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NATIONAL OPEN UNIVERSITY OF NIGERIA
SCHOOL OF MANAGEMENT SCIENCES
COURSE CODE: ACC201
COURSE TITLE: PRINCIPLES OF TAXATION
ACC201
PRINCIPLES OF TAXATION
Course Code
Course Title
ACC201
Principles of Taxation
Course Team
Mr
...
Rauta Bitrus Jat (Editor)
Dr
...
Mai-Lafia (Programme Leader) - NOUN
Mrs
...
5 Dar es Salaam Street
Off Aminu Kano Crescent
Wuse II, Abuja
Nigeria
e-mail: centralinfo@nou
...
ng
URL: www
...
edu
...
1
Tax Administration in Nigeria
...
25
Basis of Assessment of Profits of Businesses
(Basis Period)
...
48
Module 2
...
55
Taxation of Employees and Sole Traders
...
83
Companies Taxation
...
109
Module 3
...
122
Taxation of Insurance Companies
...
138
Taxation of Airline and Shipping Companies
...
154
Unit 2
Unit 3
Unit 4
4
ACC 201
PRINCIPLES OF TAXATION
MODULE 1
Unit 1
Unit 2
Unit 3
Historical and Legal Background of Taxation in Nigeria
Tax Administration in Nigeria
The Difference between Taxation of Income and the
Taxation of Capital
Basis of Assessment of Profits of Businesses (Basis
Period)
Loss Relief
Unit 4
Unit 5
UNIT 1
HISTORICAL AND LEGAL BACKGROUND OF
TAXATION IN NIGERIA
CONTENTS
1
...
0
3
...
0
5
...
0
7
...
1
Definition of Tax and Taxation
3
...
3
Structure of the Nigerian Tax System
3
...
5
Legal History of Personal Income Tax
3
...
1 Legal History of Companies Income Tax
3
...
7
Distinction between Taxes and Levies
Conclusion
Summary
Tutor-Marked Assignment
References/Further Reading
1
...
Taxation has always been with man and it will continue to be with
him
...
The government of Nigeria, as one of these
countries, has legislative powers to impose on its citizens, any form of
tax and at whatever rate it deems appropriate
...
2
...
3
...
1
Definition of Tax and Taxation
Tax is a compulsory extraction of money by a public authority for public
purposes and taxation is a system of raising money for the purpose of
governance by means of contributions from individuals or corporate
bodies (Sayode & Kajola, 2006:3)
...
People pay tax
according to their incomes and it is often paid on goods and services
...
In Ola (1985:1), taxation is defined as the demand made by the
government of a country for a compulsory payment of money by the
citizens of the country
...
Nightingale (1997) describes tax as a compulsory contribution imposed
by the government and concludes that even though tax payers may
receive nothing identifiable in return for their contributions, they
nevertheless have the benefit of living in a relatively educated, healthy
and safe society
...
6
ACC 201
PRINCIPLES OF TAXATION
SELF-ASSESSMENT EXERCISE 1
Define taxation in your own way
...
2
Objectives of Taxation
In both developed and developing economies, the primary purpose of
taxation is mainly to generate revenue for settling government
expenditure and for the provision of social amenities and the welfare of
the populace
...
Hence, you should note the following major objectives for designing a
tax policy
...
That is, the rich pay more tax
than the poor
...
Taxation is important in the
planning of savings and investments
...
Also, in changing an economic structure,
the government can use taxation as a powerful fiscal weapon to
plan and develop a country
...
In Nigeria, governments- oftentimes, introduce tax
incentives and attractive tax exemptions as an instrument to attract and
retain local and foreign investors
...
SELF-ASSESSMENT EXERCISE 2
1
...
Why do you think the achievement of tax objectives is necessary?
What are the other specific economic objectives that can be
achieved using taxation?
7
ACC201
3
...
(I)
Proportional Tax System
This form of tax assesses taxpayers on a fixed percentage
...
For example, if the tax rate is fixed at 10%, every taxpayer will have to
pay income tax at this rate, as his/her income increases or decreases
...
That
is, when the income was N15, 000, the tax payable was N1,500, but
when the income increased to N30, 000, the tax payable went up to
N3,000
...
2
...
4
...
Disadvantages
1
...
3
...
Both high-income
and low-income groups are taxed at the same rate thereby making
the low-income earner to sacrifice more than those in the high
income group
...
It is against the principle of taxable capacity
...
ACC 201
(II)
PRINCIPLES OF TAXATION
Progressive Tax System
This form of tax is graduated as it applies higher rates of tax as income
increases
...
1:
Personal Income Tax Table
Taxable Income
First
Next
Next
Next
Over
N
30, 000
30, 000
50, 000
50, 000
160, 000
Tax Rate (%)
5
10
15
20
25
From the illustration above, it shows that progressive tax system has a
main objective of redistributing the income of the rich to that of the poor
in some ways
...
Advantages
1
...
3
...
5
...
It is based on the ability of the tax payer to pay;
It maximises the revenue for the government;
It is flexible as government can use it to get more revenue or to
grant tax relief to low income earners;
It is equitable – this tax system is equitable because it requires
proportional sacrifice on the part of taxpayers
...
On the other hand, tax
rates can be raised during economic boom thereby reducing the
purchasing power of the taxpayers and as a result, inflation is
fought
...
By taxing luxury goods and incomes of the rich
heavily, the government can prevent them from wasteful
expenditures and therefore, be in the position to make better use
of the country’s resources
...
ii
...
iv
...
It has faulty basis – it is based on diminishing marginal utility of
income, which is faulty
...
It is usually fixed by the revenue board;
but where there are checks and balances, arbitrariness can be
curtailed;
It discourages capital formation – this tax system adversely
affects savings, investment and capital formation as taxpayers
that have the ability to save and subsequently invest are taxed
heavily;
It is unjustifiable – some people earn high as a result of working
hard, while some remain poor because of laziness; it becomes
unjustified to tax high-income groups at high
rates
thus
punishing them for their resourcefulness;
It may lead to tax evasion or tax avoidance – people who are
taxed heavily try to evade payment of taxes by maintaining false
accounts and submitting false statements to tax authorities or
avoid taxes by finding and taking advantage of loopholes in the
tax laws
...
A high income person pays less tax than a low
income person in a regressive tax system
...
2:
Regressive Tax Table
Taxpayer Income
N
20,000
...
00
60,000
...
00
Tax Rate
%
30
20
10
5
Tax Payable
N
6,000
...
00
6,000
...
00
This system may not be suitable for developing countries as it yields low
revenue and condone political and social reactions
...
10
ACC 201
PRINCIPLES OF TAXATION
The second form of tax classification is by incidence which is given as
follows
...
He/she is not only advised
by notification (called assessment notice), but he/she is duly receipted
...
The types of tax that fall under this heading include the following:
-
Personal income tax
Companies income tax
Capital gains tax
Education tax, etc
...
These are taxes which are imposed on commodities
before reaching consumers and are paid by those upon whom they
ultimately fall, not as taxes, but as part of the selling price of the
commodities
...
Indirect taxes may affect the cost of living, as they constitute taxation on
expenditure
...
2
...
4
PRINCIPLES OF TAXATION
Canons of Taxation
A good tax system is easy to administer and shares the burden of
taxation justly
...
(a)
(b)
(c)
(d)
(e)
Equity – a good tax system should be equitable
...
This principle
recommends progressive tax system;
Certainty – the amount of tax to be paid, the time of payment and
the manner of payment should be certain and clear to both
taxpayers and tax officials;
Convenience – a good tax system should be convenient in terms
of time and mode of payment, to the taxpayer;
Administrative efficiency – the process of levying and collecting
taxes must be administratively efficient, transparent and
economical without any distortion;
Productive – a tax system should be such that brings in sufficient
revenue to the government
...
5
Legal History of Personal Income Tax
Taxation in Nigeria started with personal income tax in 1904, when
Lord Lugard introduced income tax in the northern part of Nigeria
...
In 1917, after the amalgamation of the northern and southern
protectorates, the 1904 Revenue Ordinance was replaced by the Native
Revenue Ordinance of 1917
...
However, the Native Revenue Ordinance was later incorporated into the
Direct Taxation Ordinance No
...
Still in the preindependence era, personal income tax was administered and collected
by the native administrations or local government in the name of direct
taxation
...
12
ACC 201
PRINCIPLES OF TAXATION
In 1943, another ordinance known as the “Income Tax Ordinance of
1943” was promulgated to take care of Lagos residents, who had
opposed the 1940 ordinance
...
The Nigerian Income Tax Ordinance of 1943 remained in force in the
federal territory of Lagos until 1961 when the Personal Income Tax
(Lagos) act of 1961 was enacted by the federal government
...
C
...
The purpose of establishing the commission was to examine the
jurisdiction and fiscal powers of the various tiers of government in
Nigeria
...
1
...
3
...
The Income Tax Management Act (ITMA) 1961;
Personal Income Tax Act (PITA) 1979 as amended in 1993;
Tax reforms;
Annual pronouncements that have been gazetted
...
5
...
First, tax on companies was
imposed under the Companies’ Income Tax of 1939
...
In 1940, the Income Tax Ordinance of 1940 was promulgated to
consolidate the Companies’ income tax ordinance of 1939
...
By 1943, the income tax ordinance
was enacted for Lagos residents and foreigners, including corporate
organisations
...
13
ACC201
PRINCIPLES OF TAXATION
Chick Fiscal Commission preceded the 1954 constitution, which was the
first federal constitution in Nigeria, recommended that the two taxes
imposed under the Income tax ordinance of 1943 be within the exclusive
jurisdiction of the federal government
...
It was in the light of this that the 1960 constitution conferred an
exclusive fiscal power upon the federal government to impose taxes on
the incomes and profits of companies
...
CITA, 1961 has undergone several amendments
...
3
...
1
...
3
...
5
...
Legislations such as Personal Income Tax Act (1979), Companies
Income Tax Act (1961), Petroleum Profit Tax Act (1959),
Income Tax Management Act (1961), etc;
1999 Federal constitution;
Court judgements;
Circulars and practices of inland revenue officials;
Opinions of income tax experts;
Budget and pronouncements of relevant ministries
...
1
...
It
was also aimed at replacing the Income Tax Management Act of
1961, Income tax (Armed forces and other persons’ special
provision) act, 1972 and the Income Tax Management (Uniform
taxation provisions) act, 1975 (Soyode & Kajola, 2006)
...
Company taxation – the legislation governing this has
undergone several amendments
...
14
ACC 201
PRINCIPLES OF TAXATION
By 1961, another legislation known as Company Income Tax Act
was enacted
...
Other amendments that follow include Decree 4 of
1985, Decree 12 of 1987, Decree 31 of 1989, Decree 55 of 1989,
Decree 21 of 1991, Decree 63 of 1991, Decree 3 of 1993, and
Decree 30, 31 & 32 of 1996
...
Capital taxation – this has two legislations that govern its
administration and assessment
...
For
example, the rate of Capital Gains Tax was reduced from 20% to
10% as a result of one of these amendments
...
For the CITA, however, it was abrogated through
the 1996 budget in the interest of the country
...
Petroleum profit taxation – the upstream sector of the
petroleum industry in Nigeria started in 1957 and made its first
export of oil in 1958
...
The Petroleum Profit
Tax Act (PPTA), 1959 was enacted, and between 1966 and 1979,
it underwent series of amendments which were consolidated into
the Petroleum Profits Tax Act, Cap 354, Laws of the Federation
of Nigeria (LFN) 1990
...
(a)
(b)
(c)
(d)
Petroleum Profit Tax (amendment) decree No
...
31, 1996;
Petroleum Profits Tax (amendment) decree No
...
30, 1999
...
Consumption taxation – this was formerly legislated by Sales
Tax Decree No
...
102 of 1993
...
6
...
7 of 1993
...
15
ACC201
PRINCIPLES OF TAXATION
SELF-ASSESSMENT EXERCISE 7
Education levy is governed by which of the legislations outlined above?
3
...
The term “tax” is unique and
specific in the sense that it is imposed by the government of a country or
state
...
On the other hand, the term ‘levy’ is
generic as it could describe the imposition by a legal authority of tax,
penalties and fines
...
A tax can be imposed once and the payers continue
to pay, as and when due and on regular basis
...
Tax, like levy, is involuntary in the sense that its compliance is
compulsory, but is usually not intended to be punitive as a levy
...
If it is backed by a
particular valid tax law, it is a tax irrespective of whether it is described
as levy or tax
...
0
CONCLUSION
The foregoing discussion is essential to imparting the background
knowledge of taxation and its principles in you
...
5
...
Specifically the following areas have been covered
...
6
...
2
...
0
REFERENCES/FURTHER READING
Black Law Dictionary (1997)
...
Fasoto,
F
...
Nigeria Taxation
...
ICAN Study
Pack (2006)
...
Ibadan: VI Publishing Ltd
...
I
...
(2005)
...
Jos: Deka
Publications Nig
...
S
...
Nigerian Income Tax Laws and Practice
...
Ologhodo, C
...
(2007)
...
Jos: University Press Limited
...
(5th Ed
...
Soyode, L
...
O
...
Taxation Principles and Practice in
Nigeria
...
0
2
...
0
4
...
0
6
...
0
Introduction
Objectives
Main Content
3
...
2
Organs of Tax Administration: Federal Board of Inland
Revenue (FBIR)
3
...
1 Composition of the Board
3
...
2 State Board of Internal Revenue (SBIR)
3
...
3 Local Government Revenue Committee
3
...
4 Joint Tax Board (JTB)
3
...
5 Joint State Revenue Committee (JSRC)
3
...
6 Body of Appeal Commissioners
3
...
7 Tax Jurisdictions :Taxes to be collected by the
Federal Government
3
...
7
...
2
...
2 Taxes and levies to be collected by Local
Government
3
...
8 Registration of Taxpayers
Conclusion
Summary
Tutor-Marked Assignment
References/Further Reading
1
...
Broadly speaking, we have three tax authorities, as shown below
...
The enabling law
in respect of each type of tax contains a provision as to the body charged
with the administration of such a tax
...
18
ACC 201
2
...
3
...
1
Tax Laws
Taxation in Nigeria is governed by the following laws
...
P8, LFG 2004 – this
enables the imposition of tax on incomes of individuals, sole
traders and partnerships
...
Companies Income Tax Act, (CITA) Cap
...
An example is corporation
tax- with rate fluctuating between 30% - 45%, depending on
yearly fiscal policies of the federal government
...
P13, LFN 2004 – this
imposes tax on the profits of companies engaged in upstream
petroleum operations
...
VI, LFN 2004 – which
replaced sales tax in 1994
...
58 LFN 2004 – these are charges
on all contract documents listed in the Act
...
E4, LFN 2004 – this imposes
education levy/tax on the assessable profits of all registered
companies in Nigeria
...
C1, LFN 2004 – this
imposes tax on capital gains arising from the disposal of
chargeable assets listed in the act
...
19
ACC201
3
...
This is covered by section 1(1) of CITA
...
2
...
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
(j)
Executive chairman –to be appointed by the president
...
The director of planning, research and statistics in the Federal
ministry of finance
...
An officer from NNPC not below the rank of an executive
director
...
Any seven (7) members of the board shall constitute a quorum provided
there is in attendance the chairman or a director of a department of
FIRS
...
(a)
(b)
(c)
(d)
(e)
20
Administration of CITA and other tax acts as may be vested in
FBIR;
Assessment and collection of companies’ income tax;
Accounting for all amounts collected in a manner to be
prescribed by the minister of finance;
Advising the federal government of Nigeria through the minister
of finance on tax matters including amendments to tax laws; and
Issuing directives or guidelines on the interpretation of the
provisions of the CITA and other tax laws
...
This committee shall comprise of the
executive chairman of FBIR as the chairman and all directors and
heads of department of the FBIR, the legal adviser to FIRS and
the secretary to FBIR as members
...
Also, to advise the board on its powers and duties which it
may not delegate except to the Joint Tax Board (JTB) with the consent
of the minister
...
2
...
Composition – the board of internal revenue for each state and the FCT,
Abuja consists of:
(a)
(b)
(c)
(d)
(e)
(f)
the chief executive of the state internal revenue service as
chairman;
directors and heads of department within SIRS;
a director from the state ministry of finance;
the legal adviser to the SIRS
three other persons nominated by the commissioner for finance
on their personal merit; and
a secretary (an ex-officio member) who shall be an employee of
the SIRS
...
Functions of the SBIR
The state board of internal revenue has the following responsibilities
...
Appoint, promote, transfer and impose discipline on employees
of the SIRS
...
However, the SBIR shall not delegate any power
conferred on it under some specific sections of PITA (examplesection 2, 6, 7, etc
...
This is sequel to the abuse of
tax administration experienced in some states during the military
era in Nigeria
...
The technical committee is to comprise the following officials
...
The committee is expected to carry out the following functions
...
ACC 201
PRINCIPLES OF TAXATION
3
...
3 Local Government Revenue Committee
This committee was established by the provisions of section 90 of PITA
...
Composition of LGRCs
The Committee shall consist of:
(a)
(b)
(c)
the supervisory councillor for finance as chairman
three local government councillors as members; and
two other persons experienced in revenue matters to be
nominated by the chairman of the local government- on their
personal merits
...
The revenue committee shall be autonomous of the local government
treasury department and shall be responsible for the day – to – day
administration of the department which forms its operational arm
...
2
...
(a)
(b)
(c)
(d)
The chairman of the FBIR , who should also serve as the
chairman;
One member from each SBIR, being a person experienced in
income tax matters nominated either by name or office, from time
to time, by the commission charged with the responsibility of
matters relating to income tax in the state in question;
The secretary, who is not a member of the board, and is
appointed by the Federal Civil Service Commission (FCSC)
The legal adviser of FIRS acts as the legal adviser to the JTB
...
23
ACC201
PRINCIPLES OF TAXATION
Functions of JTB
The board shall:
(a)
(b)
(c)
(d)
(e)
exercise the powers or duties conferred on it by the PITA and
other acts;
advise the federal government, on request, in respect of double
taxation arrangement with any other country;
advise the federal government on request, in respect of rates of
capital allowances and other taxation matters having effect
throughout Nigeria in respect of any proposed amendment to
PITA;
promote uniformity both in the application of PITA and in the
incidence of tax on individuals throughout Nigeria; and
impose its decisions on matters of procedure and interpretation of
PITA on any state for purposes of conforming to agreed
procedures or interpretations
...
2
...
Composition
The JSRC comprises the following
...
The state sector commander of the Federal Road Safety
Commission (FRSC), as an observer;
The legal adviser of the SIRS;
The secretary of the committee who shall be a staff of the SIRS
...
(b)
(c)
24
(a) Implementing the decisions of the JTB
Advising the JTB, and the state and local governments on
revenue matters;
Harmonising tax administration in the state;
ACC 201
(d)
(e)
PRINCIPLES OF TAXATION
Enlightening members of the public generally on state and local
government revenue matters; and
Carry out such other functions as may be assigned to it by the
JTB
...
2
...
An appeal
commissioner:
(a)
(b)
(c)
(d)
shall be appointed from among persons appearing to the state
commissioner to have had experience and shown capacity in the
management of a substantial trade or business or the exercise of a
profession of law, accountancy or taxation in Nigeria;
shall hold office for a period of three years from the date of his
appointment;
may at any time resign as an appeal commissioner by notice in
writing addressed to the minister or state commissioner; except
that on the request of the minister or state commissioner, he may
continue to act as an appeal commissioner after the date of his
resignation and sit at any further hearing in a case in which he has
already sat before that date to hear an appeal, until a final
decision has been given with respect to that appeal;
shall cease to hold office if the state commissioner determines
that his office is vacant and on notice of the determination being
published in the state gazettes or on his acceptance of a political
appointment
...
2
...
(a)
(b)
(c)
(d)
(e)
Companies income tax of limited liability companies
(incorporated companies);
Withholding tax on companies and residents of the FCT,-Abuja,
and non-residents;
Petroleum profits tax, VAT and education tax
Capital gains tax and stamp duties on corporate bodies, residents
of the FCT and non-residents;
Pay – As – You – Earn (PAYE) of members of the armed forces,
police force, residents of the FCT and the staff of the ministry of
foreign affairs and non-residents
...
2
...
1 Taxes and Levies to be collected by the State
Government
The SBIR shall have the power to assess and collect the following
categories of taxes and levies
...
Stamp duties on instruments executed by individuals
Pools, betting and lotteries, gaming and casino taxes
Road taxes and naming of street registration fees in the state
capital
Business premises registration fees
Development levy, right of occupancy fees and market taxes and
levies
3
...
7
...
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
(j)
(k)
(l)
Shops, kiosks rates and tenant rates
On and off liquor license fees
Marriage, birth and death registration fees
Naming of street, right of occupancy fees for towns and lands in
the rural areas
Market and motor park levies
Domestic animal license fees and cattle tax
Merriment and road closure levy
Radio and television license fees
Wrong parking charges
Customary burial grounds permit fees
Religious places establishment permit fees
Signboard and advertisement permit fees
...
2
...
26
ACC 201
PRINCIPLES OF TAXATION
Incorporated companies
Within 18 months of incorporation or six months after the end of its first
accounting period, whichever is earlier, a newly incorporated company
is required to register with the FBIR, through a written application
giving the following details
...
The company will be registered if the FBIR is satisfied with the
application, otherwise, it will call for further information and /or
documents
...
For employees, the
employer is expected to register itself as an agent of the State tax
authority for the purposes of deduction of taxes from the emoluments of
its employees and remitting the tax so deducted to the tax authority
under the PAYE scheme
...
4
...
Therefore, it is very essential for you to keep what
you have learned to heart and apply it to your studies in taxation and
even beyond
...
0
PRINCIPLES OF TAXATION
SUMMARY
The unit has exposed you to the various organs charged with the
responsibility of tax administration in Nigeria
...
6
...
What are the fiscal powers, in relation to tax, that are bestowed
on the three tiers of government in Nigeria?
What process would you adopt in registering taxpayers, such as
companies, in Nigeria?
2
...
0
REFERENCES/FURTHER READING
CITN Nigerian Tax Guide Statutes
...
Lagos: The Chartered
Institute of taxation of Nigeria
...
(2007)
...
Lagos: Hosrtosaf Ltd
...
(2006)
...
Lagos: VI Publishing Limited
...
I
...
(2005)
...
Jos: Deka
Publications Nigeria
...
S
...
Nigerian Income Tax Laws and Practice
...
Ologhodo, C
...
(2007)
...
Jos: University Press Limited
...
& Kajola, O
...
(2006)
...
Ibadan: Silicon Publishing Company
...
0
2
...
0
4
...
0
6
...
0
Introduction
Objectives
Main Content
3
...
2
Taxation of Capital
3
...
1 The Structure of CGT
3
...
2 Assets Subject to CGT
3
...
3 Capital Taxation Versus Income Taxation
3
...
4 Definition of Capital Gains
3
...
5 Capital Gains Tax
3
...
6 Chargeable Assets
3
...
7 Allowable & Disallowable Expenditure
3
...
8 Determination of Consideration
3
...
9 Exemptions and Relieves
3
...
10 Part Disposal of Assets
3
...
11 Computation of Capital Gains
3
...
12 Connected Persons
3
...
13 Roll over Relief
Conclusion
Summary
Tutor-Marked Assignment
References/Further Reading
1
...
In Nigeria, taxes are levied on income from
employment business operations and the disposal of capital goods
...
This unit explains to
you, extensively, capital gains tax and draws a clear difference between
it and other forms of taxes
...
0
PRINCIPLES OF TAXATION
OBJECTIVES
At the end of this unit, you should be able to:
state the differences between the taxation of income and taxation
of capital
illustrate the composition of the taxation of income and taxation
of capital
discuss the similarities between the two forms of taxation
define capital gains tax, clearly
explain roll over relief, vividly
...
0
MAIN CONTENT
3
...
Income tax is payable on income from a source inside or
outside Nigeria and in particular, but not restricted to the following:
(a)
(b)
profit or gains from a trade, business, profession or vocation;
remunerations from and employment which may be salary, wage,
fees, allowances or gains from employment; including
compensations, commissions, bonuses, premiums or benefits in
kind
...
For individuals, graduated tax rates are used in
assessing them, while companies/corporate organisations are assessed
using fixed and uniform rates as determined by the relevant legislation
or the tax policy prevailing in that period
...
SELF-ASSESSMENT EXERCISE 1
What are the legislations that govern the taxation of income in Nigeria?
3
...
It was introduced in Nigeria through
the capital gains tax act, Cap 42, LFN, 1990
...
It is remarkable that while
taxation of income had been a permanent feature of the English tax system
30
ACC 201
PRINCIPLES OF TAXATION
since 1799, capital gains were not introduced until 1962
...
A
comprehensive version of capital gains tax was instituted in the United
Kingdom only in 1965
...
3
...
1 The Structure of Capital Gains Tax (CGT)
The tax aims at all gains accruing to any person upon the disposal of
assets in the year of assessment
...
That is, the
amount or value of the consideration laid out to acquire the asset,
incidental costs of the acquisition, cost of improvements to the property,
any amount incurred in establishing, preserving or defending the
disposer’s title to or right over the asset and incidental costs of the
disposal
...
3
...
2 Assets Subject to Capital Gains Tax (CGT)
As has been obvious by the foregoing discussions, the subject matter of
the tax is assets
...
Specific examples of
assets given by the act include options, debts and incorporeal property
(assets) generally; any currency other than Nigerian currency; any form
of property created by the person disposing off it, or otherwise, coming
to be owned without being acquired; and stocks and shares of every
description
...
Gains on foreign assets are
chargeable in Nigeria if any part of such gains are brought into or
received in Nigeria
...
2
...
Under the CGT act, a possible guide is the
reference to the receipt of a capital sum as a condition precedent to
capital gains tax liability
...
Section 6(2) defines it vividly as any money’s
worth which is not excluded from the consideration taken into account
in the computation of chargeable gains
...
Apart from the
customary dilemma of distinguishing capital from other assets, the act
itself clearly contemplates the possibility of capital gains arising from
the disposal of all forms of property, including tangible moveable
properties
...
What amounts to a disposal? Disposal is itself a term capable of very
wide definition
...
Also, a disposal occurs where any capital sum is received in
return for feature or surrender of rights, or for reframing from exercising
rights; and where any capital sum is received as consideration for use or
exploitation of any asset
...
Disposal of assets also includes a part disposal
...
Similarly
disregarded are cases where the disposal is from a deceased person to
his personal representative or from the personal representative to a
legatee
...
3
...
4 Definition of Capital Gains
Capital Gains is defined as gains resulting from increases in the market
value of assets to a person who does not regularly offer them for sale
and in whose hands they do not constitute stock – in trade
...
The gains are “paper gains” where the
asset appreciate in the hands of the owner, and are “realised gains” when
the assets are sold or disposed of
...
Conditions for assessing capital gains
to tax, according to Ayua (1999), include the following
...
ACC 201
PRINCIPLES OF TAXATION
3
...
5 Capital Gains Tax
CGTA provides for the taxation of capital gains accruing on disposal of
assets
...
The tax is administered
by the FBIR in respect of individuals resident in the FCT and corporate
bodies; while the tax is administered by the SBIR in respect of
individuals, based on their residential status
...
2
...
These assets
may or may not be situated in Nigeria
...
Incorporeal properties
are assets that have values but are not tangible e
...
goodwill,
copyrights and patents
...
This was, however,
repealed by decree No 19 of 1998 in other to accelerate the
development of capital market
...
2
...
33
ACC201
PRINCIPLES OF TAXATION
Disallowable deductions (section 15)
Sums allowable as a deduction in computing the profit or gains or losses
of a trade for income purposes are not allowable deductions under
section 14 above
...
3
...
8 Determination of Consideration
Normally, the amount indicated as capital gain in the tax returns of the
taxpayer will be accepted as the basis of assessment, but the act
envisages various situations in which the taxpayer might not be able to
state the consideration accurately, or in which his statement would be
held suspect
...
Also, disposals would, in certain circumstances, be deemed to be
for a consideration equal to the market value of the asset
...
The first part of the foregoing
provision suggests that a disposal of property free of charge is deemed
to be a disposal at market value and, therefore, that a donor of property
may be made liable to capital gains tax
...
2
...
Where trustees or nominees transfer assets to beneficiaries,
they are not considered to be disposing of the assets; hence, the
transaction does not attract capital gains tax
...
Other exemptions include gains made upon a disposal of business assets
where the proceed are spent in acquiring new business assets; gains
made upon the disposal of an interest in, the rights under any policy of
assurance or contract for deferred annuity on the life of any person;
sums obtained by way of compensation or damages for any wrong or
injury suffered by an individual; and gains made upon the disposal of a
house
...
In that case, no gain
will be considered to have occurred
...
2
...
This may be represented as followsCost
of
Partial
Disposal
=
A
x
(A+B)
C
Where A = Sales proceeds of the part disposed of;
B = Market value of the part not disposed of;
C = Cost of acquisition of the whole asset
...
purchased a set of generating plants at a cost of N24, 000 on 1st
April, 2006
...
The company incurred N1, 500 as expenses incidental to the sale
...
What is: (i) the chargeable gain, if any, on the asset sold;
(ii) the new cost of the remaining asset
...
2
...
This can
be represented as shown below
...
3
...
12 Connected Persons
If the disposal of a property is to a connected person, sections 23 and 24
will apply
...
3
...
13 Roll over Relief
Where a company, carrying on a trade or business, obtains a
consideration on the disposal of eligible assets used in the business and
applies such consideration in acquiring new assets of the same class as
the old ones which are to be used solely for the business, a roll over
relief is granted
...
Full relief is obtained only when total consideration for the sale of the
old asset is applied in the acquisition of the new asset or assets of the
same class
...
The effect of this roll over relief is to reduce the cost of acquisition of a
new asset with the resulting increase in the capital gains arising on
eventual disposal of the second asset
...
More importantly, there will be no roll over relief when the amount reinvested in the new asset is not up to the cost of the old asset
...
It is
however, available only for the following classes of assets
...
The consideration arising on disposal must be re-invested within twelve
months before or after disposal before the roll over relief can be granted
...
2
...
Define capital gains tax in your own words
...
purchased a set of plants at a cost of N120, 000 on 1st
April, 2006
...
The company incurred N7, 500 as expenses
incidental to the sale
...
What is:
(i)
(ii)
the chargeable gain (if any) on the asset sold?
the new cost of the remaining asset?
4
...
It is pertinent for you
to acquaint yourself with the basic principles for computing capital
gains, noting all the variables necessary for computing chargeable
incomes from a trade, business, profession or vocation
...
0
PRINCIPLES OF TAXATION
SUMMARY
The unit has exposed you to the following:
the difference between taxation of income and taxation of capital
capital gains tax, which is a cardinal attribute of capital taxation
the structure of CGT
part disposal, chargeable assets including all qualifying capital
expenditure (fixed assets), options, debts and incorporeal
properties
allowable expenses
roll over relief and the conditions for granting it
...
0
TUTOR-MARKED ASSIGNMENT
1
...
sold a building acquired in 2006 at a cost of N500,
000 on 1st July, 2008
...
This building, acquired on 31/12/2008 was sold
on 30th June, 2009 for N1, 500,000
...
2
...
Jat Jack who has a successful business decided to sell it to a
limited liability company, Nasuwa located in Bauchi, on 1st
January 2007
...
The assets of Jat Jack’s business are as detailed below
...
Jat Jack spent extra N170, 000 on machinery; while only N93,
800 was recovered from debtors after spending N56, 000 on debt
recovery
...
He spent about N828,
000 to refurbish the whole property before the disposal of the duplex
...
You are required to compute:
i
...
38
the chargeable gains
the chargeable tax
...
0
PRINCIPLES OF TAXATION
REFERENCES/FURTHER READING
CITN
...
(2002)
...
Fasoto, F
...
Nigeria Tax Company
...
ICAN Study Pack (2006)
...
Lagos:
VI
Publishing Limited
...
(2006)
...
Lagos: VI Publishing Limited
...
I
...
(2005)
...
Jos: Deka
Publications Nigeria
...
S
...
Nigerian Income Tax Laws and Practice
...
Ologhodo, C
...
(2007)
...
Jos: University Press Limited
...
& Kajola, O
...
(2006)
...
Ibadan: Silicon Publishing Company
...
0
2
...
0
4
...
0
6
...
0
Introduction
Objectives
Main Content
3
...
2
Basis of Assessing a Subsisting Business
3
...
4
Basis of Assessing a Ceasing Business
3
...
0
INTRODUCTION
As you are going to see in this unit, the basis period of assessment is
very important, as it is a determinant of the assessable income or profits,
and hence, the amount of tax payable by any taxpayer
...
2
...
3
...
1
Determination of Basis of Assessment
It is of significance that the tax authority determines the correct basis
period for a business that is liable to tax
...
it helps the tax authority to grant capital allowances to tax-payers,
as well as, carry forward any excess of such
...
SELF-ASSESSMENT EXERCISE 1
Justify the necessity for determination of basis period by a tax authority
...
2
Basis of Assessing a Subsisting Business
The basic principle underlying the concept of “basis of assessment” is
that the assessable profits for a year of assessment shall be the business
profits that are adjusted profit for its accounting year, ended in the
preceding year of assessment
...
This is what is popularly referred to as the “Preceding Year Basis”
(PYB) of assessment and the applicable rule is known as the “normal
rule”
...
is a Company which commenced business on 1st January,
1995
...
After applying the rules of allowable
expenses and taxable income, the company had an adjusted profit of
N30million for the year ended December 31st 2008
...
Suggested Solution
NERAT LTD
The assessable profits on Preceding Year Basis (PYB), for all relevant
years are as follows:
41
ACC201
PRINCIPLES OF TAXATION
Assessment year
Basis Period
2006
2007
2008
1/1/05 – 31/12/05
1/1/06 – 31/12/06
1/1/07 – 31/12/07
Assessable Profi ts
N million
15
22
30
Note: The above principle only applies in a situation where a company
has been in business for some years and there is no change of accounting
date
...
is a company which commenced business on 1st January, 1991
...
After applying the rules of allowable expenses
and taxable income, the company had an adjusted profit of N15million
for the year ended December 31st 2004
...
5million
Year ended December 31, 2002
- N6million
Year ended December 31, 2003
- N5million
You are required to determine the basis of assessment and assessable
profit for all relevant years of assessment
...
3 Basis of Assessing a New Business
There are commencement rules guiding assessment of a company that is
starting business newly
...
In ascertaining the assessable profit for any
person commencing trade or business newly, three years’ accounts must
be submitted
...
For example, if year of assessment is 2008, the
basis period will fall within 2008 too; and the assessable profit
will be the profit of same year, 2008;
Second year of assessment – the basis period for the second year
is the first twelve months of business operations;
ACC 201
(3)
PRINCIPLES OF TAXATION
Third year of assessment – the PYB of assessment starts from
the third year
...
PITA 1993, Section 24 (d) makes provisions for
taxpayer’s right of election (election rule) where he feels it will
be beneficial to do so
...
The notice should be given within two
years after the end of the second tax year, to request that the
assessable profits both for the second and third years shall be the
profits of the respective years of assessment
...
Goodness is a dealer in motor spare parts in Jos
...
The following results relate to his
business activities
...
Goodness had exercised the election rule available under PITA 1993
Section 24(d)
...
Suggested solution
Mr
...
)
1/2/03-31/12/03
330,000
(390,000 x 11/13)
2004 (The 1st twelve months)
1/2/03-31/1/04
360,000
(390,000 x 12/13)
2005 (PYB)
1/4/03-31/3/04
365,000
(390000x11/13+420,000x1/12)
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ACC201
PRINCIPLES OF TAXATION
Election Basis2003 (Date of commencement to 31st Dec
...
Thus, the two years involved in decision-making are 2004 and
2005 years of assessment
...
SELF-ASSESSMENT EXERCISE 3
Izondu is a dealer in tractor spare parts in Bauchi
...
44
He started this
ACC 201
PRINCIPLES OF TAXATION
The following results relate to his business activities-
14 months ended
Year ended
Year ended
Year ended
30 April
N
2001
2002
2003
2004
Profits
N
360,000
520,000
680,000
750,000
Required- you are to determine the assessable profits of Mr
...
3
...
The following steps should be followed:
1
...
Determine the year in which the business stopped its trading
activities
...
The basis of assessment is the profit from 1st January, preceding
cessation to the actual date of cessation
...
That is, assessment year before the cessation
took place
...
The basis of assessment is the usual Preceding Year Basis (PYB)
...
Illustration 3
Jabest Business Ventures ceased operations on 31st October, 2008
...
45
ACC201
PRINCIPLES OF TAXATION
Suggested Solution
Jabest Business Ventures
Assessable Profits on cessation of business
...
Therefore, the final assessment will give the following figuresN
2006
12,000
2007
45,000
2008
30,000
SELF-ASSESSMENT EXERCISE 4
Bommcos Global Ventures ceased operations on 30th June, 2008
...
46
ACC 201
3
...
Again, the relevant tax authority must
be adequately informed of the change of accounting date
...
(1)
(2)
(3)
(4)
(5)
(6)
(7)
Identify the year of assessment in which the business fails to
make up its accounts to the previous date;
Identify also the two years of assessment that follow the one
stated in step one;
Compute the assessable profits for the first year of assessment as
a result of the change in the accounting date using old accounting
date as basis period;
Calculating the two years of assessment that follows step 3 above
also using the old accounting date as basis period;
Using the new accounting date as the basis period, compute the
assessments for the three years of assessment in steps 3 and 4
above;
Aggregate the results in steps 3 and 4 above and compare with
the total of the three years in step 5 above;
The relevant tax authority would adopt the higher amount
obtained in step 6 above as the assessments for the period
...
) Ltd
...
However, as a re-organisation
strategy, the business decided to change its accounting year-end to 31st,
March
...
N
Year to 31 December, 2003
360,000
Year to 31 December, 2004
450,000
15 months to 31 March, 2006
540,000
Year to 31 March, 2007
620,000
Year to 31 March, 2008
650,000
Year to 31 March, 2009
710,000
Required- calculate the assessable profits for all the years involved
bearing in mind the Revenue’s practice when there is a change of
accounting date
...
Subsequent computations using new
accounting date for assessable profits after decision has been made
...
360, 000 (old accounting date)
2005 ………
...
432, 000 (old accounting date)
2007 ………
...
620, 000 (new accounting date)
2009 ………
...
710, 000 (new accounting date)
48
ACC 201
PRINCIPLES OF TAXATION
SELF-ASSESSMENT EXERCISE 5
Seige (Nig
...
had (for several years) been making up its accounts to
31st, March of each year
...
These are the operating results as adjusted for tax purposes
...
4
...
5
...
49
ACC201
PRINCIPLES OF TAXATION
6
...
Antele (Nig
...
had (for several years) been making up its
accounts to 31st January of each year
...
These are the operating results
as adjusted for tax purposes-
Year to 31 January, 2003
Year to 31 January, 2004
15 months to 31 April, 2006
Year to 31 April, 2007
Year to 31 April, 2008
Year to 31 April, 2009
-
N
180,000
225,000
270,000
310,000
325,000
355,000
Required- calculate the assessable profits for all the years and
states who has the power to opt for higher total profits
...
Its adjusted profit/losses for tax purposes were
as followsN
st
Year ended 31 October, 2005
24,000
Year ended 31st October, 2006
36,000
st
Year ended 31 October, 2007
96,000
Period to 30th November, 2008 78,000
Required- compute the assessable profits for all the relevant years of
assessment, bearing in mind the available option on cessation of
business
...
0
REFERENCES/FURTHER READING
CITN Nigerian Tax Guide Statutes (2002)
...
Fasoto, F
...
Nigeria Tax Company
...
ICAN Study Pack (2006)
...
Lagos: VI Publishing Limited
...
I
...
(2005)
...
Jos: Deka
Publications Nigeria
...
S
...
Nigerian Income Tax Laws and Practice
...
Ologhodo, C
...
(2007)
...
Jos: University Press Limited
...
& Kajola, O
...
(2006)
...
Ibadan: Silicon Publishing Company
...
0
2
...
0
4
...
0
6
...
0
Introduction
Objectives
Main Content
3
...
2
Methods of Obtaining Loss Relief
3
...
0
INTRODUCTION
As you are going to see in this unit, tax is based on profits which accrue
to businesses; but where losses occur instead, the assessment of tax
interest of the business or organisation is nil
...
This unit exposes you to the rules, principles and
treatment of loss relief
...
0
OBJECTIVES
At the end of this unit, you should be able to:
discuss the rules governing loss relief in Nigeria
3
...
1
Rules on Loss Relief
explain clearly the principle involved
explain the methods and treatment of loss relief
...
(a)
(b)
52
Business loss to be deducted from assessable profit of a year of
assessment shall not exceed the actual loss incurred by the
business in the previous year of assessment;
According to section 31 (1) of CITA, losses are not aggregated
with assessable profits in the computation of total profits that
ACC 201
(c)
(d)
(e)
PRINCIPLES OF TAXATION
accrue from different lines of business operations
...
Sources of profits cannot be set-off against profits from another
source; a loss incurred from a particular line of business can only
be relieved in future years from assessable profits derived from
the same source or line of business;
When losses incurred in two different assessment years are
carried forward against future profits, the first loss incurred will
be relieved in priority to the subsequent loss, subject to a
maximum of four years loss relief periods after which any
unabsorbed losses elapsed;
When business operation ceases, any terminal loss resulting
therefrom, which could not be relieved in the year of cessationdue to non-availability or insufficiency of profit- is deemed lost
...
SELF-ASSESSMENT EXERCISE 1
Stipulate the conditions for granting loss relief
...
2
Methods of Obtaining Loss Relief
There are two methods of obtaining loss relief in the Nigerian tax
system
...
Let us look at this one after another
...
Characteristics of current year loss relief system are
listed below:
(a)
(b)
(c)
(d)
It is only applicable to individuals chargeable to tax under PITA;
It is not automatic; a taxpayer who wishes to enjoy this relief
must claim it in writing within a period of 12 months after the
end of the year of assessment;
The current year loss relief is not confined to profit from a trade,
business, profession or vocation, but may be set off against all
sources of income for that year including investment income;
Under the current-year loss relief system, loss relief is available
only in the first year when the loss is incurred, any unrelieved
53
ACC201
(e)
(b)
PRINCIPLES OF TAXATION
balance can only be set off against profit from the source from
which the loss was incurred;
It is useful when profit from trade is declining but rising on other
sources of income
...
Characteristics of carry forward loss relief system include the following:
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
Unlike the current year loss relief system which is available only
to individuals, carry forward loss relief system is available to
both individuals and companies;
The carry-forward relief is confined to the amount of loss
suffered in respect of trade business, procession or vocation;
Under no circumstances shall the aggregate deduction from
assessable profit in respect of any loss exceed the amount of such
loss;
Losses are only available to be set off against income from which
the loss was incurred, it cannot be set off against any other source
of income;
Loss relief under this system is automatically granted
...
Where he ceased
to carry on trade, any unused losses cannot be made use of by the
new purchaser of the trade or firm;
Carry-forward relief is useful where profits or income from
business are increasing or where there is the likelihood of an
increase in tax rates, as this will put money into the hands of the
taxpayer
...
54
ACC 201
3
...
The implication of the above is that
when such losses are eventually aggregated, the total losses available for
relief may be in excess of the actual loss incurred
...
Illustration
Gwopak (Nigeria) Ltd
...
In 2004, it made a
good recovery
...
N
Year ended 31st December, 1999 (loss)
Year ended 31st December, 2000 (loss)
Year ended 31st December, 2001 (loss)
Year ended 31st December, 2002 (loss)
Year ended 31st December, 2003 (profit)
Year ended 31st December, 2004 (profit)
35, 000
25, 000
45, 700
7, 500
7, 900
45, 000
Required- show the relief of losses against assessable profits allowed
...
) Ltd
2000 Year of assessment (basis period- 1/1/99-31/12/99)
Loss for the year carried forward
N
(35,000)
2001 Year of assessment (basis period- 1/1/2000 – 31/12/2000)
Loss for the year
Add unrelieved loss brought forward
Total loss carried forward
N
(25, 000)
(35, 000)
(60, 000)
2002 Year of assessment (basis period- 1/1/01 -31/12/01)
Loss for the year
Add unrelieved losses brought forward
Total losses carried forward
N
(45, 700)
(60, 000)
(105, 700)
2003 Year of assessment (basis period- 1/1/02-31/12/02)
55
ACC201
PRINCIPLES OF TAXATION
Loss for the year
Add unrelieved losses brought forward
Total losses carried forward
N
(7, 500)
(105, 700)
(113, 200)
2004 Year of assessment (basis period- 1/1/04 – 31/12/03)
N
N
Assessable profits for the year
7, 900
Unrelieved losses brought forward
(113, 200)
Less relief
7, 900
(7, 900)
(105, 300)
2000 loss lapsed
27, 100 (35, 000 – 7, 900)
Unrelieved loss carried forward
(78, 200)
2005 Year of assessment (basis period- 1/1/04-31/12/04)
N
Assessable profits for the year
Unrelieved losses brought forward
(78, 200)
Less Relief: 2001 loss
25, 000
2002 loss
20, 000
45, 000
Unrelieved loss carried forward
(33, 200)
N
45, 000
(45, 000)
-
SELF-ASSESSMENT EXERCISE 3
Enumerate at least five features of carrying over loss relief
...
0
CONCLUSION
In this unit, you learnt that losses accumulated from business operations
can be relieved from current and future profits
...
Therefore, businesses can take this tax incentive and be encouraged in
spite of any negative results
...
0
SUMMARY
In this unit, you have learnt the following
...
ACC 201
PRINCIPLES OF TAXATION
6
...
Blessedson Lee commenced a merchandising business on the 1st
may, 2003 and had always prepared his accounts to 30th April of
each year
...
N
th
12 month- up to 30 April, 2004
(400, 000) loss
th
12 month- up to 30 April, 2005
(20, 000) loss
12 month- up to 30th April, 2006
500, 000 profit
th
12 month- up to 30 April, 2007
600, 000 profit
You are required to:
(a)
(b)
2
...
Ton (Nigeria) Ltd
...
In 2004, it
made a good recovery
...
N
st
Year ended 31 December, 1999 (loss)
Year ended 31st December, 2000 (loss)
Year ended 31st December, 2001 (loss)
Year ended 31st December, 2002 (loss)
Year ended 31st December, 2003 (Profit)
Year ended 31st December, 2004 (Profit)
350, 000
250, 000
457,000
75,000
79,000
450, 000
Required- show the relief of losses against assessable profits
...
0
REFERENCES/FURTHER READING
CITN Nigerian Tax Guide Statutes (2002)
...
Fasoto, F
...
Nigeria Tax Company
...
ICAN Study Pack (2006)
...
Lagos: VI Publishing Limited
...
I
...
(2005)
...
Jos: Deka
Publications Nigeria
...
S
...
Nigerian Income Tax Laws and Practice
...
Ologhodo, C
...
(2007)
...
Jos: University Press Limited
...
& Kajola, O
...
(2006)
...
Ibadan: Silicon Publishing Company
...
0
2
...
0
4
...
0
6
...
0
Introduction
Objectives
Main Content
3
...
2
Types of Capital Allowances
3
...
4
Conditions for Granting Capital Allowances
3
...
6
Basis Period for Capital Allowances
3
...
1 Basis Period
3
...
2 Overlapping Basis Period
Conclusion
Summary
Tutor-Marked Assignment
References/Further Reading
1
...
However, relief from taxation may be given in respect of capital
expenditure by means of the system of capital allowances; the
appropriate allowance being set off against taxable profits in a manner
similar to that of relieving losses
...
It
focuses on the provisions of PITA and CITA only
...
59
ACC201
2
...
3
...
1
Definition of Capital Allowances
Capital allowance may be defined as a form of standardised depreciation
given under income tax laws on certain specified qualifying capital
expenditures
...
According to Soyode & Kajola (2006:143), capital allowances are
allowances granted at approved specified rates on qualifying capital
expenditures and rates on assets in use for the purpose of business at the
end of the relevant basis period
...
The allowance is
allowed not as a deduction in computing assessable profit but as a
deduction from assessable profits in arriving at chargeable profits
...
2
Types of Capital Allowances
The system of capital allowances in Nigeria comprises, at least, five
types- as shown below
...
This
type of allowance will not apply if there is 100% initial
allowance
...
25
The formula for computing the annual allowance on a straight-line basis
is given as follows- Cost of QCE – Initial Allowance
Tax Life
Any result from this formula shall be the amount of annual allowance
applicable for the entire tax life of the QCE
...
The overall idea is
to bring the allowance into line with actual expenditure
...
Where on the other hand, the sales proceeds is more than the tax
written down value at the time of disposal, a balancing charge is
obtained
...
However, in subjecting balancing
charge to tax, it is limited to the maximum capital allowance
previously claimed on the asset prior to the disposal
...
(d)
Investment allowance – this is an incentive granted where a
company has incurred expenditure on plant and equipment
(Section 32 (1)- CITA or on plant and machinery (second
schedule (paragraph 18 (3))- CITA
...
(e)
Rural Investment Allowance (RIA) – this allowance is granted
to companies sited at least 20km away from the provision of
electricity, water, tarred road or telephone for the purpose of its
trade and which has provided the facilities that the government
61
ACC201
PRINCIPLES OF TAXATION
failed to provide can claim rural investment allowance which is
an addition to the initial allowance on such capital expenditure as
follows
...
Rural
investment allowance can only be claimed in the year the capital
expenditure is incurred and cannot be carried forward
...
Discuss?
3
...
Qualifying plant expenditure – that is, expenditure incurred on
plant, machinery and fixtures;
Qualifying plantation expenditure (expenditure incurred on
clearing of land for planting, etc)
Qualifying research and development expenditure, that is ,
expenditure incurred on equipment, facilities, patent licences, etc;
Qualifying agricultural expenditure (expenditure incurred on
plant in use for agricultural trade or business);
Qualifying public transportation, new mass transit coach
expenditure
...
4
Condition for Granting Capital Allowances
Capital allowances are granted if the following conditions are satisfied
...
SELF-ASSESSMENT EXERCISE 3
Can a car which is used by a sole trader for both business and private
purposes be granted capital allowance?
3
...
6
PRINCIPLES OF TAXATION
Basis Period for Capital Allowances
Qualifying capital expenditure bought for the purpose of a trade or
business in a basis period gives rise to the right to capital allowances
...
3
...
1 Basis Period
The basis period for capital allowances is the same as that for the
assessment of the profits of a business
...
Illustration 1
Wazobia (Nig
...
normally makes up its annual accounts on acquired
assets as follows:
Date
31/12/2004
15/5/2005
30/7/2006
13/3/2007
Assets purchased
N’Million
Building
5
Motor vehicle
3
Machinery
2
Furniture and Fittings (F&F)
1
...
Suggested Solution
(i)
Determination of basis period-
Year of Assessment
Basis Period for
(YOA)
Assessable Profits
Allowances
2006
2007
2008
1/7/04 – 30/6/05
1/7/05 – 30/6/06
1/7/06 – 30/6/07
1/7/04 – 30/6/05
1/7/05 – 30/6/06
1/7/06 – 30/6/07
64
Basis Period for Capital
ACC 201
(ii)
Computation of capital allowances-
Building
1A (%)
AA (%)
2006
2007
2008
PRINCIPLES OF TAXATION
Motor Vehicle Machinery
15
50
10
25
YOA
N’000
Cost
5,000
IA (Wk1) (750)
AA (Wk 2) (425)
TWD
3, 825
YOA
Cost
Investment
Allowance
(On Machinery)
IA
AA
(425)
TWD
3, 400
YOA
Cost
1A
AA
TWD
(425)
2,975
N’000
3,000
(1,500)
(375)
1, 125
Furniture
50
25
N’000
-
N’000
-
Total Allowance
25
20
N’000
2250
800
3,050
-
2,000
-
-
-
-
200
(375)
750
(1,000)
(250)
750
-
1000
1,050
2, 250
(345)
375
(250)
500
1,500
(375)
(225)
900
375
1,275
1,650
Calculation- (1) Initial Allowance (1A): Building =
5,000,000 x 15% = 750,000
Motor vehicle = 3,000,000 x 50% =N1,500,000
Machinery
= 2,000,000 x 50% =N1,000,000
Furniture
= 1,500,000 x 25% = N375,000
(2) Investment Allowance – Machinery = 2,000,000 x 10% = N200,000
(3) Annual Allowance (AA)- Building = 5,000,000 – 750,000 = N425,000
(100/10)
Motor vehicle = 3,000,000 – 1,500,000 = N375,000
(100/25)
Machinery = (2,000,000 – 1,000,000) = N250,000
(100/25)
Furniture = 1,500,000 – 375,000 = N225,000
(100/20)
Note- the preceding year basis of assessment is applicable only in a
situation where a normal (12 – months) accounting period ended in the
preceding year of assessment is used
...
65
ACC201
PRINCIPLES OF TAXATION
3
...
2 Overlapping Basis Period
Overlapping basis period occurs when a basis period is common to more
than one year of assessment
...
is a company engaged in the entertainment business
...
Suggested Solution
(i)
Determination of basis period for assessment
YOA
BP
OVERLAPPING PERIOD
2005(Actual)
1/9/05-31/12/05
2006(1st 12 month)
1/9/05-31/8/06
2007(PYB)
1/9/05-31/8/06
1/9/05-31/12/05
1/9/05-31/8/06
Since basis period for capital allowances derives from that for
assessment of profits, the question that arises is- when will the initial
allowance be giving in respect of assets purchased during the
overlapping basis period?
Suppose that the company purchased a motor vehicle on 15th December,
2005, in which of the assessment years will the initial allowance be
given since the period 1/9/05 to 31/12/05 is common to 2 years of
assessment (that is- 2006 & 2007)?
The rule when there is an overlapping basis period - when there is an
overlapping basis period between two years of assessment, the period
common to both is deemed to form part of the earlier year of
assessment, for the purpose of determining the assessment year to which
the initial allowances is allocated
...
, the
basis period for assessment and for capital allowance, using the normal
rule, is as follows
...
4
...
Therefore,
it is very essential for tax inspectors and tax consultants to be acquainted
with these principles
...
5
...
The meaning and scope of capital allowances
The concept of basis period for capital allowances, as well as the
rules for overlapping and gaps in basis periods
Capital allowances are computed on a straight line basis after
initial allowances have been deducted from the cost of assets
Investment allowance is granted to businesses that procure
machinery in addition to initial allowance and annual allowance,
but has no effect on the computations of either IA or AA
...
0
TUTOR-MARKED ASSIGNMENT
1
...
is a company engaged in the fashion business
...
2
...
) Ltd
...
5
Required- determine the basis period and compute the capital
allowances for all the relevant years
...
0
REFERENCES/FURTHER READING
CITN Nigerian Tax Guide Statutes
...
Lagos: The Chartered
Institute of Taxation of Nigeria
...
(2007)
...
Lagos: Hosrtosaf Limited
...
Taxation for Professional Examination I
...
Ndupuechi, T
...
I
...
Taxes and Taxation in Nigeria
...
Ola, C
...
(1985)
...
London:
Macmillan Publishers Limited
...
J
...
Taxation Principles and Practice in Nigeria (A
Practical Approach)
...
Soyode, L
...
S
...
Taxation Principles and Practice in
Nigeria
...
68
ACC 201
UNIT 2
PRINCIPLES OF TAXATION
TAXATION OF
TRADERS
EMPLOYEES AND SOLE
CONTENTS
1
...
0
3
...
0
5
...
0
7
...
1
Personal Income Chargeable to Tax
3
...
1 Earned and Unearned Incomes
3
...
2 Determination of Profits or Gains
3
...
2
...
2
...
2
...
1What is Wholly, Reasonably exclusively and
necessarily?
3
...
3
...
3
...
3
...
4
Methods of Assessing Personal Income-Pay-As-You-Earn
(PAYE) System
3
...
1 Residence
3
...
2 Operation of PAYE System
3
...
3 Direct Assessment of Tax
3
...
5
...
0
INTRODUCTION
The taxation of employees and sole traders is covered by ITMA and
PITA
...
The
collection of personal income tax is vested in the State Board of Internal
Revenue (SBIR) of the principal place of residence of self – employed
individual and principal place of business of employed individuals
...
This unit, therefore, exposes you to the Pay-As-You-Earn (PAYE)
system, earned and unearned incomes of a sole proprietorship business
69
ACC201
PRINCIPLES OF TAXATION
with all associated deductions and non-deductible expenses
...
2
...
3
...
1
Personal Income Changeable to Tax
PITA section 2(1) contains some relevant provisions on personal income
tax in Nigeria
...
2
...
The assessment of the
income is usually done on the preceding year basis
...
Income tax is payable on
income from sources within and outside Nigeria, in particular, but not
restricted to the following
...
Profits or gains from a trade, business, profession or vocation;
2
...
Remuneration covers salaries, wages, fees,
allowances including compensations, commissions, bonuses,
premiums, benefits or other perquisites allowed, given or granted
by any person to an employee
...
Benefits, in kind, include the following
...
ii
...
iv
...
The use of a motor vehicle provided by an employer;
Furniture and accommodation provided by an employer;
Services of domestic servants paid for by an employer;
Free food provided by an employer;
Cost of water and electricity consumption borne by employer
...
(a)
Where an asset belonging to an employer is made available for an
employee’s use, the employee will be treated as receiving a
taxable benefit equal to:
i
...
where the cost cannot be ascertained, 5% of the market value of
the asset at the date it was acquired by the employer;
iii
...
where living accommodation is provided for an employee or the
employee’s spouse, he will be assessed to taxable benefit equal to
the annual value for local rating purposes, less any rent refunded
or otherwise suffered by the employee or his spouse
...
where an employee receives a benefit in kind in respect of free
accommodation, which is considered as necessary for him to do
his job properly or which his position demands, for example,
hotel managers, housekeepers, night watchmen etc
...
The accommodation is regarded
as a representative accommodation
...
Gains or profits including any premiums arising from a right
granted to any person for the use or occupation of any property;
4
...
Any charge or annuity received;
6
...
Any profit, gain or other payments not falling within items 1-6
above
...
The summation of items 1-7 above will amount to statutory total
income
...
1
...
Unearned income, on the other hand, represents rent, dividends, royalty,
discounts, which may be received net of withholding tax
...
Where they are received net of
withholding tax, they are referred to as “Franked investment income”
...
1
...
There are different kinds of businesses- ranging
from sole proprietorship, partnership to incorporated companies
...
PITA (1993) defines an “individual” to include a
corporation, sole and a body of individuals; but does not include
partnership, community, family, trustee or an executor
...
To determine the profits or gains arising from a sole proprietorship
business, a computation of adjusted profit in respect of a defined period
is carried out, by considering statutory total incomes and deducting all
allowable deductions
...
Again, for a sole trader to be assessed to tax, he must have been in
business for, at least, three years from the date of commencement
...
72
ACC 201
(a)
PRINCIPLES OF TAXATION
Method one – adjusting the accounting profit
ABC Enterprises
Adjusted Profit for the 2008 Tax Year (TY)
N
Net profit as per account of the firm
Add disallowable expenses
XX
XX
Less: allowable items not treated
Income exempted
Adjusted Profit
XX
XX
N
XX
(b)
(XX)
XX
Method two – re-computing the accounts
N
Sales/Turnover
Less purchases/Direct expenses
Gross profit/income
Less operating expenses:
Selling & administrative
Salaries & wages
Discount allowed
Bad debts
Transport and travelling
Telephone & postage
Rent & Rates
Other allowable expenses
Profit subject to tax assessment
N
XX
XX
XX
XX
XX
XX
XX
XX
XX
XX
XX
XX
XX
Figure 2
...
3
...
These are
called allowable and non-allowable deductions
...
2
...
These deductions include the following
...
Any other expense proved by the board to have been incurred for
the purpose of the business
...
2
...
(a)
(b)
(c)
(d)
(e)
(f)
(g)
74
Private/personal expenses;
Capital expenditure or withdrawal of capital;
Any loss or expenses recoverable under insurance or contract of
indemnity;
Rent & cost of repairs to any premises or part of premises not
incurred for the purpose of producing the income;
Taxes on income or profits levied in Nigeria or elsewhere except
as provided in section 13 of PITA;
Any unapproved payment to a pension scheme, provident,
savings or widows society/orphanages, or any other fund or
scheme- except as permitted by paragraphs (f) and (g) of
subsection 20 of PITA;
Depreciation of any asset;
ACC 201
(h)
PRINCIPLES OF TAXATION
(k)
Any sum reserved out of profits except there is an expression
permission of section 20 of the PITA 1993;
Any provision for doubtful debt of a general nature;
Any payment of management fees except with the approval of the
commission;
Legal expenses that include:
(i)
(ii)
the cost of defending a traffic offence
acquisition of new lease – long or short
(l)
Donations- however, some donations are allowed under CITA;
(m) Fines and penalties
...
2
...
1 What is wholly, Reasonably,
Necessarily (WREN)?
Exclusively
and
(i)
Wholly – where an individual uses a part of a building privately,
as well as for business, the amount paid in any year of assessment
will be apportioned on the basis of usage; and the amount
attributable to private use will not qualify as an allowable
expense in the computation of assessable profit
...
It must be totally for the purpose of business
...
Any expense to the contrary should be disallowed
...
The expenses must have been incurred solely for
the purpose of the business
...
(iv)
Necessarily – all expenses that are reasonable will certainly be
necessary for the purpose of producing income in a business
...
That is, it must be shown that incurring the expense
played a significant role in the process of acquiring the income
...
Prepare your
presentation
...
3 Personal Income Tax Payable
To arrive at income tax payable under PITA, statutory total income will
have to be determined, followed by assessable income and then
changeable income
...
2:
Computation of Chargeable Income
The net figure, which is called chargeable income, is subject to
chargeable tax at the progressive rates in force during the relevant year
of assessment
...
3
...
The rates are known as graduated rates which have undergone a
lot of changes over the years
...
First
Next
Next
Next
Over
1996 – 1997
1998 – 2000
N
%
N
10, 000
5 First 20, 000
10, 000
10 Next 20, 000
20, 000
15 Next 40, 000
20, 000
20 Next 40, 000
60, 000
25 Over 120, 000
Figure 2
...
3
...
These are usually treated as deductions from
assessable profits
...
However, where a dependant earns, at least, N4, 000, no
allowance will be granted to the tax payer;
Life assurance relief – actual premium
Rent subsidy/allowance – year 2000 (N100, 000), year 2001
(N100, 000), 2002 and thereafter N150, 000;
Transport allowance – year 2000 – 2001 (N15, 000), year 2002
and thereafter (N20, 000)
...
Reducing tax rates and increasing
personal allowances and reliefs will lead to more disposable incomes in
the hands of taxpayers
...
3
...
(a)
Rent or housing allowance – this is not chargeable to tax,
provided that the amount received does not exceed the statutory
limits given as follows:
(i)
(ii)
Up to 1988 tax year – N720 per annum maximum
1989 – 1991 tax year – 20% of basic salary or a maximum of
N5,064
...
In
(iii)
(iv)
77
ACC201
PRINCIPLES OF TAXATION
each case the excess is regarded as benefits -in-kind and it is
taxable;
(b)
(c)
(d)
(e)
(f)
(g)
Transport allowance subject to upper limit of N15, 000 per
annum (1999), N20, 000 per annum (2001), any excess is taxable;
Utility allowance subject to upper limit of N10, 000 per annum,
any excess is taxable;
Leave Grant (LG) subject to upper limit of 10% of annual basic
salary
...
Disable Persons Allowance (DPA)- from 1989 year of
assessment and beyond, disabled persons additional allowance of
N2,000 is granted to an incapacitated employee who uses special
equipment
...
In other words, DPA shall be limited to:
(1)
(2)
N 2,000 or
10% of earned income in any one year
...
(h)
(i)
(j)
(k)
78
Meal subsidy or allowance - N5,000 per annum
Entertainment allowance – N6,000 per annum
Domestic servant allowance- it would not be surprising to note
that where the employer engages the services of steward, driver,
washman, housemaid etc
...
ACC 201
PRINCIPLES OF TAXATION
SELF-ASSESSMENT EXERCISE 3
What do you think is the reason for abolishing wife allowance in 1992?
3
...
A
...
E
...
The assessment is on actual year basis, but operates on monthly
basis throughout the year
...
3
...
1 Residence
A place of residence means somewhere available to an individual for
his/her domestic use in Nigeria, on a relevant day (1st January), which
excludes a hotel, rest house or other places at which he is temporarily
lodging unless there is no other place available for his use on that day
...
Further, it may
be necessary to determine a principal place of residence- where an
individual resides in more than one place
...
3
...
2 Operation of PAYE System
Employers can apply in writing to a tax authority signifying its intention
to operate the scheme
...
The relevant tax authority will then
issue a notice authorising the employer to deduct tax (from source) from
the employees’ salaries
...
This income tax forms can be filed directly by
the employee or through his employer
...
The
monthly tax liability is usually captured on form H1
...
Where there is any over or
under deduction/payment of tax, the excess or shortfall is
refunded or recovered
...
4
...
By direct assessment, we mean assessment
of self employed persons who have one form of income- for example,
subsistent farmers, roadside mechanics, vulcanizers, etc
...
5 Minimum Tax and Income
Section 37 and 43 of PITA (1993) provides that the computation of
minimum tax of an individual should be at the rate 0
...
The general notion by some
individuals that those who earn an income of N30, 000 and below are
tax exempted is incorrect
...
Therefore,
80
ACC 201
PRINCIPLES OF TAXATION
the minimum tax of 0
...
The rule for the 0
...
5% of the total income;
Where 5% of the chargeable income is less than 0
...
5% of the total income;
Where 5% of the chargeable income is higher than 0
...
SELF-ASSESSMENT EXERCISE 5
What is the relevance of the provision for a minimum tax rate?
3
...
The
relevant tax authority is obliged to issue a TCC within a maximum
period of two weeks of its demand or give reasons for the denial in
writing
...
TCC shall disclose (in respect of the last three years of assessment):
(a)
(b)
(c)
(d)
chargeable income;
tax payable;
tax paid; and
tax outstanding, or alternatively, a statement to the effect that no
tax is due;
TCC is usually required for the following reasons
...
Illustration
Alhaji Othman Ahmed is a resident of Lagos State
...
he is married with eight children; of which, two have graduated
from high school, while the remaining six are still in school;
he has an aged mother -fully under his care; he pays an annual
premium of N24, 000 on a life policy for himself at a capital sum
of N320, 000;
he is a full-time executive director at Omar Computers Ltd
...
31/12/2006
31/12/2007
31/12/2008
160, 000
300, 000
440, 000
Remuneration as a Director:
N
Year ended 31/12/2006 160, 000 (tax deducted N40, 000)
Year ended 31/12/2007 140, 000 (tax deducted N50, 000)
Year ended 31/12/2008 180, 000 (tax deducted N60, 000)
82
ACC 201
III
...
31/12/2006
31/12/2007
31/12/2008
45, 000
54, 000
63, 000
Profits from Fish Farming:
N
Accounting Year ended 31/12/2006
Accounting Year ended 31/12/2007
Accounting Year ended 31/12/2008
V
...
42, 000
50, 000
56, 000
Other investment incomes agreed for 2008, year of assessment
(gross) is N80, 000
Gains from sale of shares on 1/2/2007 amounted to N160, 000
You are required to compute Alh
...
Othman Ahmed
Computation of Taxable Income for the 2008 YOA
N
N
Earned income:
Salary (gross) (180,000+60,000)
Profit from fish farm
240,000
50,000
290,000
Unearned income:
Rent (gross)
300,000
Dividend (gross)
60,000
Investment income
80,000-440,000
Total statutory/assemble income
730,000
Less personal reliefs:
Personal allowance (5,000 + 20% of 290,000)63,000
Children allowance (2,500 x 4)
10,000
Depended relative allowance
2,000
Life assurance relief
24,000 99,000
Taxable/changeable income
630,000
(I) Computation of Tax Liability
N
First
Next
Next
N30, 000 @ 5%
N30, 000 @ 10%
N50, 000 @ 15%
1,500
3,000
7,500
83
ACC201
PRINCIPLES OF TAXATION
Next
N50, 000 @ 20%
Balance N470, 000 @ 25%
Total tax payable
10,000
117,500
139,500
SELF-ASSESSMENT EXERCISE 6
Why would you need a Tax Clearance Certificate (TCC) for the past
three years before contesting for an elective position?
4
...
The act provides for the taxation of employees
under the pay-as-you-earn (PAYE) system, while self-employed persons
(sole traders)’ income is assessed in the same way as companies except
that the computations of tax liability is derived using graduated tax rates
similar to the PAYE system
...
5
...
, all provided
freely by an employer to an employee (the beneficiary) are
taxable;
Allowable deductions, which contrast heavily with non –
allowable deductions, are expenses, which are deducted from
income that should be assessable tax;
Any expenses that are wholly, necessarily, reasonably and
exclusively incurred are qualified as allowable deductions;
Tax clearance certificate (TCC) is issued by the tax authority to a
tax payer when he/she officially request for it
...
0
TUTOR-MARKED ASSIGNMENT
1
...
The following information is
given about him for use in the 2008 tax year:
(a)
he is married with eight children of which, two have graduated
from high school, while the remaining six are still in school;
84
ACC 201
(b)
(c)
(d)
PRINCIPLES OF TAXATION
he has an aged mother -fully under his care;
he pays an annual premium of N28, 000 on a life policy for
himself at a capital sum of N640, 000;
he is a full-time managing director of a successful company in the
state, known as Abro-Oko Enterprises and therefore declares the
following
...
Compute the tax liabilities in respect of Manoach, Pacoa and
Goodness for 2007 YOA, given the following information-
Total earned income
Manoach
N
12, 000
Pacoa
N
17, 000
Goodness
N
23, 000
2
1
2
2
3
1
(All earned income)
No of children
Dependant
85
ACC201
7
...
(2002)
...
Fasoto, F
...
Nigeria Tax Company
...
ICAN Study Pack (2006)
...
Lagos: VI Publishing Limited
...
I
...
(2005)
...
Jos: Deka
Publications Nigeria
...
S
...
Nigerian Income Tax Laws and Practice
...
Ologhodo, C
...
(2007)
...
Jos: University Press Limited
...
& Kajola, O
...
(2006)
...
Ibadan: Silicon Publishing Company
...
0
2
...
0
4
...
0
6
...
0
Introduction
Objectives
Main Content
3
...
2
Computation of Partnership Income
3
...
1 Income of a Partner
3
...
2 Capital Allowances
3
...
3 Resident & Responsible Tax Authority
3
...
4 Loss Relief
3
...
4
Treatment of Changes in Partnership Structure
Conclusion
Summary
Tutor-Marked Assignment
References/Further Reading
1
...
The business is
usually conducted in accordance with certain terms and conditions as
agreed to by all the partners
...
According to Soyode & Kajola (2006:229), partnership is a relationship
subsisting between two or more persons agreeing to carry on business in
common with a view to making profit under some arrangement, for the
sharing of the resultant profit or loss for tax purposes
...
In computing the adjusted profit of a partnership, allowable
income and deductions according to section 20 of PITA, and
disallowable income and deductions according to section 2 are all taking
into consideration
...
87
ACC201
2
...
3
...
1
Formation of Partnership
The Partnership act of 1897 and 1907 spelt out the procedures for
forming general partnership and limited partnerships, respectively
...
This legal document is
expected to contain clauses relating to:
(a)
(b)
(c)
(d)
capital contribution;
the interest (if any) to be paid to each partner on his capital or the
interest that each partner will pay on loan or takings from the
partnership;
the salaries( if any) to be paid to active partners;
the agreed division/sharing of profits and losses;
However, where there is no formal agreement or the partnership is at
will, the following will be adopted:
(a)
(b)
(c)
(d)
partners share the profits and loss equally;
partners are not entitled to interest on capital;
partners will not be entitled to any salary; and
no interest is received from any partner for loan or takings from
the partnership
...
2
PRINCIPLES OF TAXATION
Computation of Partnership Income
The income of a partnership, for a period, is computed in accordance
with the provisions of PITA 1993- as though the income of an individual
were being computed except that the cost of the following is allowed:
(a)
(b)
(c)
any partner’s salaries;
any partner’s interest on capital; and
any partner’s leave or recreational passages
...
3
...
1 Income of a Partner
The income arrived at (as shown above) is called the computed income
of the partnership
...
The partners are individually assessed as
though they are working individually
...
The share of a partner in the computed income of a partnership shall be
a proportion of the computed income accruing to him, under the
provisions of the partnership agreement
...
2
...
The computed
profit is then shared amongst the partners
...
A partner’s share is then used to reduce his share of profit in order to
ascertain his/her taxable income
...
3
...
3 Resident and Responsible Tax Authority
A partner’s place of residence is his/her place of abode where he/she
must have resided for a period of not less than 180 days in the year of
assessment
...
It may happen that the head office of a partnership business is situated in
one territory, while some of the partners are resident in other territories
...
3
...
4 Loss Relief
The general principle of the provisions of loss relief in a sole
proprietorship business is applicable to a partner in a partnership
...
SELF-ASSESSMENT EXERCISE 2
Explain how a partner’s taxable income can be ascertained?
3
...
Any later changes agreed between the partners are to be made
known to the tax authority within 30 days of the agreement
...
If particulars are not supplied, then the
apportionment is made as the tax authority thinks just and reasonable
...
4
Treatment of Changes in Partnership Structure
The following are some of the changes that may occur in a partnership
structure and the treatment for tax purposes
...
(b)
Death, retirement and resignation of an old partner
Where an old partner dies, resigns or retires, he/she will be deemed to
have ceased business and will, therefore, be assessed to tax based on
cessation rules
...
In
this situation, neither commencement nor cessation rules will apply, but
the rules for existing businesses will be used for the new business
...
(d)
Conversion of a partnership into a limited liability company
A partnership may decide to convert to a limited liability company in
order to take advantage of limited liability
...
The transferring of qualifying capital expenditures of the old partnership
into the new company will be at agreed values; therefore, balancing
adjustments (that is, balancing allowance or balancing charge) will have
to be computed
...
Computation of capital
allowances on the transferred qualifying capital expenditure will be
undertaken accordingly
...
91
ACC201
PRINCIPLES OF TAXATION
Salaries
Interest on capital
Passages on leave
Nerat
N
10, 400
3,600
Neta
N
960
3,600
Neken
N
20, 800
-
The partners’ shares- under the deed of partnership are- Nerat ½; Neta
3/8; and Neken1/8
...
Salaries
Interest on capital
Share of passage
Computed income
Assessable incomes
Nerat
N
10, 400
3, 600
48, 000
31, 000
Neta
N
960
3, 600
36,000
20, 280
Neken
N
20, 800
12, 000
16, 400
SELF-ASSESSMENT EXERCISE 4
A change in partnership structure leads to dissolution of the partnership
business
...
0
CONCLUSION
In this unit, you have learnt that partnership taxation is part of personal
income tax
...
Consequently, taxable income and tax liability of each
partner are ascertained
...
92
ACC 201
5
...
6
...
A partnership of Dayo, Blessing and Charity which has been in
existence for some years submits accounts for the year ended 31st
December, 2007 showing a net profit of N48,000 after the
following charges
...
2
...
For convenience they
employed Gyang- a qualified engineer, on a salary of N150, 000
per month
...
93
ACC201
PRINCIPLES OF TAXATION
On 1st July 2007, Mr
...
The partnership agreement provides, among
others, that the partnership’s net profit will be shared as follows:
(a)
(b)
before the admission of Mr
...
Gyang, the sharing ratio changed toEmmanuel 50%; Okoye 30% and Gyang 20%
...
According to the partnership agreement, Emmanuel is entitled
to draw N225, 000 every month, Okoye N300, 000 and Gyang N100,
000 every month from the date he became a partner
...
The following expenses were incurred by the firm during the year
...
Gyang’s salary was not included in the above
...
Gyang,
on the other hand, is not married
...
Emmanuel has a life Assurance Policy for N300, 000 on which he pays
N8, 250 annually as premium
...
94
ACC 201
7
...
(2002)
...
Fasoto, F
...
Nigeria Tax Company
...
ICAN Study Pack (2006)
...
Lagos: VI Publishing limited
...
I
...
(2005)
...
Jos: Deka
Publications Nigeria
...
S
...
Nigerian Income Tax Laws and Practice
...
Ologhodo, C
...
(2007)
...
Jos: University Press Limited
...
& Kajola, O
...
(2006)
...
Ibadan: Silicon Publishing Company
...
0
2
...
0
4
...
0
6
...
0
Introduction
Objectives
Main Content
3
...
1
...
1
...
1
...
2
The Process of Ascertaining Profits
3
...
1 Allowable Deductions
3
...
2 Non–Allowable Deductions
3
...
3
...
4
Format for the Computation of Adjusted and Taxable
Profits
Conclusion
Summary
Tutor-Marked Assignment
References/Further Reading
1
...
The legislation is known
as Company Income Tax Act 1979 (CITA) as amended
...
A Nigerian company is distinguished from a foreign company; the
former is liable to company income tax on all its profits wherever they
arise, whether or not they have been brought into or received in Nigeria
...
In other words, the profits of a foreign company are taxed to the extent
that they are derived from sources within Nigeria
...
96
ACC 201
2
...
3
...
1
Profits Subject to Tax
Profit can be defined as the surplus of the receipts from the trade or
business, over and above the expenditure/expenses necessary for the
purpose of earning those receipts
...
In determining whether a particular activity is a trading transaction that
gives rise to trading profits, the following factors are given by
Arbico/FBIR (1968) in Soyode and Kajola (2006: 284):
(a)
(b)
(c)
(d)
(e)
(f)
(g)
Nature of assets;
Circumstances of purchase;
Vocation of taxpayer;
Number of like transactions;
The object clause of memorandum and article of association;
Length of time property was held by the company;
Circumstance of sale
...
1
...
The taxable profits
under this section are those in respect of the following:
(a)
(b)
(c)
Any
its gains arising from acquiring or trade or business for whatever
period of time such trade or business may have been carried on;
Dividends, interests, discounts, royalties, charges or annuities;
97
ACC201
(d)
(e)
(f)
(g)
(h)
PRINCIPLES OF TAXATION
Rent or any premium arising from a right granted to any other
persons for the use or occupation of any property;
Fees, dues and allowances (wherever paid) for services;
Any source of annual profits or gains not falling within the
preceding categories
...
These taxable profits can be grouped into two broad categoriestrading profits and investment income
...
1
...
However, where an institution meant for charitable purposes
carries on a profitable business, that business is subject to
taxation (Soyode & Kajola, 2006);
The profits of any company formed for the purpose of promoting
sporting activities- where the profits are wholly expendable for
such purpose, subject to such conditions as the board may
prescribe;
The profits of any company being a trade union registered under
any trade union act- in so far as such profits are derived from
trade or business carried on by such trade union;
Dividends distributed by unit trust;
ACC 201
PRINCIPLES OF TAXATION
(g)
Dividends derived by a company from another company
incorporated in Nigeria
...
(i)
The equity participation of the recipient of the dividend in
the
company paying the dividend is either wholly paid for in foreign
currency or by assets brought or imported into Nigeria between
1st January 1987 and 31st December 1992;
The company receiving the dividend is the beneficial owner of
not less than 10% of the equity share capital of the company
paying the dividend;
The dividend tax-free period shall commence from the year of
(ii)
(iii)
Assessment- following the year in which the new capital is brought into
Nigeria for the purpose of trade or business
...
The dividend tax free period for any other
business apart from the ones mentioned shall be limited to three years
...
Government approved channel
means the Central Bank of Nigeria(CBN), or any bank, or other
corporate body appointed by the minister as authorised dealer
under the foreign exchange act in force at a particular time;
99
ACC201
(n)
(o)
(p)
(q)
(r)
PRINCIPLES OF TAXATION
The interest on deposit accounts of a foreign non-resident
company- provided the deposits into the account are transfers
wholly of foreign currencies to Nigeria on or after 1st January
1990 through government approved channels;
Dividend received from investments in wholly export – oriented
business;
Dividend received from small companies in the manufacturing
sector in the five years of their operation;
The profits of any Nigerian company in respect of goods
exported from Nigeria, provided that the proceeds from such
export are repatriated to Nigeria and are used exclusively of raw
materials, plant, equipment and spare parts;
The profits of a company whose supplies are exclusively inputs
to the manufacturing of products for export provided that the
exporter shall give a certificate of purchase of the inputs of the
exportable goods to the seller of the supplies
...
1
...
The federal executive council may, by order amend all or repeal any
exemption made by notice or order, in so far as it affects a company
...
3
...
Sections 19 & 20 of CITA provide that certain
expenses and incomes shall not be included in the computation of
profits
...
100
ACC 201
PRINCIPLES OF TAXATION
The accounting profits will therefore, have to be adjusted to obtain the
profits for tax purposes
...
Taxable profit is arrived at after the treatment of the following:
(a)
(b)
(c)
loss relief;
capital allowances and balancing allowances;
balancing charge
...
2
...
Any amount recovered in respect of debts written
off previously is treated as profits of the year in which such
amount was recovered and written back to profit and loss
account;
Contribution to a pension, provident or other retirement benefits
funds, society or scheme approved by the Joint Tax Board (JTB)
...
Provident fund scheme, on the other hand, is a scheme
established by an organisation providing for retirement benefits
for the staff or contributors to the scheme;
Nigeria railway corporation deductions- such deductions as
allowed under the authorised deductions (Nigeria Railway
Corporation) rules 1959, which rule shall be in force for all
purposes of this act;
101
ACC201
(h)
PRINCIPLES OF TAXATION
Donations made under the following conditions; first, must be
made to a body, or institution listed on schedule 5 of the act
...
Funds, bodies and institutions in Nigeria to which donations may be
made as provided by schedule 5 of the act are as listed below:
(i)
(ii)
(iii)
(iv)
(iv)
(v)
(vi)
(vii)
(viii)
(ix)
(x)
(xi)
(xii)
(xiii)
(xiv)
(xv)
(xvi)
102
The Boys Brigade of Nigeria, the Boys Scouts of Nigeria and the
Girls Guild of Nigeria;
The Christian Council of Nigeria and the Islamic Education
Trust;
The Cocoa Research Institute of Nigeria
Any educational institute affiliated under any law with any
university;
Any hospital owned by the government of the federation or a
state or any university teaching hospital or any hospital which is
carried on by a society or association otherwise than for the
purpose of profits or gains to the individual members of that
society or association;
The Institute of Medical Laboratory Technology
The National Commission for Rehabilitation;
The National Library, the Nigeria Museum and Monuments and
the National Braille Library of Nigeria;
The National Council for Medical Research;
The National Science and Technology Development Agency;
The Nigeria Institution of International Affairs;
The Nigeria Institute of Oil Palm Research;
The Nigeria Institute of Trypanosomiasis Research;
The Nigeria Red Cross and Rotary International;
A public fund established and maintained for providing money
for the construction and maintenance of a public memorial
relating to civil war in Nigeria( which ended on 15th January,
1970);
A public institution or public fund (including the Armed Forces
Comfort Fund) established and maintained for the comfort,
creation or welfare of members of the Nigeria Army, Navy or Air
Force;
A public fund established and maintained exclusively for
providing money for the acquisition, construction, maintenance
or equipment of a building used or to be used as school or college
by the government of the federal or a state or by public authority
or by a society or association which is carried on otherwise for
the purpose of profit or gain to the individual members of the
society or association;
ACC 201
PRINCIPLES OF TAXATION
(xvii) The National Youth Council of Nigeria and the Nigeria Youth
Trust;
(xviii) National Sport Commission and its state associations;
(xix) The Nigeria Society for Deaf and Dumb;
(xx) The Society for the Blind, the Nigeria National Advisory Council
for the Blind, Association or Society for Blinds in Nigeria, and
Training Centres and residential schools for the blind;
(xxi) Van Leer Nigeria Educational trust;
(xxii) Southern Africa Relief Fund;
(xxiii) The Institute of Chartered Accountant of Nigeria Building Fund;
(xxiv) Any public fund established or approved by the government of
the federation or established by any of the state governments in
aid of or for the relief of drought or any national disaster in any
part of the federation;
(xxv) Nigeria Conservation Foundation;
(xxvi) Nigeria Accounting Standards Board;
(xxvii) Kewalrams Chanrai Foundation Limited;
(xxviii) Afriprint Foundation Limited;
(xxix) Paterson Zochonis Nigeria Technical Education Trust Fund;
(xxx) Educational Cooperative Society;
(xxxi) National Science and Technology Fund
...
(j)
Any other expenses wholly, exclusively, necessarily and
reasonable incurred for the purpose of trade or business;
The expenses proved, to the satisfaction of the board, to have
been incurred by the company on research and development for
the period including the amount of levy paid by it to the National
Science and Technology Funds;
Deduction for research and development
...
(k)
(l)
However, the deduction to be allowed by any company for any year of
assessment shall not exceed an amount which is equal to 10% of the
total profits of that company for that year, as ascertained before any
deduction is made
...
103
ACC201
PRINCIPLES OF TAXATION
3
...
2 Non–Allowable Deductions
The following deductions are disallowed for the purpose of ascertaining
the profits of a company notwithstanding any other provision of the act
...
The following payments are of capital nature, and therefore are
disallowed(I)
(II)
(III)
(IV)
Acquisition of new leases;
Preliminary expenses on formation of a company
Pre-production expenses;
Issue of shares and debentures
...
The business could perfectly
be carried on without any infringement of the law;
(h)
Any expense of any description incurred within or outside
Nigeria for the purpose of earning management fees unless prior
approval of an agreement given rise to such management fees has
been obtained from the minister;
(i)
Damages and compensation, may be allowable only if they
satisfy the requirements of being expenses incurred wholly,
104
ACC 201
PRINCIPLES OF TAXATION
exclusively, necessarily and reasonably for the earning of the
profits;
(j)
Advertisements which are for the purpose of promoting sales of
goods meant for resale but advertisement for the sale of capital
asset or to launch new product or for such expenses that are in the
nature of capital are disallowed;
(k)
Any expense of any description incurred outside Nigeria for and
on behalf of any company, except of a nature and to the extent as
the board may consider allowable
...
3 Taxable Person
A company shall be chargeable to tax:
(a)
(b)
(c)
in its name; or
in the name of a principal officer attorney, factor, agent or
representative in Nigeria;
in the name of a receiver or a liquidator
...
He is also liable to ensure that the company
complies with the act, assessment of the company and the
payment of the tax
...
3
...
1 Powers of the Board (FBIR) to Appoint an Agent
The Federal Board of Inland Revenue (FBIR) has powers under the law
to appoint any person by notice in writing as an agent of any company
...
Refusal to act by such an agent so appointed will result in the payment
of the tax from his/her personal resources
...
Where a company is being wound up, the
liquidator of the company shall not distribute any of the assets of the
company to shareholders, unless he has made provision for the payment
in full of any tax which may be found payable by the company
...
4
Format for the Computation of Adjusted and Taxable
profits
Name of Company (Example-Rocklink Integrated Ltd
...
Computation of adjusted profit can also
be derived through re-computation or by repeating the accounts
presented and ignoring non-allowable items, while at the same time,
taking care of items that were not treated as such
...
Illustration
Gayas (Nigeria) Ltd
...
The following is the
summary of its profit and loss account for the year ended 31st December,
2008
...
) Ltd
...
This friend is very useful as a link in the procurement of a
lucrative contract by the company;
(v)
Donation
Political parties
ICAN
Boy’s Scout of Nigeria
Society for the blind
(vi)
Capital allowances as agreed with the tax authorities is N3,074
N
300
500
125
100
1,025
You are required to compute:
(a)
The adjusted profit; and
(b)
The income tax liability for 2009 year of assessment
...
) Ltd
...
) Limited
(b)
Computation of Tax Liability
N
Adjusted profit
55,025
Less education tax @ 2%
1,079
(55,025 X 2/102)
Less capital allowances
Taxable profit
Tax liability @ 30% of 50,872 =
53,946
3,074
50,872
15,262
Gayas (Nig
...
Computation of Adjusted Profit for the Year 2008 (using the
indirect method)
N
N
N
Net profit brought forward
50,000
Add back disallowable:
Loan interest
400
Bad debt:
Employee’s loan
120
General provision
100 220
General expenses:
Subscription (social club) 96
Legal cost (lease)
120 216
Depreciation
3,125
Repairs &maintenance:
Decoration to new premises
360
Donation:
Political parties
300
ICAN
500 800
5, 121
55, 121
Less:
Profit on sale of investment
96
Adjusted profit
55, 025
SELF-ASSESSMENT EXERCISE 4
1
...
Distinguish between adjusted, assessable and taxable profits
...
0
PRINCIPLES OF TAXATION
CONCLUSION
In this unit, it has been pointed out to you that the taxation of companies
as legislated by CITA 1979 prepares tax assessment of incorporated
companies
...
Therefore,
it is pertinent that you study and understand those allowable and nonallowable items to be able to calculate the correct tax liability for a
company- given the appropriate prevailing corporation tax rate for the
period
...
0
SUMMARY
Factors such as nature of business, circumstances of purchase,
vocation of taxpayer, etc
...
6
...
When will it become necessary for the Federal Board of Inland
Revenue (FBIR) to appoint an agent for a company?
2
...
) Ltd
...
110
ACC 201
PRINCIPLES OF TAXATION
The following is the summary of its profit and loss account for
the year ended 31st December, 2007
...
) Ltd
...
7
...
(2002)
...
Fasoto, F
...
Nigeria Tax Company
...
ICAN Study Pack (2006)
...
Lagos: VI Publishing Limited
...
I
...
(2005)
...
Jos: Deka
Publications Nigeria
...
S
...
Nigerian Income Tax Laws and Practice
...
111
ACC201
PRINCIPLES OF TAXATION
Ologhodo, C
...
(2007)
...
Jos: University Press Limited
...
& Kajola, O
...
(2006)
...
Ibadan: Silicon Publishing Company
...
0
2
...
0
4
...
0
6
...
0
Introduction
Objectives
Main Content
3
...
2
Preparation of Accounts
3
...
1 Responsibility for Preparation of Accounts
3
...
3
...
3
...
4
Basis of Tax Assessment
3
...
1 Where
Aggregate
Apportionment
Exceeds
Computed Income
3
...
2 Double Taxation Relief
3
...
3 Appeals
3
...
4 Loss Relief and Capital Allowances
3
...
5 Format for Computing Distributable Income
Conclusion
Summary
Tutor-Marked Assignment
References/Further Reading
1
...
Usually, the administrators of deceased
properties are expected to give detailed account of his stewardship to all
the beneficiaries and tax authorities to their satisfaction
...
In carrying out the tax assessment, individual beneficiaries pay tax
according to their benefits (in terms of the property/assets) and not
collectively from the entire property
...
113
ACC201
2
...
3
...
1
Definition of Terms
Settlement – this is an agreement whereby a sum of money is set aside
to make provision for another person
...
Trust – this is a mandate given in trust to one or more trustees to
dispose or value property and apply the benefits arising out of the
property for the advantage of the “beneficiaries”
...
These three concepts, according to their definitions, refer to some kind
of benefits which are arranged, kept or left for the benefit of some person(s),
and administered by another person who may not necessarily be one of the
beneficiaries
...
Executor – this is a representative appointed by a deceased person (as
stated in a will) to administer his estate after his death
...
Administrator – this is a person appointed by the court to administer
the estate of an interstate or of a testator where an executor has not been
appointed or if appointed, does not act
...
That is, collecting assets, paying the debts
and distributing any surplus amongst the beneficiaries
...
Intestate – when a person dies and lives no valid will or leaves a will
but has not disposed off all his property by the will, he is said to have
died intestate, while the person who died leaving a will is known as a
testator
...
Beneficiaries – these are types of persons that may benefit from the
income of an estate; examples include the following:
(a)
(b)
Legatee – one to whom a legacy is bequeathed; that is, a person
receiving a specific bequest from the estate;
Annuitant – a person receiving an annuity that may be charged
on the income of the estate, on income and capital or on
particular assets
...
He holds
a limited interest; the capital passes to some other person known as a
remainder-man at the death of such a beneficiary
...
2
...
Analyse the similarities between a settler, an executor and an
administrator
...
2
Preparation of Accounts
Accounts are prepared for a trust, settlement or an estate to demonstrate
that funds relating to any of them have been applied in accordance with
the instruments setting them up
...
115
ACC201
PRINCIPLES OF TAXATION
3
...
1 Responsibility for Preparation of Accounts
It is the responsibility of a trustee of a settlement or trust, or the executor
of an estate in Nigeria to prepare accounts of the income from all
sources for successive periods to 31st December of each year, and to the
date in which the assets of the settlement, trust or estate are finally
distributed
...
Income of trust, settlement and estate, according to PITA 1993, schedule
2, part 1, section 1 and 2, shall for all purposes of the act be deemed to
be the income of the person creating the trust, as the case may be; and
this shall be so much of that income as is derived from a source in
Nigeria and any of the income brought into Nigeria
...
3
Computation of Income of Trust, Settlement and Estate
From the prepared accounts, income subject to income tax is computed
in a manner similar to sole traders and partnerships
...
3
...
1 Special Deductions for a Trust, Settlement and Estate
Besides the deductions allowed listed in PITA part 3, the following
deductions are unique to income of this nature:
116
ACC 201
PRINCIPLES OF TAXATION
(a)
any expenses of the trustee or executor relative to the settlement,
trust or estate which is authorised by the terms of the deed of
settlement, trust or estate or of the will as the case may be;
(b)
any annuity of fixed annual amounts paid out of the income of
the settlement, trust or estate, in accordance with the provisions
of the deed or will
...
3
...
2 Apportionment of Computed Income
Paragraph 3, part 1 of PITA states that the computed income of a year of
assessment of a settlement, trust or estate shall be apportioned for the
settlement in the following manner:
ai
...
By operation of the law of intestacy, the income of an individual
is to be divided as above (i), the income of each beneficiary of
any year from the settlement trust or estate shall be his similarly
apportioned share of the computed income;
bi
...
117
ACC201
PRINCIPLES OF TAXATION
the aggregate of the amount so reduced does not exceed the
computed income
...
Any remainder of the computed income of a settlement, trust or
estate of any year after deducting all amount apportioned to
beneficiaries or treated as income in the hands of beneficiaries
under this sub-paragraph shall be reduced proportionally
...
SELF-ASSESSMENT EXERCISE 2
Who is saddled with the responsibility of preparing an estate account,
and why is this necessary?
3
...
(a)
Individuals receiving a fixed annuity- an individual on receipt of
an annuity of fixed annual amount paid out of the income of a
settlement, trust or an estate shall be assessable to tax on the full
amount of the annuity; the income is assessed to tax on preceding
year basis and is included in his/her income tax assessment
...
The
following should, however, be noted-
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ACC 201
PRINCIPLES OF TAXATION
(i)
The income of a beneficiary is included in his income tax
assessment in the same way as income from other sources
accruing to him;
(ii)
The income of a trustee or executor is not included in any
assessment on him as an individual, but is assessed separately in
his name as trustee or executor
...
3
...
1 Where Aggregate Apportionment Exceeds Computed
Income
If the aggregate amount apportioned exceeds the computed income, the
amounts of payments made to all beneficiaries are proportionally
reduced so that the total amounts equal the computed income
...
For the nonapportioned balance of N500, the executor/administrator will be
assessed to tax based on that amount using graduated tax rates that are
applicable to individuals
...
But you will explain to the beneficiaries of the
necessity of the alteration
...
4
...
The relief shall be computed in accordance with
provisions of paragraph 3 of 2nd schedule, and in accordance with the
rules for apportioning the computed income of the year in proportion to
the respective shares
...
3
...
3 Appeals
An appeal against the inclusion of an income of settlement, trust or
estate in an assessment to tax by any tax authority is governed by the
appeal provisions of the income tax laws of the territory to the tax
authority of which the trustee or executor is answerable for the relevant
year of assessment, [schedule 2, paragraph 5, PITA 1993)
...
4
...
, and assessed on PYB
...
3
...
5 Format for Computing Distributable Income
(1)
120
Sunu (Nig
...
Trust or settlement Computed Income for the
Year Ended December
31st 2008N
N
Earned income:
Trading profit
XX
Sundry income
XX XX
Unearned income:
ACC 201
PRINCIPLES OF TAXATION
Dividends
Rent
Royalty
Less allowable expenses:
Annuity of fixed amount
Trustee remuneration
Less: loss relief
Capital allowances
Total taxable income of trust
Tax liability computed
Less withholding taxes
Distributable income
(2)
XX
XX
XX
XX
XX
XX
XX
XX
XX
XX
XX
XX
XX
XX
(XX) (XX)
XX
Sunu (Ltd
...
He was survived by a widow and four children – three sons and one
daughter
...
Pam obtained the necessary powers
under the will and has since 2006 been administering the estate
...
(gross)
N
750, 000
375, 000
Expenses:
Rates and ground Rents
Commission on rent collected
Repairs and upkeep of properties
Wages of staff
Executor’s professional fees
85, 000
37, 500
92, 500
60, 000
40, 000
Under the will, Chung Pam has discretion to make an ex-gratia payment,
in case of need, to any of the beneficiaries- but should not exceed N100,
000 in any one year
...
The beneficiaries’ share of the estate is determined by the
will to be in the following ratios
...
5
2
...
5
2
...
Suggested Solution
(1)
Estate of Gyang Mayare
Computation of income for the year ended 31st Dec
...
N
Income: gross rent
Less: rates & rent
Commission on rent
Repairs
750, 000
85, 000
37, 500
92, 500
Add dividends received (gross)
Less other expenses:
Wages
122
N
60, 000
215, 000
535, 000
375, 000
910, 000
ACC 201
PRINCIPLES OF TAXATION
Fees
40, 000
Amount due to beneficiaries
Less executor’s discretionary payments
Net computed income to be shared
(2)
100, 000
810, 000
90, 000
720, 000
Distribution of computed income
Wife
N
108,000
1st son
2nd son
N
N
30,000 30,000
180,000 180,000
Discretionary payment
Share of computed income
(1
...
5: 2
...
5:1)
Amount to be taxed
108, 000 210,000 210,000
(Using Graduated Tax Rate in 2010)
3rd son
N
30,000
180, 000
Daughter
N
72, 000
210, 000
72, 000
SELF-ASSESSMENT EXERCISE 3
Critically explain the basis of tax assessment for a settlement
...
0
CONCLUSION
In this unit, you have learnt that taxation of income of trusts, settlements
and estates is covered by PITA 1993 and the taxing system is similar to
that of individual employees and business persons
...
Therefore, any net amount is taxed using
graduated tax rates
...
Therefore, tax assessment of this
nature should be studied along side with taxation of individuals and
partnerships besides executorships and trust law and accounts as the
three intertwined
...
0
SUMMARY
In this unit, you have been taught the following:
The concepts trust, settlement and estate refer to some kind of
benefits which are arranged, kept or left by a person for the
benefit of some other person(s)
A trustee or an executor is expected to prepare annual or terminal
accounts for the consumption of all beneficiaries and the relevant
tax authorities
In trust, settlement and estates, income assessment, expenses of
the trustee or executor plus any annuity of fixed annual amount
123
ACC201
PRINCIPLES OF TAXATION
are deducted from the income in addition to other allowable
deductions as specified for individual taxpayers
A trustee or executor has discretion to make any payment that is
not captured in the will as he/she may deem necessary
Tax liability is paid by individual beneficiaries on the income
accruing to them
A trustee or executor must pay tax on any balance of money left
with him/her after all necessary payments, net balance can be redistributed
...
0
TUTOR-MARKED ASSIGNMENT
1
...
Explain this statement
...
He
was survived by a widow and three children – two sons and one
daughter
...
Tunde left a will appointing Dele Tola as his executor to administer his
estate
...
The executor’s account showed the following income and expenses
during the year ended 2008:
Income:
Rent income received from properties
Dividends paid by Rocklinks Ltd
...
During the year ended 31 December 2008, Dele paid
N180, 000 to each of the two sons, in equal amounts in this connection
...
7
...
(2002)
...
Fasoto, F
...
Nigeria Tax Company
...
ICAN Study Pack (2006)
...
Lagos: VI Publishing Limited
...
I
...
(2005)
...
Jos: Deka
Publications Nigeria
...
S
...
Nigerian Income Tax Laws and Practice
...
Ologhodo, C
...
(2007)
...
Jos: University Press Limited
...
& Kajola, O
...
(2006)
...
Ibadan: Silicon Publishing Company
...
0
2
...
0
4
...
0
6
...
0
Introduction
Objectives
Main Content
3
...
1
...
1
...
2
Interest Exempted from Tax
3
...
1 Details to be Disclosed by Banks for Agricultural
Loans
3
...
0
INTRODUCTION
Bank’s taxation falls within the provisions of the Companies Income
Tax Act of 1993 (CITA)
...
However,
banks pay extra tax on any excess profit that emanates from their
assessments
...
2
...
ACC 201
3
...
1
Banks’ Excess Profit
PRINCIPLES OF TAXATION
CITA, 1979 provides that banks shall pay tax for each year of
assessment in respect of any taxable profit computed
...
3
...
1 Meaning of Excess Profit
Excess Profit means the difference between taxable profits as computed,
using approved incomes and expenses, and the expected normal profit
which ascertaining it is based on some prescribed percentages of all
capital sources of the business (bank)
...
1
...
When this occurs, the excess tax is added to the
corporation tax, which rate has fluctuated between 30% and 45% over
the years, to arrive at the total tax liability (tax due)
...
SELF-ASSESSMENT EXERCISE 1
Explain how excess tax liability is determined
...
2
Interest Exempted from Tax
Banks in Nigeria are encouraged to grant agricultural loans to farmers at
low interest rates
...
The banks are also
encouraged to grant loans to exporters
...
2
...
18 states that “where a
bank grants a loan to a company, it shall disclose to the board the
following information:
(a)
(b)
(c)
(d)
(e)
The amount of the loan;
The moratorium period;
The date repayment is due to commence;
The amount of repayment showing capital and interest; and
The full particulars of the recipient and its permanent address
...
SELF-ASSESSMENT EXERCISE 2
What is the rationale behind exempting interest on agricultural loans
from tax in Nigeria?
3
...
Apart from the fact
that the rate was changed, there was the introduction of a minimum
normal profit of N6 million
...
Excess profit
N
xx
xx
xx
xx
xx
xx
N6million
xx
xx
Illustration
T
he following is given of Success Bank (Nig
...
Suggested Solution
Success Bank (Nig
...
) Plc for the year 1987N
Adjusted profit
2,250,000
Paid-up capital
1,500,000
Capital/Statutory reserve
750,000
General/Revenue reserve
300,000
Long-term liabilities
240,000
Unrelieved losses
245,000
Capital allowances
300,000
You are required to compute the excess profit and tax liability of the
bank, assuming 35% is the corporation tax rate
...
0
CONCLUSION
In this unit, as you would have noticed, the taxation of banks has posed
some unique challenges because of some provisions in the Banking Act
of 1969
...
Therefore, the assessment of banks to tax in
Nigeria is solely based on the provisions of CITA, 1993
...
0
SUMMARY
In this unit, it has been made known to you that:
130
the term “Excess Profit” means taxable profit Minus normal
profit
most of the provisions of CITA, 1993 apply to the banking sector
the summation of corporation tax and excess profit tax will give
the tax liabilities of banks
corporation tax rate is determined by fiscal policies on yearly
basis
...
However, it was repealed with effect from 1st
January 1991
...
0
TUTOR-MARKED ASSIGNMENT
1
...
What are the conditions for enjoying a tax free agricultural loan?
Solid Bank of (Nig
...
had been incorporated for many years
and makes up its account as at June 30th of every year
...
(a)
(b)
Capital allowance- claimed as N1,750,000
Income from banking operations (interest on agricultural loans)
amounting to N950, 000, a breakdown of the interest income is as
follows
...
131
ACC201
PRINCIPLES OF TAXATION
You are required to compute the tax liability of the bank for the relevant
year of assessment
...
0
REFERENCES/FURTHER READING
CITN Nigerian Tax Guide Statutes
...
Lagos: The Chartered
Institute of Taxation of Nigeria
...
(2007)
...
Lagos: Hosrtosaf Limited
...
Taxation for Professional Examination I
...
Ndupuechi, T
...
I
...
Taxes and Taxation in Nigeria
...
Ola, C
...
(1985)
...
London:
Macmillan Publishers Limited
...
J
...
Taxation Principles and Practice in Nigeria (A
Practical Approach)
...
Soyode, L
...
S
...
Taxation Principles and Practice in
Nigeria
...
132
ACC 201
UNIT 2
PRINCIPLES OF TAXATION
TAXATION OF INSURANCE COMPANIES
CONTENTS
1
...
0
3
...
0
5
...
0
7
...
1
Assessment of Non–Nigerian Insurance Companies for
Taxation
3
...
1 Format for Computing Taxable Profit in Respect of
Non-Nigerian Insurance Companies(Non-Life)
3
...
2 Foreign (Non–Nigerian) Life Assurance Companies
3
...
2
...
2
...
3 Permanent Establishment
Conclusion
Summary
Tutor-Marked Assignment
References/Further Reading
1
...
These
companies can either be for life or non–life insurance businesses
...
This unit, therefore, exposes you to those unique intricacies and the
computations of taxable profits for both life and non–life insurance
companies
...
0
OBJECTIVES
At the end of this unit, you should be able to:
distinguish between life and non–life insurance companies
explain how the profits of life and non–life insurance companies
are ascertained
discuss the term “permanent establishment”
explain the general procedures for ascertaining tax liabilities in
respect of all insurance companies, irrespective of their nature
...
0
MAIN CONTENT
3
...
(a)
(b)
(c)
(i)
(ii)
(iii)
(iv)
Aggregating interest and premium and other incomes received in
Nigeria (less premium return to the insured or premium paid on
re-insurance);
Adding, there to, reserves of unexpired risk at the beginning of
the year
...
3
...
1 Format for Computing Taxable Profit in Respect of
Non–Nigerian Insurance Companies (Non-Life)
Let us look at a sample format below; take note of each stage of
process
...
1
...
Where the profits of such a company accrue in part outside Nigeria, the
profit on which tax may be imposed shall be that proportion of the total
investment income of that company
...
Where the insurance company has its head office outside Nigeria, a fair
proportion of the head office expenses may be approved by the revenue
board in addition to the agency’s expenses as deduction for tax purposes
provided that:
(a)
(b)
the board may substitute some basis, other than the one
prescribed above, for ascertaining the required proportion of the
total investment income;
any amount distributed in any form as dividend from the actual
re-evaluation of unexpired risks or from any other re-evaluation
shall be deemed to be part of the total profits to the company
...
3
...
3
...
1 Non–Life Nigerian Insurance Companies
As stated in CITA 1990 Section 14(1), a non–life insurance company
shall have tax imposed on its profit ascertained as follows:
135
ACC201
PRINCIPLES OF TAXATION
N
N
Gross premium, interest and other premium paid on re-insurance
xx
Less: Reserve for expired risk (That is, % adopted x premium recovered) xx
xx
Add: Reserve for unexpired risk brought forward
xx
Less actual loss
xx
xx
Add actual loss recovered
xx
xx
xx
Less: Allowable expenses
xx
Adjusted profit (Taxable profit since there is no capital allowances) xx
3
...
2 Taxation of Life Assurance Companies in Nigeria
Section 14 (1) of CITA 1990, states that profit on which tax may be
imposed shall be the total investment income of the company less
management expenses including commission
...
In practice, the formula to be adopted for actuarial valuation can be
discussed and agreed with the FBIR and it will be subject to review from
time to time
...
Illustration 1
Tabashi Insurance Company has its head office abroad and a branch
(agent) in Nigeria:
total investment income N140, 0000
total premium receivable N80,000 of which N20, 000 is
receivable in Nigeria
agency expenses in Nigeria N14, 000
head office expenses chargeable to Nigerian branch N6, 000
disallowable expenses in agency expenses amounting to N2, 000
capital allowances available - N6,000
You are required to compute the chargeable profit of the agency in
Nigeria
...
x Total Investment = 20,000 x 140,000
Total Premium Received
80,000
Deduct: Agency expenses in Nigeria
Head office expenses
Add back disallowable expanses
Adjusted/assessable profit
Less capital allowances
Chargeable profit
14, 000
6, 000
20, 000
15, 000
2, 000
17, 000
6, 000
11,000
SELF-ASSESSMENT EXERCISE 2
Trust Insurance Company is a Nigerian company and the following is
presented to you:
Total investment income N70,0000
Total premium receivable N40,000 of which N10, 000 is
receivable in Nigeria
Agency expenses in Nigeria N7,000
Allowable expenses N3,000
Disallowable expenses in agency expenses amounting to N4,000
Capital allowances available N3,000
You are required to compute the taxable profit of the company
...
3
Permanent Establishment
The term “permanent establishment” in relation to an insurance
company means a branch, management or a fixed place of business in
Nigeria, but does not include an agency in Nigeria unless the agent has,
and habitually exercises a general authority to negotiate and conclude
contracts on behalf of such a company
...
N
Premium received
135, 000
Dividend received (Net)
1, 275
Profit on sale of fixed assets
550
Re-insurance premium
34, 500
Subscription as a member of Nigeria
Insurance Association (NIA)
500
Contribution to state education funds
1, 500
Unexpired risk – 1/5/2007
31, 000
30/4/2008
27, 500
Claims
12,000
Amount recovered under re-insurance
7, 500
Salary and other administrative expenses
14, 500
Capital allowances are:
Initial allowance
Annual allowance
Balance charge
4, 000
3, 800
550
You are required to compute the tax payable by the company for the
relevant year of assessment, assuming Company Income Tax Rate is
35%
...
50
SELF-ASSESSMENT EXERCISE 3
What is the striking difference in the computation of taxable profit of
Nigerian and non-Nigerian insurance companies?
4
...
Whatever the structure of ownership, its profits
must be subjected to the Nigerian taxation system and be assessed by the
FBIR
...
Therefore, you are expected to be
conversant with the principles and methods of computations so as to be
able to ascertain the correct chargeable profits and consequently, the tax
liability
...
0
SUMMARY
In this unit, you have learnt the following:
Insurance companies are categorised into those wholly owned by
Nigerians, those wholly owned by foreigners and those owned by
both Nigerians and foreigners;
Insurance companies can specialise in either life or non–life
insurance services for individuals and corporate organisations
...
Examples
of such things include buildings, motor vehicles, equipment,
aircraft and ships, etc
...
139
ACC201
PRINCIPLES OF TAXATION
6
...
Emma Insurance Nigeria Plc engaging in non–life business has
the following details of its transactions for the year ended 30th
April
...
N
Premium received
270,000
Dividend received (Net)
2,550
Profit on sale of fixed asset
1,100
Re-insurance premium
69,000
Subscription as member of Nigeria
Insurance Association (NIA)
1,000
Contribution to state education funds
3,000
Unexpired risk – 1/5/2006
62,000
30/4/2007
55,000
Claims
24,000
Amount recovered under re-insurance
15,000
Salary and other administrative expenses
29,000
Capital allowances were:
Initial allowance
8,000
Annual allowance
7,600
Balance allowance
1,100
You are required to compute the tax payable by the company for
the relevant year of assessment, assuming company income tax
rate is 35%
...
Bobby Ltd
...
It has branches in Togo,
Ghana and Benin Republic
...
ii
...
Premium received outside Nigeria N500, 000
Commissions and expenses attributable to operations outside
Nigeria
were N176, 000 and N15, 000, respectively
...
7
...
(2002)
...
Fasoto, F
...
Nigeria Tax Company
...
ICAN Study Pack (2006)
...
Lagos: VI Publishing Limited
...
I
...
(2005)
...
Jos: Deka
Publications Nigeria
...
S
...
Nigerian Income Tax Laws and Practice
...
Ologhodo, C
...
(2007)
...
Jos: University Press Limited
...
& Kajola, O
...
(2006)
...
Ibadan: Silicon Publishing Company
...
0
2
...
0
4
...
0
6
...
0
Introduction
Objectives
Main Content
3
...
1
...
1
...
2
Types of Construction Contracts
3
...
3
...
0
INTRODUCTION
Construction Companies that are registered in Nigeria and even those
that operate in the country pay tax under the Nigeria tax system
...
Section 13 (2) of LFN, 2004 states that profits of a company from any
trade or business shall be deemed to be derived from Nigeria
...
These companies engage in both short and long-term construction
contracts that should be completed within twelve months or expected to
take more than twelve months to be completed
...
2
...
ACC 201
PRINCIPLES OF TAXATION
3
...
1
Methods of
Companies
Computing
Profits
of
Construction
Construction companies are usually engaged in contracts that are long
term in nature
...
The
payment for such contracts is either in installments (as the degree of
completed work is ascertained) or at the end of the entire work
...
Thus, the
accounting standard board has provided two methods for this purpose
...
1
...
Cost incurred on
the contract and billings are accumulated until the contract is completed
...
Such costs are provided for and the contract is treated as
completed
...
Usually, the completed-contract method for long-term contracts is used
by enterprises in a situation where there are no dependable estimates or
where there are inherent uncertainties, which make forecasts unreliable
...
A major drawback of the completed contract method when applied to
long-term contracts is that periodic revenue is subject to distortion and
this is not accepted in tax assessment
...
SELF-ASSESSMENT EXERCISE 1
When will it become necessary to accept the complete contract method
for tax purposes?
3
...
2 The Percentage-of-Completion Method
Under the percentage-of-completion method used in construction
companies, costs that are incurred on a contract are accumulated in an
143
ACC201
PRINCIPLES OF TAXATION
asset account
...
Where the percentage-of-completion method is used, it is usual to
establish that computing the estimated total cost to completion and
comparing it with the total estimated revenue do not overstate the
revenue
...
(c)
The percentage-of-completion method is considered more reliable
because it gives both the accountant and the tax authority a fair measure
of activities performed in each accounting/basis period and the resultant
revenue and profit
...
Suffice it to say that this is the method tax
authority prefers to use for assessing construction companies to tax in
Nigeria
...
2
Types of Construction Contracts
There are several types of contracts, which can either be fixed sum, costplus a fixed rate, re-measure or variable-price
...
144
ACC 201
(a)
PRINCIPLES OF TAXATION
Fixed sum (lump sum) contract
The contractor undertakes or agrees to execute specific projects or
works in consideration for a fixed sum
...
(b)
Cost-plus a fixed rate contract
This allows for reimbursement of agreed costs incurred plus a fixed fee
or percentage boost up on the agreed costs incurred
...
(d)
Variable-price contract
This contains one or more clauses regarding:
(i)
price variation that allows adjustments to base price;
(ii)
work variation for an additional work order from an employer;
(iii) prolongation that takes care of additional costs resulting from
delays not caused by the contractor
...
3
Computation of Taxable Profit
The computation of taxable profit for a construction company is the
same with other companies in the sense that allowable and nonallowable expenses applicable to the latter also applies to the former
...
However, where the contract is contrary to the above description or
long-term in nature, certificate of work done and the amount payable
thereto shall be considered as revenue/turnover for the relevant year of
assessment and the expenses to be matched with revenue shall be
determined based on the degree of completion or work done which must
be in proportion to the revenue realised due to certification
...
3
...
However, for the initial allowance, it is given wholly in
the year of assessment in which the qualifying expenditure was
procured
...
Illustration
Zion Construction (Nig
...
A mobilisation fee of 15% of the
contract price was given to the company; the company moved to site,
immediately
...
Corporation tax rate is 35%
You are required to compute the tax liabilities for all the relevant years
of assessment
...
) Ltd
Computation of Tax Liabilities for two Years of Assessment (2008 & 2009)
2008
2009
N’000
N’000
N’000 N’000
Income as per certificate
180,000
220,000
Less allowable deductions:
Personnel cost
50,000
72,000
Subcontractors
25,000
40,000
Rent & insurance
3,000
3,000
Electricity
300
350
Motor maintenance 1,500
1,000
Equipment r/costs
6,000 85,800 6,500
122,850
Adjusted profits
94,200
97,150
Less capital allowance
36,000
35,000
Taxable profits
58,200
62,150
Therefore, tax liabilities @ 35% are given as:
2008 (35% of N58, 200,000) = N20, 370,000
2009 (35% of N62, 150,000) = N21, 752,500
SELF-ASSESSMENT EXERCISE 4
Explain the key difference in the computation of construction company
taxation with that of other businesses, as seen above
...
0
CONCLUSION
In this unit, you have learnt that taxation of construction companies is
based on income derived mostly from contract works, which come
occasionally
...
Contract work may continue for more than twelve
calendar months before they are completed and payment made
...
5
...
Completed-contract method recognises revenue at the end of the
whole contract while percentage-of-completion method
recognises the degree of work at the end of every year of
assessment as per certification;
147
ACC201
PRINCIPLES OF TAXATION
Construction contracts are of several types
...
6
...
Critically explain how taxable profit of a construction company is
computed
...
) Limited was awarded a contract of
constructing the Kabong-Gada Biu Road in Jos at a cost of
N900,000,000 naira on the 1st January, 2008
...
Work certified
Equipment purchased
Wages for casual workers
Salaries of permanent staff
Payments to subcontractors
Rent and insurance
Electricity
Motor vehicles maintenance
Depreciation on: motor vehicles
Equipment
Equipment running costs
N’000
500,000
80,000
50,000
32,000
40,000
25,000
350
1,000
1,400
28,000
6,500
Note:
(i)
Capital allowances have been agreed with the tax authority as
N71, 000,000
(ii)
Contract work given to the subcontractors is priced N80, 000,000
in total, and there is a certificate of valuation for N60, 000,000
for the year
...
148
ACC 201
7
...
C
...
Nigerian Public Finance
...
Arinze, E
...
(1998)
...
Jos: M & G Business Centre
...
L
...
Straight to the Point ICAN/Polytechnic Public
Finance
...
CITN Nigerian Tax Guide Statutes
...
Lagos: The Chartered
Institute of Taxation of Nigeria
...
(2007)
...
Lagos: Hosrtosaf Limited
...
Taxation for Professional Examination 1
...
Jhingan, M
...
(2004)
...
(2nd
Ed
...
Ndupuechi, T
...
I
...
Taxes and Taxation in Nigeria
...
Ola, C
...
(1985)
...
London:
Macmillan Publishers Limited
...
J
...
Taxation Principles and Practice in Nigeria (A
Practical Approach)
...
Soyode, L
...
S
...
Taxation Principles and Practice in
Nigeria
...
Uremadu, S
...
(2000)
...
Benin: Mindex Publishing Company
...
SAS 5 – Statement of Accounting Standard on Construction Contracts
...
0
2
...
0
4
...
0
6
...
0
Introduction
Objectives
Main Content
3
...
1
...
1
...
1
...
2
Computations of Taxable Profit and Tax Liability
Conclusion
Summary
Tutor-Marked Assignment
References/Further Reading
1
...
This provision does not apply to passengers, mails, livestock
or goods which are brought to Nigeria, solely for transhipment or for
transfer from one aircraft to another or in the direction between an
Aircraft and a ship
...
The unit shall expose you to the detailed issues involved
...
0
OBJECTIVES
At the end of this unit, you should be able to:
150
state the issues involved in taxation for shipping and airline
companies
explain the ratios required for the determination of taxable profits
distinguish between the ratio of adjusted profit and ratio of
depreciation relief
illustrate the process of arriving at tax liability using the relevant
tax rate
...
0
MAIN CONTENT
3
...
3
...
1 Gross Adjusted Profit Ratio
It is the ratio that the adjusted profit or loss before depreciation
allowance bears to the total sum receivable in respect of carriage of
passengers, mails, livestock or goods
...
3
...
2 Depreciation Relief Ratio
Depreciation relief ratio is the ratio used in ascertaining the amount of
capital allowances to be allowed
...
3
...
3 Procedures for Computing Tax Liability
Take note of the following steps:
(i)
(ii)
(iii)
(iv)
Ascertain adjusted profit;
Identify depreciation made, if any;
Ascertain total sum receivable;
Determine adjusted profit ratio (%)
=
Adjusted profit x 100
Total sum receivable 1
(v)
Determine depreciation relief ratio (%) (if necessary)
=
Depreciation
x
100
Total sum receivable
1
(vi) Identify income derived from or received in Nigeria;
(vii) Determine the assessable profit by applying 4 to 6;
(viii) Determination of depreciation relief in lieu of capital allowance
by applying (5) to (6);
(ix) Determine total profit by deducting (8) and (7);
(x)
Then finally determine the tax liability by applying the relevant
tax rate
...
3
...
Illustration 1
Sogo Airline limited is a foreign company registered in Egypt
...
You are given the financial results of the year ended
st
December 31 , 2007 as follows:
N
Income from passengers’ flight on other routes
Income from cargo loaded into aircraft on other routes
Income from passengers’ flight from Nigeria
Income from cargo loaded into aircraft from Nigeria
Deduct:
Depreciation
Staff salaries
General provision
Other expenses
330
...
22
101
...
90
N
100,550
...
00
25,600
...
32
252,370
...
32
247,104
...
(b)
Other expenses include disallowable expenses of N30
...
00
23,500
...
92
4,764
...
12
Proportion of allowable deductions applicable to Nigerian operations:
49,100
...
12 =
935
...
92
Capital allowance (120% of depreciation)
396
1,331
...
73
(b)
Income Tax Liability
Income tax at 35% of total profits =
16,717
...
92 that is N982
...
Since the tax computed is higher than the minimum tax, the tax
payable is N16, 717
...
Alternative suggested solution
N
Reported Net Profit
Add back:
General provisions
Depreciation
Other disallowable expenses
Adjusted profit
N
247,104
...
00
330
...
00
461
...
40
Adjusted Profit Ratio =
(a)
(b)
246,643
...
730515%
252,370
...
730515% x N49, 100
...
58
Less capital allowances
386
N47, 590
...
58
=
N16, 656
...
for the year ended
31/12/2007N’000
N’000
Income from pre-freight into Nigeria
40,000
Income from pre-freight out Nigeria
5,000
Income from pre-freight another routes
110,000
Income from livestock freight Kano/Lagos – Amsterdam
60,000
215,000
Salary
Depreciation
Other disallowable
116,250
15,500
9,250
(141,000)
74,000
You are informed that the airline company is a foreign airline and you
are required to prepare a statement showing the total profit for Nigerian
tax purposes
...
2%
215,000,000
Identification of income from Nigeria (N5, 000,000+ N60, 000,000) N65, 000,000
Therefore, assessable profit = 46% x 65,000,000 = N29, 900,000
Depreciation relief in lieu of capital allowances
7
...
154
ACC 201
PRINCIPLES OF TAXATION
SELF-ASSESSMENT EXERCISE 2
Seme Airways Limited is a foreign company registered in Benin
Republic
...
You are given the financial results of
the year ended December 31st, 2007 as follows
...
Other expenses include disallowable expenses of N70
...
0
to compute the total profits of Seme Airways Limited for
Nigerian income tax purposes;
to calculate the income tax liability for the relevant assessment
year; assuming rate of tax of 35%
CONCLUSION
In this unit, it has been made known to you that the computation of
taxable profit of shipping, airline and even cable companies considers
income, amongst other things, derived in Nigeria
...
The indirect method involves the computations of
ratios
...
155
ACC201
5
...
6
...
Explain the procedure for computing the tax liability of a
company engaged in shipping and airline business
...
The profit and loss account for the year ended 31st
December, 2006 has the following entries
...
2
...
0
REFERENCES/FURTHER READING
CITN Nigerian Tax Guide Statutes
...
Lagos: The Chartered
Institute of Taxation of Nigeria
...
(2007)
...
Lagos: Hosrtosaf Limited
...
Taxation for Professional Examination I
...
156
ACC 201
PRINCIPLES OF TAXATION
Jhingan, M
...
(2004)
...
Delhi: Vrinda Publications (p) Ltd
...
I
...
(2005)
...
Jos: Decca
Publications Nigeria
...
S
...
Nigerian Income Tax Laws and Practice
...
Ologhodo, C
...
(2007)
...
Jos: University Press Limited
...
& Kajola, O
...
(2006)
...
Ibadan: Silicon Publishing Company
...
0
2
...
0
4
...
0
6
...
0
Introduction
Objectives
Main Content
3
...
1
...
1
...
1
...
1
...
2
Double Taxation Agreement
3
...
4
Exemption from Double Taxation Relief
Conclusion
Summary
Tutor-Marked Assignment
References/Further Reading
1
...
The implication of this is that the
same income received is being taxed twice
...
Part VI of CITA contains the provisions relating to double taxation
relief
...
The double taxation relief is also
applicable to individuals and is governed by section 23, 24, & 25 of
ITMA 1961
...
It is possible for an
individual to be regarded as resident in more than one country for
income tax purposes in any particular year of assessment
...
It is for this purpose of lessening this burden of double taxation that
various tax laws provide for double taxation relief
...
Arrangements or agreements are usually made between
countries on reciprocal basis
...
This unit will expose you to the two categories
of double taxation relief, that is, the commonwealth income tax relief
and the double taxation agreement
...
0
OBJECTIVES
At the end if this unit, you should be able to:
discuss the concept of double taxation reliefs in clear terms
describe the conditions for granting the reliefs to taxpayers
explain the meaning of resident and non-resident taxpayers
discuss, in details, matters to be dealt with in a double taxation
agreement
state the kind of incomes that are exempted from double taxation
relief
...
0
MAIN CONTENT
3
...
This is defined in section 32 (3) of the act as
“any tax on income or profit of companies charged under a law in force
in any country within the commonwealth or in the Republic of Ireland
which provides for relief from tax charge both in that country and
Nigeria, in a manner corresponding to the relief granted by this sector
...
1
...
That is, a foreign taxpayer or any taxpayer must be resident in
Nigeria in that year of assessment;
The income must have also been subjected to tax in another
country;
There must be no double taxation agreement between Nigeria and
the other country
...
159
ACC201
PRINCIPLES OF TAXATION
3
...
2 Relief for Resident Taxpayers
(a)
(b)
If the Commonwealth Rate of Tax (CTR) does not exceed onehalf of Nigerian Rate of tax (NR), the rate which relief is to be
given shall be the Commonwealth Rate of
tax (CR)
...
1
...
CR < NR:
Relief = ½ CR
If the CR exceeds the NR, relief shall be equal to the difference
between the NR and one-half of the CR
that is- CR > NR:
Relief = NR – ½ CR
3
...
4 Double Taxation Agreement (DTA)
Double Taxation Agreement (DTA) is an international treaty set up by
the United Nations for the avoidance of double taxation and to prevent
evasion of taxation on income and capital goods between countries
...
Double taxation agreement also applies to any identical or substantially
similar taxes which are imposed by either contracting countries
...
Termination of this agreement is through diplomatic channels
by giving of audience notice
...
SELF-ASSESSMENT EXERCISE 1
Clearly spell out the conditions for granting double taxation relief
...
2
PRINCIPLES OF TAXATION
Double Taxation Agreement
The following matters are taken into consideration in double taxation
agreement:
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
(11)
(12)
Taxes to be covered by the agreement e
...
g
...
It should be noted that if there is a DTA between the other country and
Nigeria, the amount of foreign tax payable is allowed as a credit against
the tax payable in Nigeria
...
The major condition of
granting this relief is that a written agreement must exist between the
treaty partners
...
3
...
If the claim is granted, the amount of tax to be relieved will
be repaid out of the tax paid for that year of assessment or set off against
the tax payable for that year of assessment
...
SELF-ASSESSMENT EXERCISE 3
Why is there a claimable period for double taxation relief?
3
...
2
...
4
...
6
...
Illustration 1
Dina Williams, who is resident in Nigeria, has the following income for
the year ended 31st December 2002Income
Tax
Salaries (both UK and Nigeria) N160, 000
N40, 000
UK income
N20, 000
N24, 000
You are required to compute the double taxation relief due to the lady in
2002 year of assessment
...
162
ACC 201
PRINCIPLES OF TAXATION
Suggested Solution
Dina Williams
Computation of Double Taxation Relief for the 2002 Year of
Assessment
Nigeria Rate = (40, 000) X 100 = 25%
160, 000
1
UK Rate = 2, 400U X 100 = 12%
20, 000
1
The UK rate does not exceed half of the Nigeria rate and the relief
therefore will be given at 12% which is the UK rate
...
Suggested Solution
Kope Babalola
Computation of Double Taxation Relief Due for the 2002 Year of
Assessment
Nigeria = 42, 000 x 100 = 30%
140, 000 1
Ghana = 12, 000 x 100 = 20%
60, 000 1
The Ghanaian rate exceeds one-half of the Nigeria rate; and relief,
therefore, is given half of Nigeria rate
...
His
(a non-resident) income for the year ended 30th June, 2003 are as
follows
...
Suggested Solution
Gyang Botsha
Computation of Double Taxation Relief for 2003 Year of Assessment
Nigerian Rate = 45,000 x 100 = 25%
180,000 1
US Rate = 40,000 x 100 = 20%
200, 000 1
United States (USA) Rate does not exceed Nigeria rate; relief, therefore
is half of commonwealth rate
...
4
...
Therefore, it is
very essential for tax consultants and accountants to be conversant with
double taxation arrangement so as to assist their clients in minimising
tax liabilities
...
0
PRINCIPLES OF TAXATION
SUMMARY
In this unit you have been exposed to the following:
The meaning and essence of double taxation relief;
The two reliefs available in the Nigerian context are the
Commonwealth income tax relief and the double taxation
agreement;
Under the Commonwealth income tax relief, computation of CR
and NR is undertaken; and usually, ½ NR is compared to Cr,
whichever is lower is accepted for the relief
Under the DTA, the relief covers any personal income tax,
companies income tax that has been paid by any Nigerian
taxpayer to a foreign country in which this agreement has been
made with;
Nigeria has commonwealth income tax relief agreement with all
Commonwealth countries
...
0
TUTOR-MARKED ASSIGNMENT
1
...
Income
Tax
N
N
Income (Nigeria)
60, 000
4, 000
Nigeria (USA)
80, 000
7, 500
You are required to calculate his double taxation relief in the
relevant tax year
...
Mr
...
Bwos to Nigeria in January 2008- to open
the Lagos office on the following terms
...
(b)
(c)
You are required to compute the credit to be given to Mr
...
165
ACC201
7
...
Lagos: The Chartered
Institute of Taxation of Nigeria
...
(2007)
...
Lagos: Hosrtosaf Limited
...
Taxation for Professional Examination I
...
Jhingan, M
...
(2004)
...
Delhi: Vrinda Publications Ltd
...
I
...
(2005)
...
Jos: Decca
Publications Nigeria
...
S
...
Nigerian Income Tax Laws and Practice
...
Ologhodo, C
...
(2007)
...
Jos: University Press Limited
...
& Kajola, O
...
(2006)
...
Ibadan: Silicon Publishing Company