AT – May 2018 – L3 – SA – Q1 – Taxation of Corporations

Discuss multiple taxation, jurisdiction, withholding tax, and penalties related to Rex Pharmaceuticals.

Question

You are the tax controller of Rex Pharmaceuticals (Nigeria) Limited, having its head office at Ketu in Epe local government of Lagos State.

In the past three years, the company had been subjected to an array of taxes by different revenue authorities within Lagos State and indeed the entire country.

Apart from the Companies Income Tax, Withholding Tax is another tax that the company‟s management is concerned about. The Managing Director is very much 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 high cost of capital which led to increase in cost of production and attendant reduction in profit. The company‟s goods are becoming uncompetitive compared with imported similar goods. The long term effect is either reduction in work force or relocation to a more favourable economic environment. The Managing Director has invited you to his office to discuss the following issues:

(i) Whether as a corporate body, the company ought to be subjected to myriads of taxes beyond the corporate tax;

(ii) The jurisdiction of the tiers of government in the imposition and collection of taxes;

(iii) Withholding Tax;

(iv) Pay-As-You-Earn (PAYE) as it affects the staff; and

(v) Capital Gains Tax.

You have also been provided with the following information:

The company‟s technical agreement with the foreign head office and the need to remit funds;
Non-resident directors are to receive N2,500,000;
Staff P.A.Y.E has been centralised;
Dividend has been paid to shareholders in different parts of the country, and those resident in Kogi State of Nigeria, received N375,000;
Land for a factory in Abuja was purchased from Alhaji Garuba Maito who resides in Kano;
The company 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; and
Out of the thirty employees in Abuja, five are resident in Suleja, Niger State.

You are required to prepare a memo to the Managing Director explaining the following:

(a) i. Double/Multiple Taxation.
ii. Double Taxation Treaty.
iii. Multiple Taxation in Nigeria.
iv. Measures put in place to reduce cases of multiple taxation in Nigeria.
v. Withholding Tax with respect to (i) to (v).
vi. Penalty for non-deduction/remittance of Withholding Tax. (12 Marks)

(b) The arms of government empowered to legislate on tax matters by the Constitution. (4 Marks)

(d) i. The appropriate description of the income received from Laiketop Limited.
ii. The tax due from other trading activities of Rex Pharmaceuticals.
iii. Amount to be recouped by Rex Pharmaceuticals, if any.
iv. Net amount received by shareholders of Rex Pharmaceuticals.
v. Relevant section of the law to buttress your points in (i) and (ii) above. (10 Marks)

Answer

Memo to the Managing Director

From: [Your Name], Tax Controller
Date: [Insert Date]
Subject: Discussion on Tax Issues Affecting Rex Pharmaceuticals

Introduction

As requested, I have outlined the key tax issues that Rex Pharmaceuticals (Nigeria) Limited is currently facing, including the implications of multiple taxation, the jurisdiction of different tax authorities, and specific taxation matters relevant to our operations.

(a) Key Tax Issues

i. Double/Multiple Taxation

This occurs when a corporate body is subjected to various taxes beyond the corporate tax. Such multiplicity can lead to an increased financial burden on the company, affecting profitability and competitiveness.

ii. Double Taxation Treaty

This is an agreement between two countries aimed at avoiding taxation of the same income in both jurisdictions, which can alleviate the burden of multiple taxation.

iii. Multiple Taxation in Nigeria

Multiple taxation refers to various taxes levied by different tiers of government (federal, state, and local) that can apply to a single entity or transaction.

iv. Measures to Reduce Multiple Taxation in Nigeria

These measures can include the introduction of tax reforms, establishment of clear tax guidelines, and promotion of double taxation treaties.

v. Withholding Tax

Withholding tax applies to certain payments made to non-residents and is deducted at the source. Rex Pharmaceuticals must ensure proper compliance to avoid penalties.

vi. Penalty for Non-Deduction/Remittance of Withholding Tax

Failure to deduct or remit withholding tax can result in significant penalties, including fines and additional tax liabilities.

(b) Arms of Government Empowered to Legislate on Tax Matters

Federal Government: legislates on income taxes.
State Governments: can legislate on capital gains tax, property tax, etc.
Local Governments: impose local levies.

(c) Relevant Tax Authority and Withholding Tax Due

The relevant authority is the Federal Inland Revenue Service (FIRS). The specific withholding tax due would depend on payments made to non-residents.

(d) Taxation Specifics

i. Appropriate Description of Income from Laiketop Limited

This income is classified as dividend income, which is subject to withholding tax.

ii. Tax Due from Other Trading Activities of Rex Pharmaceuticals

This would be computed based on the net profits generated from those activities, subject to the corporate tax rate.

iii. Amount to Be Recouped by Rex Pharmaceuticals

This would depend on allowable tax deductions and overall tax liability for the financial year.

iv. Net Amount Received by Shareholders of Rex Pharmaceuticals

This would be the dividend amount after deducting withholding tax.

v. Relevant Section of Law

The relevant sections would pertain to corporate taxation laws and provisions for withholding tax.

Conclusion

I recommend a thorough review of our current tax practices to ensure compliance and identify potential areas for optimization. Please let me know if you would like to discuss this further.

Thank you for your attention to these important matters.

Best regards,
[Your Name]
Tax Controller
Rex Pharmaceuticals (Nigeria) Limited

Tags: Capital gains tax, Corporate Tax, PAYE, Tax Compliance, Tax Planning, Withholding Tax
Level: Level 3

Topic: Taxation of Companies
Series: MAY 2018

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