- 15 Marks
Question
The Managing Director of ICTREC Mining Company Limited is concerned about the correct computation and presentation of deferred taxes in the company’s financial statements. Last year, the Federal Inland Revenue Service raised a query on the company’s financial statements and the annual tax returns filed for tax assessment purposes.
To avoid any future tax queries on the financial statements, the Managing Director has approached your firm of chartered accountants to assist in preparing financial statements suitable for presentation at the company’s annual general meeting and submission to the tax authorities for determining tax liabilities.
All relevant books of accounts for ICTREC Mining Company Limited’s financial transactions have been made available to you. The following is an extract from the accounts for the year ended December 31, 2021:
Income and Expenses (N’000):
- Turnover: 125,400
- Rent and Rates: 12,200
- Direct Mining Transportation Cost: 1,190
- Direct Mining Cost: 47,400
- Gross Profit: 64,610
- Dividends Income (net): 3,900
- Interest on Foreign Deposit: 2,750
- Total: 71,260
- Salaries and Wages: 25,340
- Depreciation of Mining Plant: 2,500
- Depreciation (Other Non-Current Assets): 7,840
- Other Administrative and General Expenses: 4,210
- Loan Interest: 850
- Loss on Sale of Old Mining Plant: 200
- Net Profit: 30,320
Additional Information:
- Interest on foreign deposit was repatriated through the company’s domiciliary account in a Nigerian deposit money bank.
- Unrelieved losses amount to N2,800,000.
- Capital allowance agreed with tax authorities for the year was N7,250,000.
- Tax written down value of qualifying capital expenditure as of December 31, 2021, was N35,110,000, while net book value was N23,700,000.
- Opening tax written down values and net book values were N42,620,000 and N33,900,000, respectively.
- Unpaid tax at the beginning of the year was N15,620,000, with payments made during the year totaling N18,860,000.
- Depreciation rate of 10% per annum applies to the mining plant.
- The mining plant was revalued in 2017, with a revaluation surplus of N5 million included in the financial statements that year.
Required:
You have been directed by your Principal Partner to work on this assignment and prepare a draft report for his review. The report should show the computation of the following:
- Tax liabilities for the relevant year of assessment
(7 Marks) - Deferred tax provisions for 2021 and 2022
(8 Marks)
Total: 15 Marks
Answer
Draft Report on Tax Liabilities and Deferred Tax Provisions for ICTREC Mining Company Limited
To: Principal Partner
From: [Your Name], Chartered Accountant
Date: [Insert Date]
Subject: Computation of Tax Liabilities and Deferred Tax Provisions for ICTREC Mining Company Limited
Introduction
This report presents the computation of ICTREC Mining Company Limited’s tax liabilities for the relevant year of assessment (2021) and the deferred tax provisions for the years 2021 and 2022. The goal is to ensure compliance with Nigerian tax regulations and to support accurate financial reporting for submission to the Federal Inland Revenue Service (FIRS) and presentation at the company’s annual general meeting.
a. Computation of Tax Liabilities for the Relevant Year of Assessment (2021)
1. Taxable Income Calculation
Starting with the net profit and adjusting for taxable and non-taxable income and expenses:
- Net Profit (per accounts): N30,320,000
- Adjustments to Income:
- Dividends Income (net): N3,900,000 (not taxable, deduct)
- Interest on Foreign Deposit: N2,750,000 (assumed taxable in Nigeria, include)
- Depreciation:
- Mining plant depreciation: N2,500,000 (add back)
- Depreciation on other non-current assets: N7,840,000 (add back)
- Loss on Sale of Old Mining Plant: N200,000 (add back, non-deductible)
- Adjusted Profit Before Tax:
Add the adjustments to income to arrive at the adjusted taxable income.
2. Capital Allowance Deduction
- Unrelieved Losses: N2,800,000 (deductible)
- Capital Allowance: N7,250,000 (deductible)
The taxable income after deductions will be derived by subtracting the unrelieved losses and capital allowance from the adjusted profit.
3. Tax Payable Calculation
Multiply the taxable income by the corporate income tax rate to calculate the total tax liability for 2021.
b. Deferred Tax Provisions for 2021 and 2022
Deferred tax arises due to the difference between the tax written down value of qualifying capital expenditures and the net book value of these assets, along with temporary differences in the recognition of income and expenses.
1. Deferred Tax for 2021
- Tax Written-Down Value (as of Dec 31, 2021): N35,110,000
- Net Book Value (as of Dec 31, 2021): N23,700,000
- Temporary Difference: N35,110,000 – N23,700,000 = N11,410,000
- Deferred Tax Liability for 2021:
Temporary difference × corporate tax rate (e.g., 30%).
2. Deferred Tax for 2022
- Opening Tax Written-Down Value: N42,620,000
- Opening Net Book Value: N33,900,000
- Temporary Difference (Beginning of Year): N42,620,000 – N33,900,000 = N8,720,000
- Adjust the temporary difference by considering depreciation and any changes to the capital allowance for the year.
- Deferred Tax Liability for 2022:
Recalculate based on the adjusted temporary difference for the year.
Conclusion
This report provides the computation of ICTREC Mining Company Limited’s tax liabilities and deferred tax provisions for the year 2021 and deferred tax estimates for 2022. The calculations are structured to ensure compliance with Nigerian tax regulations, assist in accurate financial reporting, and support the company’s goal of avoiding future tax queries from FIRS.
- Topic: Taxation and Corporate Governance
- Series: NOV 2022
- Uploader: Dotse