AT – Nov 2014 – L3 – SB – Q4 – Petroleum Profits Tax (PPT)

Analyze tax implications for Broadway Limited's pioneer status and relevant years of assessment.

Question

Broadway Limited was incorporated on 31 May 2004, as a manufacturer of plastic products. Four Lebanese shareholders invested substantially, intending to become members of the Board of Directors. The company applied for a Pioneer Status under the Industrial Development (Income Tax Relief) Act, Cap. 17, LFN 2004 and was granted a Pioneer Certificate, with a Production Day certified as 1 August 2004.

The following information has been extracted from the company’s records:

Details	Amount (N)
Net Profit for Financial Year Ended 31 July 2008	5,005,000
Depreciation	396,435

The Federal Inland Revenue Service (FIRS) certified the following expenditures up to and including the year ended 31 July 2007:

Expenditure Type	Amount (N)
Industrial Building	6,142,500
Non-Industrial Building	2,990,000
Plant and Machinery	4,631,250
Motor Vehicles	4,062,500

The promoters declined to apply for an extension of the Pioneer period.

Required:
Advise the management on the tax implications for the relevant years of assessment.

Answer

Pioneer Status Overview:

Under the Industrial Development (Income Tax Relief) Act, Pioneer Status grants companies full or partial relief from income taxes for a defined period (usually three years, extendable by two additional years).

Broadway Limited’s Pioneer Certificate took effect on 1 August 2004, granting tax relief until 31 July 2007. Since the company declined to apply for an extension, the Pioneer period expired, and normal tax rules apply from the year beginning 1 August 2007.

Relevant Tax Implications:

Exemption from Tax During Pioneer Period (2004-2007):
- Profits earned during the Pioneer period (1 August 2004 – 31 July 2007) are tax-exempt.
- No income tax liability arises for this period.
Post-Pioneer Period Tax Liability (2007-2008):
- From 1 August 2007, Broadway Limited’s profits are subject to normal tax rules.
- Profits for the year ended 31 July 2008 are taxable.
Allowable Deductions and Capital Allowances:
- Certified capital expenditures incurred during the Pioneer period qualify for capital allowances after the Pioneer period ends.
- Capital allowances reduce taxable profits in subsequent years.
Treatment of Capital Expenditures Certified by FIRS:

Asset Type	Cost (N)	Initial Allowance (IA)	Annual Allowance (AA)
Industrial Building	6,142,500	15%	10%
Non-Industrial Building	2,990,000	15%	10%
Plant and Machinery	4,631,250	50%	25%
Motor Vehicles	4,062,500	50%	25%

Computation of Taxable Profit for 2007-2008:

Particulars	Amount (N)
Net Profit for the Year	5,005,000
Add: Depreciation (Non-Allowable for Tax)	396,435
Adjusted Profit Before Allowances	5,401,435
Less: Capital Allowances
– Industrial Building (IA: 15%; AA: 10%)	922,125
– Non-Industrial Building (IA: 15%; AA: 10%)	448,500
– Plant and Machinery (IA: 50%; AA: 25%)	3,003,812.50
– Motor Vehicles (IA: 50%; AA: 25%)	2,031,250
Total Capital Allowances	6,405,687.50
Taxable Profit

Conclusion:

No Tax Liability in 2007-2008:
- Due to substantial capital allowances carried forward, Broadway Limited’s taxable profit for the year ended 31 July 2008 is negative (N1,004,252.50 loss).
- No income tax is payable for this period.
Carry-Forward of Unutilized Capital Allowances:
- The excess capital allowances (N1,004,252.50) can be carried forward to subsequent years.

Recommendations:

Maintain Accurate Records:
Ensure proper documentation of capital allowances for carry-forward purposes.
Leverage Post-Pioneer Period Benefits:
Broadway Limited should optimize tax relief on certified capital expenditures to sustain profitability.
Review Extension Opportunities:
Although the Pioneer period has expired, similar tax reliefs for reinvestments may be explored in the future.

Tags: Income Tax, Industrial Development, Pioneer Status, Tax Relief
Level: Level 3

Topic: Petroleum Profits Tax (PPT)
Series: NOV 2014

Uploader: Dotse