- 30 Marks
Question
Paper World Nigeria Limited, Ibadan, a manufacturer of paper pulp, paper, and paperboard, was granted a pioneer certificate by the Federal Government on May 1, 2017, for an initial period of three years. Due to unfavorable business conditions and interference by the Ministry of Industry on dividend policy, loss treatment, and capital allowances, the company did not apply for an extension to the pioneer status.
The company’s financial statements for the first three years are as follows:
(i) Financial Data for the Years Ended
| Year End | April 30, 2018 | April 30, 2019 | April 30, 2020 |
|---|---|---|---|
| N’000 | N’000 | N’000 | |
| Net loss | (28,700) | (25,500) | (20,200) |
| After charging: | |||
| Salaries and wages | 15,300 | 16,100 | 17,360 |
| Transport and traveling | 1,100 | 1,700 | 1,820 |
| Depreciation | 6,800 | 7,530 | 8,600 |
| Rent and rates | 1,200 | 1,400 | 1,500 |
| Donations to social clubs | 100 | 0 | 250 |
| Allowance for doubtful debts: | |||
| Specific | 1,400 | 1,200 | 1,500 |
| General | 1,850 | 1,750 | 1,800 |
| General expenses | 1,650 | 1,820 | 1,900 |
(ii) Qualifying Capital Expenditure (QCE) Certified by FIRS at Pioneer Period End
(iii) Additional QCE Acquired:
| QCE | Number of Items | Amount (N’000) | Date of Acquisition |
|---|---|---|---|
| Furniture and fittings | 2 | 500 | June 12, 2020 |
| Motor vehicles | 1 | 2,200 | March 7, 2021 |
(iv) Operational Result (April 30, 2021)
| Description | N’000 |
|---|---|
| Turnover | 102,500 |
| Dividend income (grossed up) | 1,200 |
| Other operating income | 800 |
| Total | 104,500 |
| Deductions: | |
| Salaries and wages | 39,600 |
| Repairs and maintenance | 3,500 |
| Depreciation | 15,300 |
| Rents and rates | 6,800 |
| General and administrative expenses | 9,970 |
| Legal fees | 2,500 |
| Audit and accountancy fees | 3,200 |
| Allowance for doubtful debts | 6,600 |
| Bank charges | 2,100 |
| Net profits | 14,930 |
Additional Information:
- Dividend Income: From equity shares in a Nigerian listed company.
- QCE Acquisitions:
- Non-industrial building: N10,000
- Industrial building: N25,600
- Manufacturing industrial plants: N12,600
- Furniture and fittings: N3,400
- Motor vehicles: N4,000
(vi) Repairs and Maintenance Breakdown:
| Category | Amount (N’000) |
|---|---|
| Manufacturing plant repairs | 1,500 |
| Motor vehicle maintenance | 800 |
| Non-industrial building improvement | 1,200 |
(vii) General and Administrative Expenses:
| Category | Amount (N’000) |
|---|---|
| Transport and traveling | 3,750 |
| Advertisement | 4,920 |
| Transfer to revenue reserve | 1,300 |
(viii) Legal Fees Breakdown:
| Category | Amount (N’000) |
|---|---|
| Collection of trade debts | 1,100 |
| Fine for late tax filing | 50 |
| Legal expenses on new share issue | 1,350 |
(ix) Doubtful Debts Allowance Breakdown:
| Category | Amount (N’000) |
|---|---|
| Bad debts written off | 2,800 |
| Specific provision | 2,500 |
| General provision | 3,700 |
| Bad debts recovered | (2,400) |
Required: As the company’s newly appointed Tax Consultant, prepare a report to the Managing Director stating the:
- Adjusted Profits for the Relevant Periods (13 Marks)
- Tax Liabilities Payable for the Relevant Assessment Year (11 Marks)
- Provisions of the Industrial Development (Income Tax Relief) Act 2007 (as amended) in respect of a Pioneer Company’s:
- i. Dividend Payment (2 Marks)
- ii. Losses Made During the Pioneer Period (2 Marks)
- iii. Capital Allowances for Qualifying Capital Expenditure Acquired During the Pioneer Period (2 Marks)
Answer
BFN & Co (Tax Consultants)
9, Alabata Road, Abeokuta
Date:
To: The Managing Director
Paper World Nigeria Limited
2, Oyo-Ogbomoso Road, Ibadan.
Subject: Computation of Adjusted Profits, Tax Liabilities, and Other Tax Matters
a. Adjusted Profits
During the pioneer period (2018, 2019, and 2020), Paper World Nigeria Limited recorded a total adjusted loss of N45,720,000. Detailed breakdown:
- Year Ended April 30, 2018: Adjusted Loss N19,950,000
- Year Ended April 30, 2019: Adjusted Loss N16,220,000
- Year Ended April 30, 2020: Adjusted Loss N9,550,000
For the year ended April 30, 2021, the adjusted profit amounted to N36,630,000.
b. Tax Liabilities Payable for 2022 Assessment Year
Given the absence of total profit, the company has no companies income tax liability. However, it is liable for Tertiary Education Tax at 2.5% of the assessable/adjusted profit, totaling N915,750. Since the company has been operational for less than 48 months, it is exempt from minimum tax.
Management should file the annual tax return promptly and include a cheque of N915,750 to the Federal Inland Revenue Service (FIRS).
c. Provisions of the Industrial Development (Income Tax Relief) Act 2007 (as amended)
- Dividend Payment
Dividends can be declared tax-free from pioneer profits. Dividend distribution is restricted to the balance on the profit and loss account. - Losses During the Pioneer Period
Losses certified by the FIRS may be carried forward and relieved in the first year of new trade. Unrelieved losses at the end of the first year lapse permanently. - Capital Allowances
Qualifying capital expenditures from the pioneer period are aggregated and treated as incurred on the first day of the new trade, qualifying for initial and annual allowances from the first assessment year of the new trade
- Topic: Taxation of Specialized Businesses
- Series: NOV 2023
- Uploader: Dotse