- 15 Marks
Question
(a) Sadiq Corporation was incorporated in Sweden as a limited liability company and has a subsidiary, Omologede Ventures Nigeria Limited located in Akure, Nigeria. Peniel Nigeria Plc awarded a contract to Sadiq Corporation to renovate a rice milling factory in Gboko, Benue State, and another in Abakaliki, Ebonyi State. The contract value for the Gboko factory is $11,064,150, and $7,337,616 for the Abakaliki factory. Sadiq Corporation later sub-contracted the two jobs to its subsidiary in Nigeria. The renovation is expected to be completed within six months.
The following information was submitted to the Federal Inland Revenue Service by Omologede Ventures Nigeria Limited for the year ended December 31, 2017:
| Description | Amount (N) |
|---|---|
| Direct materials | 962,100,000 |
| Scaffolding | 183,538,320 |
| Administrative expenses on hired professionals | 33,352,800 |
| Rentals on equipment | 18,708,248 |
| Maintenance of equipment | 7,431,688 |
| Personnel card (domestic) | 28,803,029 |
| Personnel cost (foreign) | 14,738,250 |
| Fees to engineers | 11,298,689 |
| Other operational costs | 6,512,070 |
Additional Information:
- Capital allowance agreed by Omologede Ventures Nigeria Limited with the Federal Inland Revenue Service for the year was N104,418,744.
- 60% of the total contract sum was made available to Omologede Ventures Nigeria Limited.
- Depreciation is N69,902,092.
- 70% of the total contract sum was paid at the beginning of the job, while the balance was paid in September of the same year.
- The exchange rate at the time of signing the contract was N180 to $1. The rate changed in August of the same year to N195 to $1.
Withholding tax provisions were fully complied with by the two companies, and the tax remitted to the relevant tax authority as and when due.
Required:
As the local consultancy firm in Nigeria, provide advice to the management of the two companies on the tax implications of the contracts for the relevant year of assessment, clearly showing their tax liabilities (if any).
(15 Marks)
Answer
The managing director
Sadiq Corporation
Sweden
Through:
The managing director
Omologede Ventures Nigeria Limited
Akure, Nigeria
Subject: Tax Implications of Renovation Contracts in Benue and Ebonyi States, Nigeria
Dear Sir,
Based on the provided contractual details and financial statements submitted by Omologede Ventures Nigeria Limited for the fiscal year ending December 31, 2017, we advise as follows regarding the tax obligations:
- Nature of Project:
The contract awarded by Peniel Nigeria Plc to Sadiq Corporation is a turnkey project, which implies a single contract encompassing design, delivery, and installation within Nigeria. As a result, the entire revenue earned on this project is taxable in Nigeria, irrespective of the contractor’s residence status. - Taxable Profit:
Since the whole profit earned on the contracts in both Benue and Ebonyi states is deemed Nigerian-sourced income, it is subject to taxation in Nigeria. The expenses associated with the subcontract work assigned to Omologede Ventures Nigeria Limited will be recognized for tax purposes. However, allowable expenses will be capped at the actual costs incurred by Omologede Ventures as stipulated by Nigerian tax laws. - Withholding Tax (WHT):
- Peniel Nigeria Plc deducted 5% WHT on the total contract payment to Sadiq Corporation, which will serve as a tax credit.
- Sadiq Corporation, in turn, is responsible for deducting 5% WHT from its subcontracted payments to Omologede Ventures.
- Exchange Rate Adjustments:
The exchange rate was initially N180 to $1 but rose to N195 by August 2017. The fluctuating rates affected the contract payments and must be factored into the tax calculations to accurately determine the assessable income. - Capital Allowance and Depreciation:
The agreed capital allowance of N104,418,744 and depreciation (N69,902,092) on the equipment utilized by Omologede Ventures should be incorporated to reduce the taxable profit further.
Since a withholding tax of 5% would have been deducted on the total contract value by Peniel Nigeria Plc, the same total withholding tax credit will be utilized by Sadiq Corporation. Also, Sadiq Corporation is obliged to deduct withholding tax from the sub-contract to Omologede Ventures because it was an entirely fresh contract to Omologede Ventures and only the tax withheld on the contract fee to nOmologede Ventures shall be utilized by Omologede Ventures. Therefore, the withholding tax to be utilized against the total income tax on the contract is the aggregate of tax withheld by Peniel Nigeria Plc and Sadiq Corporation as shown above.
- Topic: International taxation
- Uploader: Kofi