- 20 Marks
Question
Lagode Nigeria Limited, based in Lagos, Nigeria, commenced operations as a manufacturer of indigenous fabrics in 2013. Products are sold to wholesalers and retailers in Nigeria and to Africans in diaspora, particularly during annual holiday periods. A market survey in 2018 revealed a lack of local Nigerian fabric manufacturers in North America, prompting the company to establish Kuramo Incorp. in Ottawa, Canada, which began operations in January 2020.
The operating results for both locations for the year ended December 31, 2022, are as follows:
| Description | 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 | 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:
- Ottawa branch is a wholly owned Nigerian company.
- Miscellaneous expenses are allowable for tax purposes.
- Capital allowances agreed with Nigerian tax authorities:
Location Capital Allowance (N’000) Lagos operations 6,800 Ottawa operations 9,900 - The exchange rate for Canadian operations is fair.
- No double taxation agreement exists between Nigeria and Canada.
Required:
In accordance with the provisions of the 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 agreements 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)
Total: 20 Marks
Answer
a. Computation of Double Taxation Relief
Adjusted Profit of the Foreign Company (Kuramo Incorp):
| Item | N’000 |
|---|---|
| Net profit as per accounts | 74,250 |
| Add Back | |
| Depreciation | 8,750 |
| Foreign tax paid | 18,900 |
| Total Adjustments | 27,650 |
| Adjusted Profit | 101,900 |
| Deduct | |
| Capital allowances | 9,900 |
| Total Profit | 92,000 |
Since CR (20.54%) is greater than ½ NR (15%), the relief = ½ NR
- Double Taxation Relief: 15% of N92,000,000 = N13,800,000
b. Tax Liabilities of the Nigerian Company
Lagode Nigeria Limited – Computation of Adjusted Profit for the year ended December 31, 2022:
| Item | N’000 |
|---|---|
| Net profit as per accounts | 126,940 |
| Add Back | |
| Depreciation | 14,510 |
| Foreign tax paid | 18,900 |
| Total Adjustments | 33,410 |
| Adjusted Profit/Assessable Profit | 160,350 |
Lagode Nigeria Limited – Computation of Tax Liabilities for the 2023 Assessment Year:
| Item | N’000 |
|---|---|
| Adjusted Profit/Assessable Profit | 160,350 |
| Less | |
| Capital allowances | 16,700 |
| Total Profit | 143,650 |
| Companies Income Tax | 43,095 |
| Less: Double Taxation Relief | 13,800 |
| Net (Final) Companies Income Tax Payable | 29,295 |
| Tertiary Education Tax @ 2.5% | 4,008.75 |
c. Implications of Double Taxation Agreement on Withholding Tax Deductions by a Company Resident in a Country:
(i) With No Double Taxation Agreement with Nigeria:
- The company will incur a withholding tax deduction at the rate of 10% on revenue from dividends, interest, and royalties.
(ii) With Double Taxation Agreement with Nigeria:
- The withholding tax deduction is reduced to 7.5% on revenue from dividends, interest, and royalties.
- Topic: Double Taxation Reliefs and Credits
- Series: MAY 2024
- Uploader: Dotse