Subject: ADVANCED TAXATION

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  • 10 Marks

AT – Nov 2024 – L3 – Q5b – Tax Implications of Foreign Acquisition

Evaluate the tax implications of a 70% equity acquisition by a foreign company and the proposed funding option

Baimbil LTD, based in Australia, has decided to acquire a company in Ghana instead of starting a new one.

The shareholders of Borketey LTD, a resident company in Ghana, have decided to sell the company due to cash flow challenges. As a result, Baimbil LTD approached the management of Borketey LTD and engaged a consultancy firm to perform due diligence checks. Following this, Baimbil LTD acquired 70% of the equity of Borketey LTD.

Below is an extract from the books of Borketey LTD for the 2023 year of assessment:

Description Amount (GH¢)
Share Capital 1,000,000
Retained Earnings (500,000)
Shared Deals 50,000
Bad Debts (Sold to MN LTD, now bankrupt) 1,000,000

Proposed Financing by Baimbil LTD:

The following proposals have been tabled for consideration after the acquisition:

  1. Baimbil LTD to provide GH¢100 million as debt with 2% interest above the market rate.
  2. Baimbil LTD to provide GH¢100 million as additional equity capital.
  3. Baimbil LTD to provide collateral for a bank facility of GH¢100 million in Ghana.

Required:

(i) Evaluate the tax implications of the 70% equity acquisition.

(ii) Evaluate the tax implications of the three proposed financing options.

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  • 10 Marks

AT – Nov 2024 – L3 – Q5a – Transfer Pricing Documentation and Compliance

Explain the required transfer pricing documentation and exemptions under Ghana’s Transfer Pricing Regulations, 2020 (L.I. 2412).

You are a Senior Transfer Pricing Associate of Fameye and Associates. You have received the following email from a former client, Asew LTD, who has received a Transfer Pricing audit assessment from the Ghana Revenue Authority (GRA) for the 2021, 2022, and 2023 years of assessment.

Subject: Transfer Pricing Compliance Assistance

Hello Team,

I came to the office today and received a letter from the GRA regarding a tax assessment on transfer pricing issues. According to the letter, our company owes the GRA some penalties for non-compliance with the transfer pricing regulations. I am confused as to what our compliance obligations are. I would need your assistance on how we can comply with the transfer pricing laws of Ghana.

I hope to hear from you soon.

Kind regards,

Nii Armaah
Managing Director, Asew LTD

Required:

In line with the provisions of the Transfer Pricing Regulations, 2020 (L.I. 2412), draft a response for the review of your Tax Partner, covering the following:

(i) The required transfer pricing documentation that must be maintained by companies in Ghana under the three-tier transfer pricing documentation requirements, including the time by which these must be filed with the GRA, where applicable.                      (ii) TWO conditions or circumstances under which a company may be exempted from compliance with any of the above documentation requirements.

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  • 5 Marks

AT – Nov 2024 – L3 – Q4b – Crowding Out Effect in Fiscal Policy

Explain the concept of ‘Crowding Out’ in fiscal policy, using relevant examples.

Expansionary Fiscal Policy has been criticised on the grounds that it can lead to ‘Crowding Out’.

Required:

Explain with appropriate examples what is meant by ‘Crowding Out’ as used under Fiscal Policy.

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  • 10 Marks

AT – Nov 2024 – L3 – Q4a – Value Added Tax Deductibility

Determine the deductible input VAT for a VAT-registered company operating multiple business divisions under different VAT treatments.

The two scenarios below relate to ClearTel LTD, a VAT-registered company in Ghana. Each scenario is an independent scenario and should be considered separately.

Scenario 1

ClearTel LTD operates three divisions (XYZ). Division X deals in the sale of computers and mobile phones. Division Y deals in the sale of locally-manufactured sanitary towels. Division Z is into the supply of fertilizers to farmers in Ghana.

Revenue from each division for 2024 is shown below:

Division Description Revenue (GH¢)
X Computers and mobile phones 1,005,700
Y Sale of locally-manufactured sanitary towels 2,500,000
Z Supply of fertilizers to farmers 78,800,000

ClearTel LTD has incurred total input VAT of GH¢50,500,000, and the Finance Manager of the company is unable to determine specifically which division of the business this input VAT amount relates to.

Required:

Determine the amount of input VAT ClearTel LTD can deduct, in line with the provisions of the Value Added Tax Act, 2013 (Act 870 as amended). Justify your answer

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  • 5 Marks

AT – Nov 2024 – L3 – Q3c – Automatic Stabilizers vs Discretionary Fiscal Policies

Explain the difference between automatic stabilizers and discretionary fiscal policies with examples.

Some commentators in Ghana have argued that economic policymakers should allow automatic stabilizers to shape and direct the destiny of the economy rather than discretionary fiscal policies since the latter has failed woefully.

Required:
Distinguish between automatic stabilizers and discretionary fiscal policies as economic tools. Illustrate with examples.

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  • 3 Marks

AT – Nov 2024 – L3 – Q3b – Prohibitions on Representation and Tax Advice

Explain the prohibitions on representation and tax advice in relation to tax consultants under the Revenue Administration Act, 2016 (Act 915).

With reference to the Revenue Administration Act, 2016 (Act 915), what constitutes prohibitions on representation and tax advice in relation to tax consultants?

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  • 12 Marks

AT – Nov 2024 – L3 – Q3a – Tax Planning and Objection to Tax Assessment

Advise Poyooyo LTD on provisions in tax laws to challenge a disputed tax liability.

The Directors of Poyooyo LTD have heard of the Maxims of Tax Planning, which outline strategies for minimizing tax liabilities legally.

In a recent visit by the Domestic Tax Revenue Division of the Ghana Revenue Authority (GRA), the Large Taxpayers Office (LTO) in Accra conducted a tax audit on the company, resulting in tax assessments raised against Poyooyo LTD for settlement.

Management of the company, in their last meeting with the directors, presented the outcome of the tax audit and strongly argued that the assessment was erroneous. They claimed that the liabilities raised were based on legitimate tax planning strategies the company employed.

They believe that the company is in full compliance with the tax laws and should not be required to settle the tax liabilities assessed. However, payment of the liability would significantly impact the company’s cash flow and disrupt its operations.

Poyooyo LTD has approached your tax consulting firm for assistance and guidance.

Required:

Advise Poyooyo LTD on the provisions of the tax laws that could be taken advantage of to avert the payment of the liability.

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  • 5 Marks

AT – Nov 2024 – L3 – Q2c – Extension of Time and Early Filing of Tax Returns

Explain the conditions for tax return extension and early filing requirements.

Akosua Sokode has set up a small business to sell cosmetics in Accra. She just called you, an associate member of the Institute of Chartered Accountants Ghana, to seek your advice on tax returns and payment of taxes. Akosua Sokode told you that she cannot meet her tax payment deadlines and cannot file tax returns by the due dates. She also confided in you that maintenance of documents is a big problem for her.

Required:

Address the concerns of Akosua Sokode by briefing her on the following:

i) THREE factors regarding the extension of time for filing tax returns.

ii) TWO circumstances under which the Commissioner-General may request for filing of tax returns before the due date.

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  • 9 Marks

AT – Nov 2024 – L3 – Q2b – Tax Implications of 100% Acquisition in Mining Operations

Explain the tax implications of a 100% acquisition and compute the gains from the acquisition.

Tongo LTD (Tongo) is a mining company operating in the Upper East Region of Ghana. The following relates to the operations of Tongo for the 2023 year of assessment:

Description GH¢
Revenue (Gross) 200,000,000
Cost of Operations 80,000,000
Margin/Profit 120,000,000

Additional Information:

  1. Tempane Mines LTD acquired 100% interest in Tongo for a consideration of GH¢310,000,000 at the end of 2023.
  2. The cost of assets acquired at their respective acquisition dates are as follows:
Year Cost of Assets (GH¢)
2020 100,000,000
2021 75,000,000
2023 50,000,000

Required:

i) Explain the tax implication of the 100% acquisition.

ii) Compute the gains from the above acquisition and determine how the gains should be treated.

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  • 30 Marks

AT – Nov 2014 – L3 – SA – Q1 – Tax Administration and Dispute Resolution

Explain penalties for non-compliance, compute profit and tax liabilities, and detail exemptions from minimum tax liability.

The Tax Consultants, ABFR Consult, received an e-mail from Mrs. Deboh Komo, Managing Director of Deboko Nigeria Limited. Extracts of her e-mail are as follows:

  1. The company was incorporated on 1 February 2007.
  2. It commenced business as importers of new engines for tricycles on 1 May 2009.
  3. The Directors chose 30 June as the year-end and made the first financial statements up to 30 June 2010.
  4. The company did not file any tax returns to date due to a general lull in business activities.
  5. The tax monitoring section of the Federal Inland Revenue Service (FIRS) visited the company on 2 September 2014, uncovering non-compliance.
  6. No tax registration was done, and no returns were filed.
  7. The Accounts Officer advised the company to register for all statutory payments, including Value Added Tax (VAT) and Companies Income Tax, but the management delayed.
  8. The company pleaded for leniency, but the FIRS insisted on full compliance with tax laws.

Additional Information:

  1. Statement of Profit or Loss and Other Comprehensive Income:
Period Ended 30/06/13 (₦’000) 30/06/12 (₦’000) 30/06/11 (₦’000) 30/06/10 (₦’000)
Operating Profit/(Loss) 1,060 960 720 (504)
Depreciation 380 120 120 153
Staff Loans Written Off – – – 40
Stamp Duties on Incorporation – – – 16
Sales Tax 120 80 44 40
Donations to Christian Association 60 – – 10
Specific Bad Debts Written Off 28 – – 14
  1. Statement of Financial Position:
Item 30/06/13 (₦’000) 30/06/12 (₦’000) 30/06/11 (₦’000) 30/06/10 (₦’000)
Paid-Up Capital 30,000 15,000 15,000 15,000
Deposit for Shares 25,000 10,000 5,000 –
Net Assets 101,500 84,110 76,700 66,000
Revenue 210,500 180,400 162,000 104,000
Gross Profit 16,400 14,200 12,800 10,200
  1. Capital Allowances Agreed:
Year of Assessment 2014 2013 2012 2011 2010 2009
Capital Allowances 140 150 150 250 200 300

Requirement:

(a) Explain the penalties for late submission of annual returns to the FIRS. (4 Marks)

(b) Compute the Total Profit and Tax Liabilities of the company for the relevant years of assessment. (24 Marks)

(c) Explain the conditions for exemption from minimum tax liability under the Companies Income Tax Act CAP C21 LFN 2004 (as amended). (2 Marks)

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  • 20 Marks

ATAX – May 2021 – L3 – Q6 – Tax Administration and Dispute Resolution

Explanation of fiscal federalism, roles and tax rights of government tiers, tax administration at the state level, and remedies for multiple taxation.

Nigeria is generally described as a Federation with three levels of government with varying but sometimes overlapping tax powers.

Required:

a. Explain the term “Fiscal Federalism” and give examples of other countries that may be described as a Federation. (6 Marks)

b. Discuss briefly the following:
i. Roles of the three tiers of government. (3 Marks)
ii. Structure and tax rights of different levels of government. (3 Marks)
iii. Functions of the various tax administrative organs at the State government level. (3 Marks)

c. Articulate the causes and possible remedies of multiple taxation in Nigeria. (5 Marks)

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  • 20 Marks

ATAX – May 2021 – L3 – Q5 – Capital Gains Tax (CGT)

Computation of capital gains tax, reliefs, and tax implications on compensation and reorganization transactions.

DD Nigeria Limited, a private limited liability company, was incorporated in March 2010. The company produces highly successful spring water. The Board of Directors of the company comprises a non-executive Chairman, his wife as the Managing Director, and the Chairman’s childhood friend. For the day-to-day running of the business, the Managing Director is being assisted by the Production Manager, Sales/Marketing Manager, Administrative Officer, and Accounting Officer (a diploma graduate).

The company has a track record of steady growth in profitability and market share. In a bid to cut down its cost of raw materials, particularly polythene, the Board at its recent meeting decided to acquire a polythene company in the neighborhood that is witnessing dwindling fortunes due to insufficient funds to finance its working capital. The Board has also lost confidence in the Accounting Officer as his poor knowledge in tax-related matters was brought to the fore during a recent visit to the company by officials of the Federal Inland Revenue Service.

The Managing Director has approached your firm of tax consultants to help provide professional advice on tax matters in respect of some transactions and activities that occurred in the last one year.

Records of the following transactions were made available to you:

(i) The company purchased plant and machinery at a cost of ₦5,000,000 on April 1, 2019. Plant was later disposed on September 15, 2019, for ₦3,500,000. The undisposed machinery was valued at ₦4,300,000. Incidental expenses incurred on disposal were ₦250,000.

(ii) The company sold an acre of land, which was acquired on May 22, 2018, at a cost of ₦6,750,000 for ₦12,500,000 on October 19, 2018. In the following month, the company bought another land, which was to be used for the purpose of the business, for ₦15,000,000 to replace the one sold. It was, however, subsequently disposed of for ₦18,000,000 in June 2019.

(iii) Part of the industrial building (where the production unit is located) was damaged in October 2020 during a protest by some youths in the area. The company, in November 2020, received ₦2,200,000 as compensation under a policy of insurance. The company has the intention of utilizing the fund for the acquisition of another building.

Required:

As the tax consultants to DD Nigeria Limited, draft a report to the Managing Director of the company explaining and providing computations (where necessary) on the:

a. Capital gains tax liability for the relevant tax year in respect to transaction (i). (5 Marks)
b. Relief available (if any) and tax liability due in respect to transaction (ii). (9 Marks)
c. Tax implications on the compensation under the policy of insurance received on the damaged industrial building. (2 Marks)
d. Treatment of gains arising from business reorganization in line with the provision of Section 49, Finance Act 2019, which amended Section 32, Capital Gains Tax Act Cap C1 LFN 2014. (4 Marks)

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  • 20 Marks

ATAX – May 2021 – L3 – Q4 – Taxation of Non-Resident Companies and Individuals

Circumstances under which non-resident companies are taxed in Nigeria and computation of Gen Power Incorporated's tax liabilities.

“The concept of residence determines the extent to which the income of a taxpayer is liable to tax under a tax jurisdiction.”

Background:
Gen Power Incorporated, an international power plant company based in New York, USA, has subsidiary outlets in many parts of the world, including Kem Limited in Lagos, Nigeria. In 2018, Gen Power Incorporated was awarded a contract for US $3 million by the Nigerian government to construct a power plant. The project was executed by Kem Limited, and the following expenses were incurred:

Expense Description Amount (₦’000)
Materials and other direct inputs 320,800
Hire of special equipment 31,500
Foreign experts cost and emoluments 65,300
Personnel costs 110,400
Administrative expenses 52,000
Depreciation of assets 60,700
Repairs and maintenance 7,200
Fuel and oil 8,200
Miscellaneous expenses 27,100

Other Relevant Information:

  1. The exchange rate is ₦362 to US $1.
  2. A similar special equipment could be hired for ₦25 million.
  3. Administrative expenses include ₦12 million transferred to revenue reserve.
  4. Breakdown of repairs and maintenance:
Repairs and Maintenance Breakdown Amount (₦’000)
Maintenance of vehicles 2,000
Improvement to the office building 1,700
Repairs of equipment 2,100
Renewals of tools and implements 1,400
Total 7,200
  1. Miscellaneous expenses include ₦4 million as loss on exchange for imported materials.
  2. Capital allowances agreed with the tax authorities: ₦57 million.

Required:

a. Describe FIVE circumstances under which a non-resident company will be assessable to tax in Nigeria. (5 Marks)

b. Compute the tax liabilities of Gen Power Incorporated for the relevant year of assessment. (15 Marks)

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  • 20 Marks

ATAX – May 2021 – L3 – Q3 – Taxation of Mergers and Acquisitions

Explaining acquisitions versus mergers, outlining tax implications for companies, and evaluating AfCFTA's impact on transactions.

The price of crude oil had fallen from over US$100 per barrel in the past few years to under US$40 per barrel recently in the international market. This has resulted in squeezed margins despite efforts to cut costs.

Krude Explora Nigeria Limited, an indigenous oil servicing company operating in the oil and gas sector for 23 years, faces a going concern risk due to falling profitability and liquidity challenges. It is probable that the company will default on its loan facility of US$122.5 million from B2B Energy Bank Plc. If this happens, the company will likely be taken over by Asset Management Corporation of Nigeria (AMCON).

Coincidentally, Wakanda Oil Exploration Limited, a multinational oil servicing company operating across Africa and the Middle East, has just sent an offer to acquire Krude Explora Nigeria Limited. The proposed acquisition will solve the liquidity problems in the short term, while efficiency and scale from the acquisition will hopefully return the company to profitability.

As the lead tax advisor for the proposed transaction, you are required to:

a. Explain the term “acquisition” as compared to a “merger” and give one example each of a recent merger and acquisition in the Nigerian petroleum industry. (4 Marks)

b. Outline and explain briefly the areas that may have tax implications for:
i. Krude Explora Nigeria Limited (4 Marks)
ii. Wakanda Oil Exploration Limited (4 Marks)

c. Discuss the likely impact of the African Continental Free Trade Area agreement and the local economy on a proposed acquisition or merger. (7 Marks)

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  • 20 Marks

ATAX – May 2021 – L3 – Q2 – Tax Incentives and Reliefs

Computation of adjusted profit and tax liabilities for Nature Agricultural Products Limited under pioneer status.

The quest for economic development in every sector of the country has enabled the Federal Government to come up with various tax incentives, especially for pioneer companies.

Nature Agricultural Products Limited, a medium-sized company, was incorporated on January 10, 2015, as a manufacturer of animal feeds. The company thereafter applied for a pioneer status and was granted a pioneer certificate with a production day of March 1, 2015.

The following details were provided in respect of the business operations of the company:

(i)

(ii.) Capital expenditure incurred on or before February 28, 2018:

(iii) Accumulated profit as at February 28, 2018= N3,968,000
The management of the company did not apply for extension of the pioneer period.

Required:

a. Compute the adjusted profit for the relevant years. (3 Marks)

b. Compute the tax liabilities for the relevant assessment years. (17 Marks)

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  • 40 Marks

ATAX – May 2021 – L3 – Q1 – Taxation of Companies

Computation of CIT and TET for 2017-2019, advisory on AfCFTA impacts on trade, and evaluation of Country-by-Country Reporting obligations.

DIY Limited was incorporated on June 12, 2010, and commenced commercial activities on October 1, 2011.
The primary activities of the company are the manufacture, distribution, and sale of solar panels for domestic use. DIY Limited has its main factory in Daura, Katsina State, Northern Nigeria, and distributors in Kaduna, Abeokuta, Onitsha, and Ilorin.

Extracts from the company’s audited financial statements for 2016 to 2018 are as follows:

Note:

  • 20% of “other overheads” represent depreciation and amortization for each year.
  • Capital allowances for the respective years represent 150% of depreciation and amortization.

Chief Musa Jugula (MJ), the owner and founder of DIY Limited, owns 70% of the shares of the company while the remaining 30% shares are currently held by his three children and two wives.

Chief MJ is considering expanding into Ghana, exploring either a branch or a subsidiary model. He is also interested in the African Continental Free Trade Area agreement and its implications compared to the ECOWAS region.

Forecast financial performance for 2021 to 2023:

Required:

a. Compute the Companies Income Tax (CIT) and Tertiary Education Tax (TET) payable by DIY Limited for 2017 to 2019 years of assessment and comment on any issues you consider as enablers or hindrances to investment promotion in Nigeria. Assume a tax written-down value of qualifying capital expenditure (QCE) of ₦230 million, unutilized losses of ₦28 million, and capital allowances brought forward of ₦50 million for the 2017 year of assessment.

b. As the Managing Partner of Poknos & Co, write a brief advice to Chief Musa Jugula about the African Continental Free Trade Area agreement and how the treaty compares to that of Economic Community of West African States (ECOWAS) region from the perspective of trade in goods. Your advice should cover both opportunities and challenges that may arise from the implementation of the African Continental Free Trade Agreement. (10 Marks)

c. Advise with reasons:
i. If DIY Limited is liable to prepare and submit Country-by-Country Reports (CbCR). (5 Marks)
ii. The relevant tax authority where the Country-by-Country Reports (CbCR) should be submitted, assuming it is applicable to the company. (5 Marks)

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  • 15 Marks

ATAX – May 2022 – L3 – Q7 – Petroleum Profits Tax (PPT)

Identify allowable expenses under the PIA and explain implications of mergers in upstream petroleum operations.

In the last three years, some major oil producing companies have decided to divest their investments from the Nigerian oil and gas sector. One of the reasons for this might be the new global energy order, which seems to favour the evolution of a “green environment” as against the present use of hydrocarbons with its inherent environmental degradation and pollution.

Similarly, in response to the yearnings of various stakeholders in the oil and gas sector, the Federal Government enacted the Petroleum Industry Act (PIA) 2021. Generally, the Act provides the legal, governance, regulatory, and fiscal framework for the Nigerian petroleum industry, the development of host communities, and for related matters.

Notable commentators and professionals in the sector suggest that the divestment of major oil and gas operators in Nigeria could be beneficial to local investors if funds are sourced and deployed to businesses in the sector. Mergers and acquisitions of indigenously owned oil-producing companies have been noted as one valuable option in this regard.

Required:

a. In respect of the Petroleum Industry Act 2021, identify the expenses allowable in the computation of adjusted profit of a company in upstream petroleum operations. (6 Marks)
b. Identify and explain SIX implications of mergers and acquisitions in respect of a situation where a new company takes over an existing company. (9 Marks)

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  • 15 Marks

ATAX – May 2022 – L3 – Q6 – Taxation of Non-Resident Companies and Individuals

Discuss the tax implications of an overseas branch and compute the associated tax liabilities.

Maigona Agro Limited is a Nigerian company operating in the agricultural sector. It has a large expanse of land in the Northern part of the country, which is used strictly for the cultivation of cotton seeds. As a result of the collapse of the textile/garment industry, specifically due to the unfavourable business climate in Nigeria, the company in 2015 established a branch, BAM Textile Mills, in the United Kingdom. Part of the cotton produced locally is sold to BAM Textile Mills at a competitive price, for the production of finished product (branded textile clothing).

A tax dispute recently arose between the Management of Maigona Agro Limited and officials of the Federal Inland Revenue Service (FIRS) on the correct assessment of profits made by BAM Textile Mills. The Managing Director is of the opinion that the tax paid by BAM Textile Mills in the United Kingdom should be the final tax since the company is only an overseas branch. He further averred that the provisions of the Companies and Allied Matters Act 2020 (as amended) are only applicable to companies incorporated in Nigeria. The Managing Director was furious when the company received a reminder of notice of assessment from the FIRS and has therefore threatened to approach the Tax Appeal Tribunal for redress.

You have been engaged by the company as its Tax Consultant to provide professional advice on the tax implication of the profit made by BAM Textile Mills, UK and possibly representation at the Tax Appeal Tribunal sittings. The statement of profit or loss for the year ended October 31, 2021 (BAM Textile Mills’ result has been converted to Nigerian Naira at the prevailing exchange rate) and other relevant documents were handed over to you by the Managing Director.

The extracts from the statements of profit or loss of the two corporate entities revealed the following:

Maigona Agro Ltd (N’000) BAM Textile Mills (N’000) Total (N’000)
Gross Turnover 975,100 1,820,500 2,795,600
Less:
Cost of materials/inputs 350,200 672,000 1,022,200
Salaries and Wages 122,530 400,400 522,930
Administrative Expenses 45,700 110,900 156,600
Depreciation 75,600 147,300 222,900
Donation 8,500 0 8,500
Share of Head Office Expenses 33,300 50,000 83,300
Income Tax Paid in the UK 0 72,200 72,200
Total Expenses 635,830 1,452,800 2,088,630
Net Profit 339,270 367,700 706,970

Additional Information:

  1. The capital allowances of Maigona Agro Limited in respect of plant and equipment, farming tools, and other qualifying capital expenditure as agreed with the tax authorities was N45,000,000. The amount of capital allowances of N57,000,000 claimable by BAM Textile Mills on qualifying assets was also certified by the tax authorities.
  2. Included in the donation was N5,000,000 given to victims of the COVID-19 (Omicron variant) pandemic in Nigeria.
  3. The UK tax rate is assumed to be 35%.

Required:

a. Advise the management of Maigona Agro Limited on the tax implications of the overseas branch. (4 Marks)
b. Compute the tax liabilities of the company in line with your submission in (a) above. (11 Marks)

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  • 15 Marks

ATAX – May 2022 – L3 – Q5 – Ethical Issues in Tax Practice

Identify ethical issues in a tax engagement and discuss punitive measures for ensuring adherence to ethical and legal standards.

Mr. Barau Olubami completed his first degree in a reputable university in Nigeria seven years ago. After the compulsory youth service, he wrote and passed the professional examination and was subsequently admitted as an associate member of the Institute of Chartered Accountants of Nigeria. He had four-year training in a professional audit firm before he decided to establish his accounting firm. The firm consists of him as the principal partner, two accounting graduates (as Assistant Auditors/Consultants), a secretary, and an office assistant.

Within six months of his professional practice, he was able to get three clients to which he provides services, that include preparation of tax records, computation of end-of-year tax liabilities, filing of tax returns, advisory to clients on tax matters, compliance with tax legislations, and management of tax audit and investigation.

In one of the social events he attended with his father, he was introduced to Mr. Chidi Odamo, his father’s schoolmate in his polytechnic days. Mr. Odamo is the Chief Executive of Odamo Nigeria Limited, a company that manufactures paints. In a private chat they both had, Mr. Odamo complained bitterly that his current tax consultant has not been helping him to pay less amount of tax liability to the relevant tax authorities, unlike what his friends in the same industry are enjoying through the assistance of their tax consultants. Mr. Olubami informed Mr. Odamo that he knew his current tax consultant very well as he was his senior in the university. He also submitted that his (Olubami’s) firm is the tax consultant to another company in the same industry with Odamo Nigeria Limited. He then promised Mr. Odamo that if he is given the tax consultancy/audit work, he knows how to resolve the issue with the tax officials and the company will be the better for it.

The engagement with the current tax consultant was terminated two weeks after Mr. Odamo and Mr. Olubami had a “fruitful” discussion and the latter’s firm was appointed as the company’s new tax consultant after both parties agreed to a clause in the engagement contract that aside from the professional fees, the firm is entitled to 20% of tax saved.

During the review of previous tax returns filed with and tax paid to the tax authority, he observed a significant material error of the sum of N3 million made by the tax authority in favour of his client (Odamo Nigeria Limited). Since this could not be regarded as tax saved by his firm, he decided not to inform the company as this is considered as “by-gone.”

During the course of the year’s tax audit, documents and information received from the company’s accountant were not independently validated. These documents were sent to the two Assistant Auditors to work with. Specifically, sales were grossly understated; the cost of new vehicle and furniture and fittings were understated while some expenses incurred were overstated.

At the completion of the work done by the two Assistant Auditors/Consultants, Mr. Olubami held a meeting with the company’s Managing Director and presented a draft report, which showed that the company’s total tax liability for the year was N12 million. He promised him that with the assistance of his “contact” at the Revenue Service, the tax liability would be reduced to N7 million. The company’s Managing Director advised him to go ahead and file appropriate returns as the matter was fully settled. Self-assessment returns were filed and perhaps with the connivance of unscrupulous tax officials, the company paid N7 million tax liability. However, if a thorough job was done, the company’s tax payable for the year would have been N18.25 million.

Required:

a. Examine TEN ethical issues that arose from the tax engagement. (10 Marks)
b. What are the punitive measures put in place to ensure that accountants in practice adhere to legal and ethical issues when preparing tax returns? (5 Marks)

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