- 10 Marks
Question
ABCEE Limited has been in the business of clearing and forwarding in Nigeria since 2007. The company has a standing policy of declaring dividends to the shareholders and has continued to do so despite the dwindling business activities in recent years. The following information was extracted from the ABCEE Limited’s income tax returns submitted to the Federal Inland Revenue Service for the 2016 year of assessment:
| Description | Amount (N) |
|---|---|
| Total profit per 2016 tax computation | 10,899,000 |
| Tax assessed based on total profit @ 30% | 3,269,700 |
| Dividend declared | 14,000,000 |
Required:
As the desk officer in charge of ABCEE Limited, compute the revised tax liability of the company in line with Section 19 of the Companies Income Tax Act Cap C21 LFN 2004 (as amended).
Answer
Abcee Limited
Revised income tax liability for 2016 year of assessment
Revised Tax Liability Computation under Section 19 of CITA
- Explanation of Section 19:
- Section 19 of the Companies Income Tax Act stipulates that where a company declares a dividend that exceeds its total profit as ascertained for tax purposes, the company will be assessed to tax based on the dividend declared as if it were the total profit. This is referred to as the “Dividend Tax Rule” or “Excess Dividend Tax.”
- Determine the Total Profit and Compare with Dividend Declared:
- Total profit per tax computation: N10,899,000
- Dividend declared: N14,000,000
- Application of Section 19:
- Since the dividend declared (N14,000,000) is greater than the total profit (N10,899,000), Section 19 applies, and the dividend amount will be considered as the revised total profit for tax computation.
- Compute the Revised Tax Liability:
- Revised total profit based on dividend declared: N14,000,000
- Tax rate applicable: 30%
Revised Tax Liability Calculation:
- N14,000,000 × 30% = N4,200,000
- Revised Tax Liability:
- The revised tax liability for ABCEE Limited under Section 19 is N4,200,000.
Conclusion:
The revised tax liability, in line with Section 19 of the Companies Income Tax Act, is N4,200,000, replacing the initially assessed tax of N3,269,700 based on the total profit.
- Tags: Companies Income Tax, Dividend, Section 19, Tax Liability
- Level: Level 2
- Topic: Companies Income Tax (CIT)
- Series: MAY 2019
- Uploader: Kwame Aikins