1. Variance in Tax Charge vs. Applicable Tax Rate:

The effective tax rate (ETR) may differ from the statutory tax rate due to several factors:

1. Non-Taxable Income:
   • Certain income items might be exempt from tax, reducing the overall tax liability.
   • For example, investment income or capital gains may enjoy preferential tax treatment.
2. Non-Deductible Expenses:
   • Certain expenses are not allowed as deductions for tax purposes, increasing taxable income.
   • These could include penalties, fines, or disallowed portions of interest expenses.
3. Deferred Tax Adjustments:
   • Temporary differences between accounting profits and taxable profits can cause variances.
   • These arise from timing differences in recognizing revenues or expenses for tax and accounting purposes.
4. Tax Reliefs and Incentives:
   • Tax credits or incentives, such as investment allowances or loss carry-forwards, reduce the tax charge.
   • Differences in company-specific reliefs can explain the discrepancy between the two companies.
5. Prior Period Adjustments:
   • Under/over provisions of tax in prior years may affect the current year’s tax charge.
6. Foreign Income and Withholding Taxes:
   • Taxes on foreign income or withholding taxes may distort the relationship between profits and tax liabilities.

2. Variance in Tax Paid vs. Tax Charge in Financial Statements:

The tax paid in the cash flow statement often differs from the tax charge in the profit or loss statement due to:

1. Timing Differences:
   • Taxes charged in the income statement relate to the accounting period, while cash taxes reflect payments made during the period.
   • For example, payments may include settlements for prior years or advance tax payments for future years.
2. Deferred Tax Movements:
   • Deferred tax adjustments (non-cash items) do not involve immediate tax payments but impact the tax charge.
3. Withholding Taxes and Credits:
   • Withholding tax deductions by third parties reduce taxes payable but do not affect cash paid.
4. Provisions and Estimates:
   • Tax provisions in financial statements may differ from the actual cash settled with tax authorities.
5. Tax Refunds or Overpayments:
   • Overpayment of taxes in prior periods may lead to refunds or credits, which reduce cash taxes.

3. Explanation for the Observed Case:

• For Mr. Ojoowuro’s Company:
  • The lower effective tax rate (14.3%) could result from non-taxable income or tax reliefs not applicable to Irin Plc.
  • Tax payments in the cash flow (N24 million) exceed the tax charge (N15 million) due to settlements of prior period tax liabilities or advance payments for future taxes.
• For Irin Plc:
  • The higher effective tax rate (33.3%) could result from non-deductible expenses or deferred tax liabilities.
  • Tax paid (N24 million) being less than the tax charge (N30 million) could indicate unpaid current taxes or utilization of prior overpayments.

4. Conclusion:

The discrepancies between the effective tax rates, statutory tax rates, and tax payments arise from a mix of accounting, statutory, and timing factors. It is crucial to analyze the specifics of each company’s tax policies and transactions to fully understand these differences.