AT – Nov 2017 – L3 – Q3 – Double Taxation Reliefs and Credits

Outline objectives of the MOU with oil companies and compute double tax credit for Salim Consultants.

Question

a. Outline FIVE objectives of the Memorandum of Understanding which the Federal Government of Nigeria entered into with the Oil Producing Companies on January 1, 1986.

b. SALIM CONSULTANTS LIMITED, incorporated in 2012, is a corporate advisory firm in Nigeria. In 2015, it expanded to Burundi to explore business opportunities there. The directors are interested in the Double Taxation Agreement but have not benefited from it before.

Below is a summary of the Income Statements for the year ended December 31, 2016:

Description	Nigeria (N)	Burundi (N)	Total (N)
Gross Advisory fees	57,000,000	21,750,000	78,750,000
Other Income	960,000	1,800,000	2,760,000
Total	57,960,000	23,550,000	81,510,000
Deduct Expenses:
Deal Execution Expenses	(30,225,000)	(9,750,000)	(39,975,000)
Office Rent	(1,800,000)	(675,000)	(2,475,000)
Depreciation	(5,100,000)	(2,700,000)	(7,800,000)
Loss on sale of Non-Current Assets	–	(525,000)	(525,000)
Foreign Exchange Loss Provision	(960,000)	–	(960,000)
Other Operating Expenses	(3,240,000)	(1,380,000)	(4,620,000)
Net Operating Profit	16,635,000	8,520,000	25,155,000

Additional information:
(i) N2,130,000 was paid to the Burundi Tax Authority after claiming N4,800,000 Capital Allowance. Capital Allowance claimable in Nigeria was N7,800,000.
(ii) Other income of N960,000 is profit from the sale of Non-Current Assets, while N1,800,000 is gains from the disposal of securities.

Required:
a. Explain briefly what is meant by Double Taxation Relief.
b. Compute the Double Tax Credit claimable by the Company assuming there is a Double Taxation Agreement with Burundi.

Answer

a. Double Taxation Relief Explanation:
Double Taxation Relief is a mechanism designed to prevent the same income from being taxed twice in different jurisdictions. When a company or individual earns income in one country but is a resident of another, they might be liable for taxes in both countries. Double Taxation Relief, usually established through Double Taxation Agreements (DTAs) between countries, allows the taxpayer to claim a tax credit in one country for the taxes paid in the other. This credit reduces the overall tax burden, encouraging cross-border trade and investment.

b. Computation of Double Tax Credit:
To compute the Double Tax Credit claimable by the company with a Double Taxation Agreement (DTA) with Burundi, we would apply the following steps based on the income earned and taxes paid in each jurisdiction:

Determine Taxable Income: Calculate the taxable income that is subject to taxation in both countries.
Identify Tax Rates: Note the tax rate applied in the resident country (e.g., home country) and the foreign country (Burundi in this case).
Compute Tax Paid Abroad: Multiply the income earned in Burundi by the Burundi tax rate to get the tax paid in Burundi.
Compute Tax Liability in Home Country: Calculate the tax liability on the same income in the home country by applying the home country’s tax rate to the taxable income from Burundi.
Apply the Lower of the Taxes Paid: The Double Tax Credit allowed would typically be the lower of the actual tax paid in Burundi or the tax liability calculated for the same income in the home country.