- 20 Marks
Question
Lagode Nigeria Limited, a company based in Lagos, Nigeria, commenced operations as a manufacturer of indigenous fabrics/ clothing materials in 2013. The finished products are sold to wholesalers and retailers in Nigeria and Africans in diaspora. There is usually a brisk market during annual holiday periods when Nigerians, in particular, come home for visitations and whilereturning to their foreign destinations purchase some of these finished fabrics for personal use and/or resale purposes.
A market survey conducted by Lagode Nigeria Limited in October 2018 revealed that there was no company in the North American continent that was into the manufacturing of local Nigerian fabrics; hence the opportunity for the company to enter the market.
The resolution of the Board of the company in one of its meetings in 2019 favoured the establishment of a branch of the company in Canada. Kuramo Incorp., Ottawa, was therefore registered and started operations in January 2020. The company has been operating successfully with gross turnover and profits generated from its operations more than that in Lagos (Head office), in each of the last three years.
The business operating results of the two companies for the year ended December 31, 2022 revealed the following:
| Lagos, Nigeria N‟000 | Ottawa, Canada N‟000 | |
|---|---|---|
| Gross turnover | 180,200 | 330,800 |
| Less: Expenses | ||
| Cost of materials | 72,100 | 162,320 |
| Wages and salaries | 18,050 | 42,120 |
| Finance costs | 1,400 | 3,150 |
| Miscellaneous | 4,600 | 5,270 |
| Depreciation of plant and equipment | 5,760 | 8,750 |
| Share of head office expenses | 25,600 | 16,040 |
| Foreign tax paid | – | 18,900 |
| Total expenses | 127,510 | 256,550 |
| Net profit | 52,690 | 74,250 |
Additional information:
(i) The Ottawa branch is a wholly owned Nigerian company.
(ii) All the items classified in miscellaneous expenses are allowable for tax purposes.
(iii) Capital allowances as agreed with the Nigerian tax authorities comprise:
| N‟000 | |
|---|---|
| Lagos operations | 6,800 |
| Ottawa operations | 9,900 |
(iv) The exchange rate used in the conversion of the Canadian operation’s transactions to Nigerian currency (Naira) is fair and appropriate.
(v) There is no double taxation agreement between Nigeria and Canada.
Required:
In accordance with the provisions of Companies Income Tax Act Cap. C21 LFN 2004 (as amended) you are to:
a. Compute the double taxation relief (if any) available to the Nigerian company
(9 Marks)
b. Advise on the tax liabilities of the Nigerian company for the relevant assessment year
(9 Marks)
c. Comment on the implications of double taxation agreement on withholding tax deductions by a company resident in a country:
(i) With no double taxation agreement with Nigeria
(1 Mark)
(ii) With double taxation treaty with Nigeria (1 Mark)
Answer
a.
Computation of double taxation relief
Adjusted profit of the foreign company (KuramoIncorp)
| N‟000 | N‟000 | |
|---|---|---|
| Net profit as per accounts | 74,250 | |
| Add back: | ||
| Depreciation | 8,750 | |
| Foreign tax paid | 18,900 | 27,650 |
| Adjusted profit | 101,900 | |
| Deduct: Capital allowances | 9,900 | |
| Total profit | 92,000 |
Commonwealth rate of tax (CR) = N18,900,000 x 100
N92,000,000
= 20.54%
CR = 20.54%
Nigerian rate of tax (NR) = 30%
½NR = 30%/2 = 15%
Since CR is greater than ½NR, then relief = ½NR
Double taxation relief = 15% of N92,000,000 = N13,800,000
b. Tax liabilities of the Nigerian company
Lagode Nigeria Limited Computation of adjusted profit For the year ended December 31, 2022
| N‟000 | N‟000 | |
|---|---|---|
| Net profit as per accounts (N52,690 + N74,250) | 126,940 | |
| Add back: | ||
| Depreciation (N5,760 + N8,750) | 14,510 | |
| Foreign tax paid | 18,900 | 33,410 |
| Adjusted profit/ assessable profit | 160,350 |
Lagode Nigeria Limited Computation of tax liabilities For the 2023 assessment year
| N‟000 | |
|---|---|
| Adjusted profit/assessable profit | 160,350 |
| Less: Capital allowances (N6,800 + N9,900) | 16,700 |
| Total profit | 143,650 |
Companies income tax @ 30% of N143,650 43,095 Less: Double taxation relief (as above) 13,800 Net (final) companies income tax payable 29,295
Tertiary education tax @ 2.5% of N160,350 4,008.75
c.
Implications of double taxation agreement on withholding tax deductions by a company resident in a country:
i) With no double taxation agreement with Nigeria It will suffer withholding tax deduction at the rate of 10% of the value of the revenue from dividends, interest and royalties.
ii) With double taxation agreement with Nigeria It will suffer withholding tax deduction at the rate of 7.5% of the value of the revenue from dividends, interest and royalties.
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