- 15 Marks
Question
Pategi and Abu are brothers based in Hackettstown, New Jersey, USA. In 2009, they, along with ten other African-Americans, incorporated a telecommunications company named Pategi Telecommunications Limited. The company, headquartered in the USA, has a representative office in Share, Kwara State, Nigeria. In the year ended December 31, 2014, the following transactions were extracted from the company’s records:
- Number of Minutes of Telecommunication Transactions:
- U.S. to other parts of the World: 1,705,000 minutes
- U.S. to Nigeria: 374,000 minutes
- Nigeria to U.S.: 426,250 minutes
- Nigeria to Canada: 550,000 minutes
- U.S. to Canada through Nigeria: 794,750 minutes
Total Minutes: 3,850,000 minutes
- Worldwide Expenses Incurred (Naira):
- Refurbishment: N7,150,000
- Rent: N1,100,000
- Depreciation: N25,991,563
- Salaries and Wages: N4,065,188
- Other Disallowable Expenses: N9,658,000
- Administrative Expenses: N4,820,750
Total Expenses: N52,785,501
- Telecommunication Charges:
- Average charge rate per minute: $0.50
- Applicable exchange rate: N198 to $1.00
Required:
Advise the company on the total tax liabilities for the relevant year of assessment. (Total 15 Marks)
Answer
MEMO
Date: November 17, 2017
To: The Board of Directors, Pategi Telecommunications Limited
From: Tax Consultant
Subject: Tax Liabilities for the Assessment Year 2015
The following outlines the computation of tax liabilities based on income derived from Nigeria and other global telecommunication routes, as well as allowable deductions and exchange rate applications:
- Computation of Total Income
- Nigeria to U.S.: 426,250 minutes × $0.50/min × N198/$ = N42,198,750
- Nigeria to Canada: 550,000 minutes × $0.50/min × N198/$ = N54,450,000
Total Income from Nigeria: N96,648,750 - U.S. to other parts of the World: 1,705,000 minutes × $0.50/min × N198/$ = N168,795,000
- U.S. to Nigeria: 374,000 minutes × $0.50/min × N198/$ = N37,026,000
- U.S. to Canada through Nigeria: 794,750 minutes × $0.50/min × N198/$ = N78,680,250
Total Income from Other Routes: N284,501,250
Global/Worldwide Income: N381,150,000
- Adjusted Profits Computation
- Income derived from Nigeria: N96,648,750
- Income derived from Other Routes: N284,501,250
Worldwide Total Income: N381,150,000
Allowable Deductions:
- Rent: N1,100,000
- Salaries and Wages: N4,065,188
- Administrative Expenses: N4,820,750
Total Deductions: N9,985,938
Adjusted Profit: N371,164,062
- Adjusted Profit Ratio (APR) Calculation
- APR = Adjusted Profit before Depreciation ÷ Worldwide Income
- APR = (N371,164,062 ÷ N381,150,000) × 100% ≈ 97%
- Depreciation Ratio (DR) Calculation
- DR = Depreciation ÷ Worldwide Income
- DR = (N25,991,563 ÷ N381,150,000) × 100% ≈ 6.82%
- Assessable Profit
- Assessable Profit = APR × Income Derived in Nigeria
- Assessable Profit = 97.38% × N96,648,750 = N94,116,552.75
- Capital Allowance
- Capital Allowance = DR × Income Derived in Nigeria
- Capital Allowance = 6.82% × N96,648,750 = N6,591,444.75
- Taxable Profit
- Taxable Profit = Assessable Profit – Capital Allowance
- Taxable Profit = N94,116,552.75 – N6,591,444.75 = N87,525,108
- Company Income Tax
- Tax = 30% of Taxable Profit
- Tax = 0.30 × N87,525,108 = N26,257,532.40
Summary and Advice
The Income Tax Payable for the 2015 Assessment Year is calculated as N26,257,532.40, conditional upon the following:
- Verification by the U.S. Tax Authority of a consistent approach to computing tax for Pategi Telecommunications relative to Nigerian standards.
- Certification of the adjusted profit and depreciation ratios.
If these conditions are not met, FIRS may assess the company on a fair percentage of the income received in Nigeria as assessable profit.
Please contact us for further clarification if necessary.
Yours faithfully,
XYZ & Co.
Tax Partner
- Topic: Tax Administration and Dispute Resolution
- Series: NOV 2017
- Uploader: Dotse