ATAX – May 2017 – L3 – Q1 – Overview of Advanced Taxation

Explain tax concepts and calculate Companies Income Tax due for Rex Pharmaceuticals.

Question

You are the Tax Controller of Rex Pharmaceuticals (Nigeria) Limited having its Head Office in Ketu, Epe Local Government of Lagos State.

In the past three years, the company had been subjected to taxes by different Revenue Authorities within Lagos State and indeed, the entire country.

Apart from the Companies Income Tax, the issue of Withholding Tax is an area where the company’s management is very much concerned. The Managing Director is worried that this multiplicity of taxes is taking its toll on the company’s financials.

The company is already facing myriads of problems ranging from outrageous cost of capital which had led to increase in cost of production and attendant decrease in profit. The company’s goods are becoming uncompetitive, compared to imported goods. The long-term effect is either reduction in workforce or relocation to a more favorable economic climate.

The Managing Director summoned you to his office and among the issues raised at the meeting were:

(i) as a corporate body, the company ought not to be subjected to multiplicity of taxes beyond the Companies Income Tax;
(ii) the jurisdiction of the tiers of Government in imposition and collection of taxes;
(iii) the Withholding Tax;
(iv) the Pay As You Earn as it affects the staff; and
(v) the Capital Gains Tax.

You have also been informed of the following:

The company’s technical agreement with the foreign Head Office and the need to remit funds;
The Non-Executive Directors;
The Non-Resident directors are to receive N2,500,000;
Centralization of staff PAYE deductions;
Dividend payment to shareholders in different parts of the country. Those resident in Kogi are to receive N375,000;
Land for a factory in Abuja purchased from Alhaji Garuba Maito who resides in Kano;
Rex Pharmaceuticals received N4,500,000 as Net dividend from an associated company Laiketop Limited for the year ended September 30, 2014. In the Audited Financial Statements of Rex Pharmaceuticals for the year ended December 31, 2015, a dividend of N9,500,000 was proposed. Out of this amount, N3,500,000 was from dividend received from Laiketop Limited while the balance was from a Total Profit of N22,500,000 from other trading activities;
At present, out of the thirty employees in Abuja, five are resident in Suleja, Niger State.

Required:

(a) Explain briefly the following:
i. Capital Gains Tax
ii. Withholding Tax
iii. Double Taxation Treaty
iv. Multiple Taxation (12 Marks)

(b) Discuss measures put in place by the government to reduce cases of multiple taxation. (6 Marks)

(d) Determine the Companies Income Tax due from Rex Pharmaceuticals Limited for the year ended December 31, 2015. (6 Marks)

Answer

(a)

i. Capital Gains Tax
Capital Gains Tax is a charge on capital gains accruing to an individual or organization on the disposal of a capital asset (chargeable asset). The current rate, as provided for in the Capital Gains Tax Act Cap CI LFN 2004 (as amended), is 10%. The tax is charged on the gains on an actual or current year basis.

The tax is administered by the Federal Inland Revenue Service (FIRS) for individuals resident in the Federal Capital Territory and corporate bodies, while the State Board of Internal Revenue administers the tax for individuals resident in the respective states.

ii. Withholding Tax
This is an advance payment of tax, used as a tax credit for settling the income tax liability of the particular year to which the income suffering the deduction relates.

Withholding Tax is deductible at the point of payment or when credit is taken, whichever comes earlier. Tax withheld must be remitted within 30 days from the date the duty to deduct arises.

The Federal Government, through the Federal Inland Revenue Service, collects Withholding Tax from residents of the Federal Capital Territory and corporate bodies, while State Governments, through their respective State Internal Revenue Boards, assess and collect Withholding Tax from individuals only.

Penalty for Non-Deduction/Non-Remittance of Withholding Tax:
For failure to deduct or remit within 30 days, a company or individual shall be liable to:

A penalty of 10% of the tax not deducted/remitted.
Interest at the prevailing Central Bank of Nigeria minimum rediscount rate.
Imprisonment for a period not exceeding three years.

iii. Double Taxation Treaty
When a Nigerian company earns foreign income, such income is included in its Chargeable Profit for the year of assessment and subjected to Nigerian tax. However, in many cases, the foreign income would have already been taxed in the country where it was derived. This results in double taxation, as the same income is taxed in two jurisdictions.

To minimize the negative effects of double taxation on international trade and attract foreign investment, Nigeria has signed bilateral tax treaties with various countries. These treaties provide reliefs to Nigerian companies earning foreign income that has already been taxed abroad.

iv. Multiple Taxation
This occurs when more than one tier of government imposes taxes or levies on the same income, assets, or financial transactions.

(b) Government’s Efforts to Reduce Cases of Multiplicity of Taxes:
i. The Federal Government issued Decree No. 21 (now an Act) under the Laws of the Federation of Nigeria 2004 on Taxes and Levies (Approved List for Collection) No. 21 of September 30, 1998.
ii. The schedule outlines the taxes and levies to be collected by the Federal Government, State Governments, and Local Governments.
iii. The Constitution provides that no tax should be imposed on the same person by more than one State or in respect of the same income by more than one Local Government.

(c) Legislative Powers on Tax Matters:
The power to legislate on taxation rests with:

The National Assembly (consisting of the Senate and the House of Representatives).
State Governments (through their respective State Assemblies).

The National Assembly can delegate assessment and collection duties to a State Government, while a State Assembly may delegate the power to administer and collect any tax, fee, or rate to a Local Government. However, there must be an assurance that no tax or fee at a stipulated rate is levied on the same person in respect of the same income by more than one Local Government.

(d) Since Rex Pharmaceuticals Limited received N4,500,000 from Laiketop Limited net of tax, the amount received is regarded as Franked Investment Income and is not subject to further tax