Professional Body: ICA (Nigeria)

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AT – May2024 – PL – SC – Q7 – Cross-Border Tax Issues

Advise on concept and practice of treaty shopping, strategies to curb it, features of ECOWAS CET, and trade defense measures.

Question

Abakali Limited is a company engaged in the manufacturing of three variants of beverages. The products of the company are well received by the consumers as the company now controls about 55% of the domestic market. The “chocolate” brand is the top earners for the company. According to a recent newspaper review, “it has the same quality as those imported into the country from the western world”.

The Board of the company has at one of its meetings decided to enter the West African market in 2024 and by 2026, the European market, through:

(i) Establishment of depots in major cities of four neighbouring countries (Republic of Benin, Togo, Ghana and Niger) and goods will be transported by road; and

(ii) Incorporation of a branch in a European country, full production will commence.

As stressed by one of the directors at the meeting, the major challenge the company has to sort out before the foray into these new markets, is the strategy to mitigate the negative impact of high tax rates (in Europe and West African countries) on the profits of the company, for better returns on investment to be achieved.

A director, who had earlier worked in an international company, suggested the use of “treaty shopping” as a tax planning strategy in the location of the branch office in Europe.

He equally pointed out that the Economic Community of West African States (ECOWAS) common external tariff framework has provided solution to the issue of different tax regimes in the sub-region.

Most of the members of the Board are not conversant with the concept of “treaty shopping” and ECOWAS common external tariff framework, and has therefore requested for professional advice on these issues.

The Managing Director, on behalf of the Board, has approached your professional accounting firm to provide advice on the salient points raised in the meeting.

Required:

As the officer designated to handle this task, you are to write a report to your Principal Partner for his review, before same is sent to the client. The report should address the following salient concerns of the client:

a. Explanation of the concept and practice of “treaty shopping” (6 Marks)

b. Discussion the strategies employed by various countries in curbing treaty shopping in international transactions

(2 Marks)

c. Discussion on the features of ECOWAS common external tariff framework

(4 Marks)

d. Comment on the trade defense measures put in place to guide the operations of the common external tariff framework

(3 Marks)

Answer

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Tags: Anti-Treaty Shopping Strategies, ECOWAS Common External Tariff, Trade Defense Measures, Treaty Shopping
Level: Level 3

Topic: Cross-Border Tax Issues, Emerging Trends in Taxation, International taxation
Series: MAY 2024

AT – May2024 – PL – SC – Q6 – Capital Gains Tax

Advise on capital gains tax payable, cost of undisposed property, roll-over relief, and due date for tax payment on land disposal.

Question

Kanadu Nigeria Limited is a manufacturer of leather shoes, bags and allied accessories since 2017. The recent changes in the taste of customers, particularly the quest for imported, cheaper leather shoes and bags, have had negative impact on the company’s profits. The management has decided to re-organise the business in a way to satisfy the customers better.

The following transactions were extracted from the books of the company:

(i) June 2017: Acquisition of an acre of land at the outskirt of the State capital forN8,500,000. The company spent an additional amount of N1,500,000 to sand fill the land;

(ii) August 2017: A factory was built on the acquired land for the purpose of the business at a cost of N65,000,000;

(iii) May 2022:Sold part of the factory‟s land for N25,500,000;

(iv) The market value of the remaining property unsold, as valued by a professional valuer, at the time of disposal in May 2022, was N99,500,000; and

(v) July 2023: Acquisition of a new acre of land in the town for N45,000,000 (utilised all the proceeds from the disposal of the land).

This is expected to be used for construction of another factory in the same line of business.

The company’s General Manager, who is an engineer, has just engaged your professional accounting firm as its tax consultants.

Required:

As the Principal Partner, you are to prepare a report to the General Manager, stating the:

a. Capital gains tax payable in line with the provisions of Capital Gains Tax Cap C1 LFN 2004 (as amended)

(10 Marks)

b. New cost of undisposed property

(2 Marks)

c. The roll-over relief (if any) the company is entitled to

(2 Marks)

d. Due date(s) for the payment of tax liabilities

(1 Mark)

Answer

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Tags: Capital gains tax, Chargeable Gain, Payment Due Date, Roll-Over Relief, Undisposed Property Cost
Level: Level 3

Topic: Capital Gains Tax (CGT), Tax Administration and Dispute Resolution
Series: MAY 2024

AT – May2024 – PL – SC – Q5 – Tax Administration and Dispute Resolution

Discuss NEITI's vision, mission, four objectives, and three responsibilities each for government, taxpayer, revenue agencies per National Tax Policy 2017.

Question

The Nigeria Extractive Industries Transparency Initiative (NEITI) was established through the NEITI Act, 2007. The body has the responsibility for the development of a framework for transparency and accountability in the reporting and disclosure of revenue due to or paid to the Federal Government by companies in the extractive industry.

In the same vein, the National Tax Policy, 2017, expressly stipulates the responsibilities of the various stakeholders towards the achievement of efficient tax administration in Nigeria.

Required:

a. Discuss the vision, mission and FOUR primary objectives of NEITI as provided for in the enabling Act.

(6 Marks)

b. Explain THREE responsibilities of each of the under listed stakeholders as provided for in the National Tax Policy, 2017:

(i) The government (3 Marks)

(ii) The taxpayer (3 Marks)

(iii) Revenue agencies (3 Marks)

Answer

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Tags: Extractive Industries, National Tax Policy, NEITI, Stakeholder Responsibilities, Vision Mission Objectives
Level: Level 3

Topic: Emerging Trends in Taxation, Tax Administration and Dispute Resolution
Series: MAY 2024

AT – May2024 – PL – SB – Q4 – Ethical Issues in Tax Practice

Prepare a paper on threats to fundamental principles, safeguards, legal/ethical issues in tax engagements, and ICAN's powers to enforce ethical standards.

Question

Professional ethics are essential for building trust and credibility with clients, colleagues and the society at large. The integrity and reputation of the profession are also maintained by members who are required to demonstrate ethical and globally accepted professional behaviours.

It is on this premise that a retreat on “Ethics and professionalism in tax management in Nigeria” is to be organised by a reputable professional accounting firm, for its newly employed audit officers and tax consultants.

Your professional accounting firm has been invited to send a resource person to present a paper at the workshop.

Required:

As the accounting firm‟s Senior Manager (Audit), you have been mandated by the Senior Partner to prepare and present the paper at the workshop. The contents of the paper should address the following pertinent areas:

a. Categories of threats that may pose a challenge to compliance with fundamental principles of accounting profession.

(3 Marks)

b. Safeguards that can be used to eliminate or reduce the identified threats.

(4 Marks)

c. Identification of specific legal and ethical issues that could arise from tax

engagements.

(7 Marks)

d. Powers available to The Institute of Chartered Accountants of Nigeria (ICAN) in enforcing the ethical standards of its members.

(6 Marks)

Answer

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Tags: ICAN Powers, Legal and Ethical Issues, Professional Ethics, Safeguards, Threats to Compliance
Level: Level 3

Topic: Ethical Issues in Tax Practice, Tax Administration and Dispute Resolution
Series: MAY 2024

AT – May2024 – PL – SB – Q3 – International Taxation

Compute double taxation relief, advise on tax liabilities for a Nigerian company with a Canadian branch, and comment on withholding tax implications with/without tax treaty.

Question

Lagode Nigeria Limited, a company based in Lagos, Nigeria, commenced operations as a manufacturer of indigenous fabrics/ clothing materials in 2013. The finished products are sold to wholesalers and retailers in Nigeria and Africans in diaspora. There is usually a brisk market during annual holiday periods when Nigerians, in particular, come home for visitations and whilereturning to their foreign destinations purchase some of these finished fabrics for personal use and/or resale purposes.

A market survey conducted by Lagode Nigeria Limited in October 2018 revealed that there was no company in the North American continent that was into the manufacturing of local Nigerian fabrics; hence the opportunity for the company to enter the market.

The resolution of the Board of the company in one of its meetings in 2019 favoured the establishment of a branch of the company in Canada. Kuramo Incorp., Ottawa, was therefore registered and started operations in January 2020. The company has been operating successfully with gross turnover and profits generated from its operations more than that in Lagos (Head office), in each of the last three years.

The business operating results of the two companies for the year ended December 31, 2022 revealed the following:

	Lagos, Nigeria N‟000	Ottawa, Canada N‟000
Gross turnover	180,200	330,800
Less: Expenses
Cost of materials	72,100	162,320
Wages and salaries	18,050	42,120
Finance costs	1,400	3,150
Miscellaneous	4,600	5,270
Depreciation of plant and equipment	5,760	8,750
Share of head office expenses	25,600	16,040
Foreign tax paid	–	18,900
Total expenses	127,510	256,550
Net profit	52,690	74,250

Additional information:

(i) The Ottawa branch is a wholly owned Nigerian company.

(ii) All the items classified in miscellaneous expenses are allowable for tax purposes.

(iii) Capital allowances as agreed with the Nigerian tax authorities comprise:

	N‟000
Lagos operations	6,800
Ottawa operations	9,900

(iv) The exchange rate used in the conversion of the Canadian operation’s transactions to Nigerian currency (Naira) is fair and appropriate.

(v) There is no double taxation agreement between Nigeria and Canada.

Required:

In accordance with the provisions of Companies Income Tax Act Cap. C21 LFN 2004 (as amended) you are to:

a. Compute the double taxation relief (if any) available to the Nigerian company

(9 Marks)

b. Advise on the tax liabilities of the Nigerian company for the relevant assessment year

(9 Marks)

c. Comment on the implications of double taxation agreement on withholding tax deductions by a company resident in a country:

(i) With no double taxation agreement with Nigeria

(1 Mark)

(ii) With double taxation treaty with Nigeria (1 Mark)

Answer

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Tags: Companies Income Tax, Double taxation relief, Foreign Branch, Tax Treaty Implications, Withholding Tax
Level: Level 3

Topic: Double Taxation Reliefs and Credits, International taxation, Taxation of Non-Resident Companies and Individuals
Series: MAY 2024

AT – May2024 – PL – SB – Q2 – Petroleum Profits Tax

Compute hydrocarbon tax for 2023 and advise on tax implications of investing in deep offshore areas for a petroleum company.

Question

New Rain Petroleum Company Limited has been operating in the onshore and shallow water areas of the Niger Delta region for over fifteen years. The company was granted a petroleum mining lease licence in January 2021. In its bid to improve profitability, the company‟s management intends to apply for licence to operate in the deep sea area as from 2025. The decision of the management is expected to be laid before the members of the company at the 2023 annual general meeting, which comes up in the second half of 2024.

The following was extracted from the book of accounts of the company for the year ended December 31, 2023:

Income:	N‟ million	N‟ million
Fiscal value of crude oil sold (note 1)		191,100
Value of condensate from associated gas sold (note 1)		84,474
Value of natural gas liquid from associated gas sold (note 1)		55,328
Other incidental income		151
Realised exchange gain		38
Gross total income		331,091
Expenses/deductions:
Royalty incurred and paid	86,200
First exploration wells cost	6,800
First two appraisal wells costs	18,700
Joint cost- terminalling	12,000
Gas reinjection wells cost	3,420
Salaries and wages	9,300
Power cost	1,650
NDDC charge	125
Concessional rentals	60,430
Depreciation of assets	13,860
Allowance for doubtful debts (note 3)	2,400
Host community trust fund contribution	4,800
Stamp duty	16
Staff welfare	350
Travelling	180
Donations and subscription (note 4)	6
Decommissioning and abandonment	1,300
Environment remediation fund contribution	1,250
General expenses (note 5)	500
Finance costs	1,750	225,037
Net profit		106,054

The following additional information was also provided:

(i) Data on crude oil; condensate from associated gas sold; and natural gas liquid from associated gas sold;

Category	Quantity (million barrels)	Actual price USD	Fiscal price USD
Crude oil	5.25	70	72
Condensate from associated gas	3.61	45	44
Natural gas liquid from associated gas	2.80	38	40

(ii) Omitted from the records was a balancing charge of N1, 500,000 made from disposal of an old oil equipment platform;

(iii) Allowance for doubtful debts:

	N‟ million
Specific provisions	900
General provisions	1,500
	2,400

(iv) Donations and subscription:

	N‟ million
Recognised orphanage homes	3.0
Host community‟s cultural group	2.0
Subscription to oil and gas association	1.0
	6.0

(v) General expenses:

	N‟ million
Penalty for gas flare	250
Printing of stationery items	140
State government levy	110
	500

(vi) Agreed capital allowances:

	N‟ million
Brought forward	167
For the year	2,105
	2,272

(vii) Production allowance:

	N‟ million
Onshore operations	900
Shallow water operation	1,700
	2,600

(viii) The exchange rate averaged N520 to 1 USD during the year; and

(ix) Assume the tax liabilities are to be paid in domestic (Naira) currency.

Required:

As the company’s Tax Manager, you are to advise the management, in accordance with the provisions of Petroleum Industry Act 2021, on:

a. Hydrocarbon tax payable in the relevant assessment year (18 Marks)

b. The tax implications, if the company decides to involve or invest in deep offshore areas

(2 Marks)

Answer

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Tags: Capital allowances, Cost-Price Ratio, Hydrocarbon Tax, Offshore Operations, Petroleum Industry Act, Production Allowances
Level: Level 3

Topic: Petroleum Profits Tax (PPT), Taxation of Specialized Businesses
Series: MAY 2024

SFM – May 2024 – PL – SC – Q7 – Mergers and Acquisitions

Discuss manager-shareholder conflicts with examples; explain reasons for synergy in mergers/takeovers.

Question

a. Discuss conflict of interest that may exist between managers and shareholders and give examples. (8 Marks)

b. Explain why synergy might exist when one company merges with or takes over another company. (7 Marks)

Answer

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Tags: Agency Conflicts, Corporate Governance, Manager-Shareholder Conflicts, Synergy in Mergers, Takeovers
Level: Level 3

Topic: Mergers and acquisitions
Series: MAY 2024

AT – May2024 – PL – SA – Q1 – Taxation of Companies

Advise on treatment of excess deductible interest on foreign loan, compute adjusted profit for 2022, and tax liabilities for 2018-2023 assessment years for an agro-allied company.

Question

Soft Farm and Agro-Allied Limited, a subsidiary of Emperor Agro Incorporated, Italy, was incorporated in Nigeria in January 2018. Soft Farm and Agro-Allied Limited produces palm kernel for domestic use and export to the European market.

The Managing Director of the company has just received a letter from the head office (parent company) of an impending visits occasioned by poor business performance (below the group‟s return on investment benchmark of 25%) since commencement of the business, in spite of financial and technical supports rendered by the parent company. It would be recalled that in January 2022, the parent company granted the loan request of N100 million to Soft Farm and Agro- Allied Limited for business expansion.

The Board has scheduled a special meeting for next month for the consideration of the financial report of Soft Farm and Agro-Allied Limited for the year ended December 31, 2022 and review of past financial reports and tax assessments.

As the newly engaged Tax Consultant to the company, you have been invited to be part of the meeting for the purpose of providing professional opinion on tax related issues that may arise. To help you prepare adequately for the meeting, the Financial Accountant has been directed by the Managing Director to make available to you the financial statements for all the periods under review, books of accounts, returns filed with tax authorities and other supporting documents.

You noted from the preliminary review of the financial report for the year ended December 31, 2022, an item that requires further discussions with management of the company. This issue is in respect of interest paid on loan obtained from the parent company.

Extract from the financial statements for the year ended December 31, 2022 reveals:

	N‟000	N‟000
Gross turnover:
Domestic sales		147,500
Export sales		200,100
Other operating income		3,300
Total gross turnover		350,900
Deduct:
Staff salary	122,600
Ground rent paid to the State government	3,200
Motor running expenses	1,750
Audit and accountancy fees	1,000
Repairs and maintenance	5,800
Depreciation of assets	38,240
Rent paid	1,850
Power and lightning	5,400
Legal cost	5,000
Rates (water)	2,100
Allowance for doubtful debts	10,500
Donations	4,000
Interest and other finance costs paid	15,600
Income tax provision	23,400
General expenses	5,900	246,340
Net profit		104,560

The following additional information is available:

(i) Export sales

20% of the export sales was made to the parent company at the prevailing

international market price.

(ii) Other operating income:

	N‟000
Dividend received (net)	2,700
Profit from disposal of non-current asset	600
	3,300

(iii) Repairs and maintenance:

	N‟000
Repairs of plantation equipment	1,200
Repairs to premises (non-industrial building)	900
Expansion to warehouse (industrial building)	3,700
	5,800

(iv) Rent paid:

This is in respect of accommodation for the newly employed General Manager, whose basic salary is N4,800,000.

(v) Legal cost:

	N‟000
Cost of income tax appeal	850
Cost of debt collection	1,300
Cost of acquiring new lease	1,700
Renewal of old lease	1,150
	5,000

(vi) Allowance for doubtful debts:

	N‟000
Specific provisions	5,230
General provisions	7,870
Bad debts recovered	(2,600)
	10,500

(vii) Donations:

	N‟000
Palm Oil Research Institute	1,400
National Library	600
Cocoa Research Institute of Nigeria	1,000
Women Society of the host community	1,000
	4,000

(viii) Interest and other finance costs paid

In January 2022, the company obtained a loan facility of N100 million from the parent company forthe purpose of expansion of the business at a competitive interest rate of 12% per annum. The duration of the facility is 10 years.

The company is expected to pay interest due for the first 3 years, while from years 4 to 10, both principal and interest dues are to be paid at the end of each year.

The balance as shown in the financial statements is attributed to other finance cost and bank charges paid to domestic deposit money banks on various accounts operated by the company.

(ix) General expenses:

	N‟000
Wedding gift to staff	350
Fine imposed on a company‟s driver for traffic offense	150
Haulage expenses	3,200
Transport and travelling	2,200
	5,900

(x) Schedule of prior years‟ turnover and assessable profits:

Year ended December 31	Turnover N‟000	Assessable profit N‟000
2018	154,400	78,750
2019	198,600	95,120
2020	310,300	142,800
2021	314,900	166,900

(xi) Schedule of qualifying capital expenditure incurred:

Date of acquisition	Asset type	Amount N‟000
August 31, 2017	Plantation equipment	4,600
August 31, 2017	Industrial building	12,000
August 31, 2017	Non-industrial building	9,000
January 1, 2018	Motor vehicles (3)	8,400
January 1, 2018	Furniture and fittings (10)	1,500
February 14, 2021	Motor vehicles (2)	5,600
June 12, 2022	Furniture and fittings (10)	2,000
July 8, 2022	Research and development	7,000

Required:

As the Tax Consultant to the company, you are to draft a report to the Managing Director of Soft Farm and Agro-Allied Limited, in line with the provisions of the Companies Income Tax Act Cap C21 LFN 2004 (as amended). The report should provide professional advice on the:

a. Treatments of excess amount of deductible interest paid

(6 Marks)

b. Adjusted profit of the company for the year ended December 31, 2022 (7 Marks)

c. Tax liabilities for all the relevant assessment years

(17 Marks)

Answer

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Tags: Adjusted Profit, Agro-Allied Business, Capital allowances, Companies Income Tax, Foreign Loan, Interest Deductibility, Tertiary Education Tax
Level: Level 3

Topic: International taxation, Tax Incentives, Taxation of Companies, Transfer Pricing
Series: MAY 2024

May 2024 – PL – SC – Q6 – Foreign Exchange Risk Management

Explain economic exposure and management; estimate impact on Linko Plc's value from expected USD strengthening vs GBP.

Question

a. With respect to foreign currency risk management, explain economic exposure and discuss generally, how a company can manage economic exposure. (8 Marks)

b. Linko Plc is a Uk-based company. It supplies medical equipment to the USA and Europe. It also buys some basic raw materials from USA.

In a typical financial year Linko has net imports of 8 million dollars from USA. This is expected to continue for the next six years.

The company’s cost of capital is 10% per year. Assume that cash flows occur at the year end. Ignore taxation.

Required:

Assuming that there is no change in the physical volume or dollar price of imports, estimate the impact on the expected market value of Linko Plc, if the market expects the dollar to strengthen by 4% per year against the pounds. The current spot rate exchange rate (US$ per £1) is 1.9156 – 1.9210. (7 Marks)

Answer

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Tags: Currency Strengthening, Economic Exposure, FX Risk Management, Market Value Impact, Net Imports, Spot Rates
Level: Level 3

Topic: Foreign Exchange Risk Management
Series: MAY 2024

SFM – May 2024 – PL – SC – Q5 – Financial Distress and Bankruptcy

Explain problems/costs of financial distress; describe impacts of high gearing on stakeholders and protective measures.

Question

a. Explain the main problems and costs which might arise for a company experiencing a period of severe financial difficulties. (7 Marks)

b. Describe how interested parties, other than bondholders, will be affected by high financial gearing levels, and describe what protective measures they can take. (8 Marks)

(Total 15 Marks)

Answer

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Tags: Agency Costs, Bondholders, Costs of Distress, Financial Distress, High Gearing, Stakeholder Protection
Level: Level 3

Topic: Financial Distress and Bankruptcy
Series: MAY 2024

AT – May2024 – PL – SC – Q7 – Cross-Border Tax Issues

Advise on concept and practice of treaty shopping, strategies to curb it, features of ECOWAS CET, and trade defense measures.

Question

The Board of the company has at one of its meetings decided to enter the West African market in 2024 and by 2026, the European market, through:

(i) Establishment of depots in major cities of four neighbouring countries (Republic of Benin, Togo, Ghana and Niger) and goods will be transported by road; and

(ii) Incorporation of a branch in a European country, full production will commence.

A director, who had earlier worked in an international company, suggested the use of “treaty shopping” as a tax planning strategy in the location of the branch office in Europe.

He equally pointed out that the Economic Community of West African States (ECOWAS) common external tariff framework has provided solution to the issue of different tax regimes in the sub-region.

The Managing Director, on behalf of the Board, has approached your professional accounting firm to provide advice on the salient points raised in the meeting.

Required:

a. Explanation of the concept and practice of “treaty shopping” (6 Marks)

b. Discussion the strategies employed by various countries in curbing treaty shopping in international transactions

(2 Marks)

c. Discussion on the features of ECOWAS common external tariff framework

(4 Marks)

d. Comment on the trade defense measures put in place to guide the operations of the common external tariff framework

(3 Marks)

Answer

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Tags: Anti-Treaty Shopping Strategies, ECOWAS Common External Tariff, Trade Defense Measures, Treaty Shopping
Level: Level 3

Topic: Cross-Border Tax Issues, Emerging Trends in Taxation, International taxation
Series: MAY 2024