- 30 Marks
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)
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