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)

 DEBBY TAX CONSULTANTS

BENIN-CITY

Date: The Managing Director Soft Farm andAgro-Allied Limited Benin-City

Dear Sir,

RE: TREATMENT OF EXCESS AMOUNT OF DEDUCTIBLE INTEREST PAID AND COMPUTATIONS OF ADJUSTED PROFIT AND TAX LIABILITIES

We refer to your request on the treatment of amount of deductible interest paid, computations of adjusted profit, and tax liabilities in respect of the company‟s financial activities for the relevant assessment years. Our comments are as follows:

(a) Treatment of excess amount of deductible interest paid on foreign loan

In line with the loan agreement, the company is expected to pay by the end of December 31, 2022, the sum of N12million, being the interest due on the N100 million facilities obtained from the parent company. The N12million loan payment was correctly captured by the Financial Accountant in the financial report.

However, by the provision of paragraph 2 of the 7th Schedule to the Finance Act 2019, there is a limit on allowable deductible interest paid on foreign loan. Any amount beyond the limit is considered to be excess interest and this shall be a disallowable deduction for the purpose of determination of tax liability.

The excess interest, as provided in paragraph 2, means an amount of total interest paid or payable in excess of 30% of earnings before interest, taxes, depreciation and amortisation of the Nigerian company in that accounting period.

As shown in the attached appendix 1, the interest paid on the foreign loan is N12million (12% of N100million).This is less than the 30% threshold (N54.54million), hence the interest deductible rule did not affect the company.

(b) Adjusted profit for the year ended December 31, 2022

As revealed in the attached appendix 2, the adjusted profit of the company for the year ended December 31, 2022 is N178,520,000.

(c) Tax liabilities for the relevant assessment years Appendix 3 presents the report of the companies income tax and tertiary education tax payable for 2018 through 2023 assessment years.

We hope this report adequately represents the mandate given to us. Should you require any further clarification, we will be glad to address it.

Yours faithfully,

For: DEBBY TAX CONSULTANTS

Deborah Oguns Principal Partner

Appendix 1: Computation of excess deductible interest paid

Loan amount = N100 million Interest rate = 12% per annum Interest paid = 12% of N100 million = N12 million

Excess deductible interest = 30% of earnings before interest, taxes, depreciation and amortisation

N‟000 N‟000
Net profit 104,560
Add:
Interest 15,600
Depreciation 38,240
Income tax 23,400 77,240
EBIT 181,800

Maximum allowable interest deduction = 30% of N181,800,000

= N54,540,000

Since, the interest paid (N12million) is less than the 30% threshold (N54,540,000), the company is not affected by the interest deductivity rule.

Appendix 2: Adjusted profit

N‟000 N‟000
Net profit as per accounts 104,560
Add back:
Repairs and maintenance:
Expansion to warehouse 3,700
Depreciation 38,240
Legal cost:
Income tax appeal 850
Acquisition of new lease 1,700
Allowance for doubtful debts:
General provisions 7,870
Donations (Women society) 1,000
Income tax provisions 23,400
General expenses:
Wedding gift 350
Fine for traffic offense 150 77,260
181,820
Less: Non-taxable income
Dividends received 2,700
Profit on disposal of non-current asset 600 3,300
Adjusted profit 178,520

Appendix 3: Tax liabilities for the relevant assessment years

2018 assessment year: (Basis Period: 1/1/18 – 31/12/18)

N‟000 N‟000
Adjusted profit/assessable profit 78,750
Deduct:
Capital allowances for the year (see note 1) 15,155
Capital allowances utilised (15,155) (15,155)
Unutiised capital allowances c/f Nil
Total profit 63,595

Companies income tax @ 30% of N63,595

19,078.5

Tertiary education tax @ 2% of N78,750

1,575

2019 assessment year Basis Period: 1/1/18 – 31/12/18)

N‟000 N‟000
Adjusted profit/assessable profit 78,750
Capital allowances for the year Nil
Total profit 78,750

Companies income tax @ 30% of N78,750

23,625

Tertiary education tax @ 2% of N78,750

1,575

2020 assessment year (Basis Period: 1/1/19 – 31/12/19)

N‟000 N‟000
Adjusted profit/assessable profit 95,120
Deduct:
Capital allowances for the year (see note 1) 3,060
Capital allowances utilised (3,060) (3,060)
Unutilised capital allowances c/f Nil
Total profit 92,060

Companies income tax @ 30% of N92,060

27,618

Tertiary education tax @ 2% of N95,120

1,902.4

2021 assessment year (Basis Period: 1/1/20 – 31/12/20)

N‟000 N‟000
Adjusted profit/assessable profit 142,800
Deduct:
Capital allowances for the year (see note 1) 3,060
Capital allowances utilised (3,060) (3,060)
Unutilised capital allowances c/f Nil
Total profit 139,740

Companies income tax @ 30% of N139,740

41,922

Tertiary education tax @ 2% of N142,800

2,856

2022 assessment year (Basis Period: 1/1/21 – 31/12/21)

N‟000 N‟000
Adjusted profit/assessable profit 166,900
Deduct:
Capital allowances for the year (see note 1) 6,559.97
Capital allowances utilised (6,559.97) (6,559.97)
Unutilised capital allowances c/f Nil
Total profit 160,340.03
Companies income tax @ 30% of N160,340.03

48,102.009

Tertiary education tax @ 2% of N166,900

3,338 2023 assessment year (Basis Period: 1/1/22 – 31/12/22)

N‟000 N‟000
Adjusted profit/assessable profit 178,520
Deduct:
Capital allowances for the year (see note 1) 11,029.4
Capital allowances utilised (11,029.4) 11,029.4
Unutilised capital allowances c/f Nil
Total profit 167,490.60

Companies income tax @ 30% of N167,490.6

50,247.18

Tertiary education tax @ 2.5% of N178,520

4,463

Note 1: Capital allowances

Plant equipment IA 95% AA Nil Indust. Building IA 15% AA 10% Non-ind Building IA 15% AA 10% Motor Vehicle IA 50% AA 25% Furniture & fittings IA 25% AA 20% Research & dev IA 95% AA Nil C/A
N‟000 N‟000 N‟000 N‟000 N‟000 N‟000
2018 A/Y
Cost 4,600 12,000 9,000 8,400 1,500
IA (4,370) (1,800) (1,350) (4,200) (375) 12,095
AA (1,020) W(i) (765) (1,050) (225) 3,060
15,155
2019 A/Y
TWDV 230 9,180 6,885 3,150 900
AA
2020 A/Y
TWDV 230 9,180 6,885 3,150 900
AA (1,020) (765) (1,050) (225) 3,060
3,060
2021 A/Y
TWDV 230 8,160 6,120 2,100 675
AA (1,020) (765) (1,050) (225) 3,060
3,060
2022 A/Y
TWDV 230 7,140 5,355 1,050 450
Additions 5,600
IA (2,800) 2,800
AA (1,020) (765) (1,749.97 W(ii)) (225) 3,759.97
6,559.97
2023 A/Y
TWDV 230 6,120 4,590 2,100.03 225
Additions 3,700 2,000 7,000
IA (555) (500) (6,650) 7,705
AA (1,334.5) (765) (700) (524.9) 3,324.4
11,029.4
TWDV 230 7,936.5 3,825 1,400.03 1,200.1 350

Workings

i. 2018 A/Y (Industrial building)

IA = 15% of N12,000,000 = N1,800,000

AA = (N12,000,000 – N1,800,000)/10 = N1,020,000

ii. 2022 A/Y (Motor vehicle)

AA (old) = N1,050,000 – N30 (for 3 items disposed) = N1,049,970

AA (new) = (N5,600,000 – N2,800,000)/4

= 700,000

1,749,970