on loan paid to other creditors: N1,000,000
- Depreciation: N400,000
It was discovered that N450,000 of the loan paid to other creditors was in respect of a loan obtained to generate tax-exempt profits.
The Managing Director of XYZ Limited has asked you as a tax consultant to explain the provisions of section 24 of CITA 2004 (as amended) and the Seventh Schedule in respect of the interest deductible by a Nigerian company.
Required:
a. Compute the interest deductible in the relevant assessment year. (16 Marks)
b. Explain how the excess interest not deducted in the relevant assessment year would be treated. (4 Marks)
Answer
a. XYZ Limited
Computation of interest deductible in 2021 assessment year
The interest deductible is N1,335,000
Treatment of excess interest not deducted in the relevant assessment year
The excess interest of N1,600,000 less N1,335,000 which is N265,000, will be
carried forward and added to the interest expense for that year with a view to
computing its restriction.
It should be noted that the excess interest of N265,000, may only be carried
forward for a period not exceeding five years, that is, 2026 assessment year,
whilst applying for each of the years, the same rule based on which the excess
interest expenditure was first computed.
- Tags: Companies Income Tax, Excess Interest, Interest Deduction, Loan Interest
- Level: Level 2
- Topic: Companies Income Tax (CIT)
- Series: NOV 2021
- Uploader: Kwame Aikins