- 20 Marks
Question
Debby Oil Limited is an oil prospecting company that has been operating in the deep ocean of the Niger Delta since 1990. The company makes up its accounts to December 31 each year.
The company is in discussion with a consortium of five deposit money banks in Nigeria for the purposes of taking a medium-term (5 years) loan facility of USD 5 million to finance further expansion of its facilities and acquisition of a marginal field. As part of the documents required by the banks for processing the loan facility are the audited financial statements and tax computations for the last five financial years. The company is yet to submit the documents for the year ended December 31, 2020, to the consortium.
The extract from its activities for the year ended December 31, 2020, is as presented below:
| Item | Amount (₦’000) |
|---|---|
| Oil inventory (Jan 1, 2020) | 1,220,000 |
| Oil inventory (Dec 31, 2020) | 1,380,000 |
| Sales – Export | 9,524,000 |
| Sales – Local | 2,900,500 |
| Other income | 1,235,300 |
| Production cost | 3,440,000 |
| Operating expenses | 1,789,600 |
| Intangible drilling cost | 1,425,200 |
| Tangible drilling cost | 532,000 |
| Traveling expenses | 54,000 |
| Salaries and wages | 1,860,000 |
| Pension fund contribution | 175,000 |
| Loan interest | 150,000 |
| General expenses | 800,500 |
| Depreciation | 170,000 |
| Royalties and production rentals | 810,000 |
| Donation | 20,000 |
| Bank charges | 25,300 |
| Harbour dues | 15,000 |
| Non-productive rent | 350,000 |
| Audit and accountancy fees | 28,000 |
| Customs duty on essentials | 7,300 |
| Income tax provision | 865,860 |
| Transfer to general reserves | 900,000 |
Additional Information:
- Posted prices of crude oil exported is USD 35 per barrel at the standard API gravity of 32°.
- Actual realised price is adjusted for deviation from the standard API gravity. Each degree change in API results in a price adjustment of USD 0.20.
- 650,000 barrels of crude oil were exported during the year with an API gravity of 34°.
- Other income of ₦735 million was generated from the company’s ocean tanker business. Associated expenses of ₦580.5 million were included in general expenses.
- Operating expenses included ₦9 million for short lease renewal.
- Pension fund contributions were approved by the State Internal Revenue Service.
- Loan interest included ₦78 million paid to a subsidiary company, approved by the board.
- A new pipeline and storage tank costing ₦150 million was acquired for offshore operations in a 180-meter deep area.
- Transfer to general reserves was board-approved.
- Capital allowances agreed with the tax authorities include an annual allowance of ₦120 million and a balancing charge of ₦8 million.
- Assume USD 1 is equivalent to ₦420.
Required:
As the company’s Assistant Tax Manager, draft a report to the Tax Manager showing the company’s tax liability for the relevant assessment year according to the Petroleum Profits Tax Act, Cap P.13, Laws of the Federation of Nigeria 2004 (as amended).
Answer
Subject: COMPUTATION OF TAX LIABILITY FOR 2020 YEAR OF ASSESSMENT
Memo Date: April 1, 2021
From: Assistant Tax Manager
To: Tax Manager
I have completed the tax liability computation for Debby Oil Limited, with the following results:
The total tax liability for the year ended December 31, 2020, is ₦2,132,004,000, comprising:
- Chargeable Tax: ₦2,080,208,000
- Tertiary Education Tax: ₦51,796,000
A detailed schedule outlining the tax liability calculation is attached for your review.
Please reach out if any further details or clarifications are required.
Best regards,
Segge Oshah
Assistant Tax Manager
SCHEDULE OF COMPUTATION OF TAX LIABILITY
Debby Oil Limited
Computation of Tax Liability
For 2020 Year of Assessment
Workings
- Topic: Petroleum Profits Tax (PPT)
- Uploader: Kofi