April 2021 Pathfinder For PTE 2 Level

THE CHARTERED INSTITUTE OF TAXATION OF NIGERIA
APRIL 2021 PATHFINDERR FOR PTE II.
INCOME TAX FOR

SPECILAIZED BUSINESS
WEDNESDAY 14TH APRIL, 2021 EXAM NO…………………………….
ATTEMPT QUESTION ONE AND ANY OTHER FOUR QUESTIONS.
SHOW ALL WORKINGS. TIME: 3 HOURS.
1. Rivers Oil Producing Company Limited is engaged in petroleum operations. Following a

disagreement between the Board of Directors of the company and the external auditors
as to the company’s tax liability as at 31 December, 2019, you were appointed as the
tax consultant to review the tax position of the company as at that date. You have been
given the following information in respect of the company’s operations for the year
ended 31 December, 2019.
(a) The company produced 600,000 barrels of crude oil during the year of which 8%
was sold in the local market at the rate of N45 per barrel, while the rest was
exported.
0
(b) The API gravity of crude oil exported was 30 . The posted price of crude oil was
0
$25 per barrel at the standard API gravity of 35 . For every degree increase or
decrease in API gravity above or below the standard API gravity, the price is
increased or decreased by $0.05. The rate of exchange was N100 to $1.
(c) Expenses incurred by the company:

N
Administration expenses 124,400,000
Production expenses 396,000,000
Depreciation 37,600,000
Cost of information on the existence and extent
of petroleum deposits 4,200,000
Cost of drilling three appraisal wells 11,450,000
Non-productive rent 3,120,000
Royalty on export sales 68,310,000
Royalty on local sales 108,000
Customs duties 66,000
Intangible drilling cost 17,400,000
Donations 6,000,000
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Repairs and maintenance 105,600,000
(d) Losses in respect of petroleum operations brought forward are as follows:

2014 3,000,000
2015 12,000,000
2016 8,000,000
2017 7,000,000
2018 2,000,000
32,000,000
(e) Capital allowances brought forward 14,356,000
(f) Schedule of qualifying capital expenditure with years of acquisitions:
Asset Year Onshore Between Above

100m & 200m
200m
N N N
Building 2011 5,000,000
Pipeline 2014 15,000,000
Plant 2015 20,000,000
Pipeline 2016 10,000,000
Pipeline 2019 12,000,000 8,000,000 6,000,000
(h) The company had made payment of N165,000,000 from the estimated returns
filed with Federal Inland Revenue Service in 2019.
Required:
Write a letter to the Managing Director of the company to advise him of the company’s
tax liability for the relevant accounting period. (40 Marks)
Note: All computations should be in Naira.
SOLUTION TO QUESTION 1
Dogo Bassi & Co.
(Chartered Tax Practitioners)
No 8 Buhari Street,
Alapere, Lagos.
14 April, 2021
The Managing Director,

Rivers Oil Producing Company Limited
Port Harcourt,
Rivers State
Dear Sir,
Page 2 of 65
REVIEW OF PETROLEUM PROFITS TAX LIABILITY AS AT 31 DECEMBER, 2019
Further to your letter on the above subject matter we attach herewith our computation of your
company’s tax liability for 2019 year assessment.
Our computation was based on the provisions of the Petroleum Profits Tax Act, Cap, P13, LFN
2004, Tertiary Education Trust Fund (Establishment) Act, 2011 and the information extracted
from the company’s accounts for the year ended 31 December, 2019.
The computation has shown that the assessable profit, chargeable profit and chargeable tax
(petroleum profits tax) are N601,688,889; N573,332,889 and N487,332,956 respectively.
Since your company has already made payment of tax by instalments totalling. N165,000,000
based on the return of estimated tax as required by law, you will now be required to pay the
final instalment of the sum of N322,332,956. The final instalment is the amount of tax
assessed for 2019 less the amount of monthly instalment already paid. The company is also
liable to pay tertiary education tax of N12,037,778.
We advise that the company’s accounts and particulars should be submitted to FIRS on or
before 31 May, 2020 in compliance with the five months’ deadline for submission of accounts
after year end. Also note that the final instalment of the petroleum profits tax is due and
payable within twenty-one days after the service of the notice of assessment of tax for the
accounting period, while the tertiary education tax is due and payable within sixty days after
the FIRS has served notice of the assessment on the company.
We thank you for appointing us as your tax consultant and enclose herewith our bill of
N1million for the assignment. Should you require further explanation or clarification, please
do not hesitate to contact us.
Yours faithfully,
for: Dogo Bassi & Co.
Fillibus Bassi
Principal Partner
Appendix
Rivers Oil Producing Company Limited
Computation of Petroleum Profits Tax for 2019
Accounting Period
N N
Value of crude oil sold (w1):
- Export sales 1,366,200,000
- Local sales 2,160,000
1,368,360,000
Less: Allowable expenses:
Administration expenses 124,400,000
Production expenses 396,000,000
Cost of drilling first 2 appraisal wells (2/3 x 11,450,000) 7,633,333
Non-productive rent 3,120,000
Royalty on export sales 68,310,000
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Royalty on local sales 108,000
Custom duties 66,000
Intangible drilling costs 17,400,000
Repairs & maintenances 105,600,000
722,637,333
Tertiary education tax (w2) 12,033,778 734,671,111
Adjusted profit 633,688,889
Less: Losses brought forward 32,000,000
Assessable profit 601,688,889
Less: Capital allowance – lower of capital allowances 14,356,000
brought forward
Petroleum investment allowance (w3) 3,000,000
Annual allowance for the year (w4) 11,000,000
28,356,000 (28,356,000)
And
85% of assessable profit (i.e. 85% x 601,688,889) 511,435,556
Less 170% of PIA (i.e. 170% x 3,000,000) 5,100,000
505,363,334
Chargeable profit 573,332,889
Assessable tax = 85% of chargeable profit (i.e. 85% x 487,332,956
573,332,889)
Chargeable tax 487,332,956
Less: PPT instalment paid in 2019 (165,000,000)
Final PPT instalment (13th instalment) 322,332,956
Workings
(W1) Computation of value of crude oil sold
Posted price: $ $
Posted price at standard API gravity 25.00
Standard API gravity 35o
API gravity of crude oil exported 30o
Decrease in API gravity 5o 0.05 (0.25)
Posted price per barrel in $ 24.75
Rate of exchange – N100 = $1
Posted price per barrel in naira ($24.75 x 100) N2,475
Value of crude oil sold N N

Export sales – 600,000 bbls x 92% x N2475 per bbl 1,366,200,000
Local sales – 600,000 bbls x 8% x N45 bbl 2,160,000
1,368,360,000
(W2) Computation of Tertiary Education Tax N

Value of crude oil sold 1,368,360,000
Less allowable expenses (excluding education tax) (722,637,333)
Adjusted profit before education tax 645,722,667
Less losses brought forward (32,000,000)
Assessable profit before education tax 613,722,667
Tertiary education tax – 2/102 x 613,722,667 12,033,778
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(W3) Computation of petroleum investment allowance (PIA)
Water Depth Qualifying Expenditure PIA
N % N
Onshore 12,000,000 5 600,000
Between 100 – 200 meters 8,000,000 15 1,200,000
Above 200 metres 6,000,000 20 1,200,000
3,000,000
(W4) Computation of Annual Allowance

Asset Year of Qualifying Annual Allowance
Acquisition Expenditure % N
Building 2011 5,000,000 0 (9th year) --
Pipeline 2014 15,000,000 0 (6th year) --
Plant 2015 20,000,000 19 (5th year) 3,800,000
Pipeline 2016 10,000,000 20 (4th year) 2,000,000
Pipeline 2019 26,000,000 20 (1st year) 5,200,000
11,000,000
EXAMINER’S REPORT
The question tests candidates’ knowledge of the computation of tax liability of a company that
is into the sale of crude oil.
Candidates’ performance was very good as more than 95% of the candidates attempted the
question and 70% of the candidates scored above 50% of the marks allotted to the question.
Candidates are advised to make a good use of the Institute’s Study Pack and previous
examinations’ Pathfinders.
2. (a) Within the context of mining and solid mineral operations.
(i) Explain the term “deferment of royalty”. (2 Marks)
(ii) Under what circumstances will deferment of royalty be granted.

(2 Marks)
(b) Chinedu Mining Company Limited commenced granite mining operations in

January 2019. It submitted accounts for the year ended 31 December, 2019 in
March 2020 for both Companies Income Tax and Mineral royalties. Prior to the
submission of this accounts, the company had not submitted any document to
the Tax Authority except those which it used in opening the company’s tax file.
During the year under review, the company decided to expand the business as
part of its strategy to capture a larger market within Mining Operation by buying
a quarry site. The following extract of the company’s financial statements was
presented to you.
Page 5 of 65
N N
Revenue from mining operation 135,300,650
Less:
Direct exploration expenses 50,450,150
Selling & marketing expenses 2,895,256
Financial charges 2,540,650
Administrative expenses 4,675,875
Donations 85,950
Overseas expenses 950,560
Cost of fabricating spare parts 850,000
Cost of valuation of property 2,560,000 66,884,396
Net Profit 68,416,254
The following information were also provided:
(a) The figure of donations include N20,000 made to a non-charitable

organisation.
(b) Capital allowances agreed with the Tax Authority is N11,885,750.
(c) Overseas travel relates to air fares and other expenses incurred by the
wife and children of the Managing Director during summer holiday abroad.
(d) Recoverable insurance claim of N750,000 is included in administrative
expenses.
(e) The company won 65,000 metric tonnes of granite, out of which a total
of 48,500 metric tonnes were sold as at the end of the year.
(f) The market price of granite is N5,500 per tonne.
(g) The royalty rate is 5%.
You are required to calculate:
(i) The tax liability of the company for the relevant assessment year.
(8 Marks)
(ii) The royalty payable. (3 Marks)

(Total 15 Marks)
(a) (i) Deferment of Royalty Payment
Deferment of royalty payment on mineral products occur in a situation where
the minister grant the deferment to a producer of mineral product for a particular
period in the national interest and that of the producer. Such deferment may be
due to cash flow problems of the producer as a result of some uncontrollable
disaster.
(ii) > Circumstances under which deferment of royalty can be granted

Deferment of royalty payment may be granted to preserve jobs and to
lessen costly economic impact which pressure to pay the royalty on the
producer may cause the latter to close down the mine site when it found
out it has no capability to continue operation. Tax policy makers will now
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see the need to defer the royalty payment so as to keep the company
operational.
➢ When there are circumstances beyond the control of the company that
prevented them from working. For example, the issue of Covid-19
pandemic.
(b) Chinedu Mining Company Limited

(i) Computation of Tax liability for 2020 Tax Assessment year
N N
Net profit as per accounts 68,416,254
Add back: Donations 20,000
Overseas expenses 950,560
Recoverable insurance claim 750,000
Cost of valuation of property 2,560,000
6,156,515
Assessable Profit 74,572,769
Deduct: Capital allowances (11,885,750)
Chargeable Profit 62,687,019
Tax liability = N62,687,019 x 30% = N18,806,106
Education tax = Assessable profit x 2%

= N74,572,769 x 2% = N1,491,455.40
(ii) Computation of Royalty for the year ended 31/12/2015

Total production for the year 65,000 M/tonnes
Volume of granite sold 48,500 tonnes
Market price per tonne N5,500
Value of tonnage sold = 48,500 x N5,500

= N266,750,000
Royalty payable is 5% x N266,750,000

= N13,337,500
EXAMINER’S REPORT
The question tests “Deferment of Royalty” and circumstances under which it is granted. It
also tests the computation of tax liability and royalty payable by mining company.
Majority of the candidates attempted the question and performance was fair. Part ‘a’ of the
question on “Deferment of Royalty” and circumstances under which it is granted appears
strange to the candidates, while part ‘b’ on tax computation and royalty was, however, well
answered and this assisted few of the candidates to score good marks.
Candidates’ generally do not understand the royalty deferment question resulting in poor
results. They however appeared to understand and perform fairly well in the tax computation
and royalty section.
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Candidates’ are advised to ensure adequate preparation for the professional level final paper
by ensuring that they cover all sections of the syllabus.
3. (a) Discuss the methods of assessing to tax the profit of a foreign company engaged
in cable or wireless undertakings. (7 Marks)
(b) The following is the income statement of Prosperity Unit Trust Scheme for the
year ended 31 December, 2020.
N000 N000 N000
Investment income:
Dividend received (gross) 2,900,000
Bank interest received (gross) 1,450,000
Rent received (gross) 1,500,000
Other income (profit on sale of fixed asset) 50,000
5,900,000
Less expenses:
Staff salaries 1,600,000
Managers’ remuneration 700,000
Depreciation 45,000
Miscellaneous expenses:
Preliminary expenses 60,000
Diminution in the value of investments 100,000
Subscription to the Association of Unit Trust Schemes 5,000
Reserve for future investment 350,000
Fine for contravention of financial regulations 7,000 522,000 2,867,000
Net profit 3,033,000
Required:
Compute the assessable profit of Prosperity Unit Trust Scheme for the relevant year of
assessment. Withholding tax had been deducted at source from the investment income.
(8 Marks)
(Total 15 Marks)
(a) Methods of assessing the profit of a foreign company engaged in cable or wireless
undertakings
(i) The company is assessable to tax on a preceding year basis.
(ii) The company is assessable to tax as if it operated ships or aircrafts. Therefore,
the provisions of CITA in respect of a foreign shipping or airline shall apply
mutatis mutandis to the computation of the company’s profits deemed to be
derived from Nigeria as though the transmission of messages to places outside
Nigeria were equivalent to the shipping or loading of passengers, mails, livestock
or goods in Nigeria.
(iii) The profit or loss of the company deemed to be derived from Nigeria is the full
profit or loss arising from the transmission of messages to places outside Nigeria.
(iv) If the FIRS is satisfied that the tax authority of the country in which the cable or
wireless company is registered computes and assesses profits or loss on a basis
not materially different from that prescribed by CITA and the foreign tax
authority certifies both the adjusted profit ratio and the depreciation ratio, the
profits or loss of the company liable to tax in Nigeria is computed by applying
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the adjusted profit ratio to the total sums receivable in respect of the
transmission of messages to places outside Nigeria. An allowance is granted in
lieu of capital allowance and this is computed by applying the depreciation ratio
to the total sums receivable in respect of the transmission of messages to places
outside Nigeria.
(ii) The adjusted profit ratio is the ratio of profit or loss before depreciation of an
accounting period to the total sums receivable in respect of the transmission of
messages. The depreciation ratio is the ratio of depreciation for an accounting
period to the total sums receivable in respect of the transmission of messages.
(iii) If the FIRS is not satisfied with the foreign tax authority’s basis of computing
and assessing profits or loss and the foreign tax authority’s certification of the
profit or loss ratio and the depreciation ratio, the FIRS may compute the profits
deemed to be derived from Nigeria by applying a fair percentage to the full sum
receivable in Nigeria in respect of the transmission of messages to places outside
Nigeria.
(iv) The tax payable for any year of assessment shall not be less than two per cent
of the full sums receivable in respect of the transmission of messages to places
outside Nigeria.
(b) Prosperity Unit Trust Scheme

Computation of Assessable Profit for 2021 Year of Assessment
N000 N000
Net profit per accounts 3,033,000
Less:
Dividend received (franked investment income) 2,900,000
Profit on sale of fixed asset 50,000 (2,950,000)
83,000
Add disallowable deductions:
Depreciation 45,000
Preliminary expenses 60,000
Diminution in the value of investments 100,000
Reserve for future investment 350,000
Fine for contravention of financial regulations 7,000 562,000
Assessable profit 645,000
Notes:
(a) Dividend received is a franked investment income. It is not subject to further tax, hence,
it is excluded from the assessable profit.
(b) Withholding tax deducted at source from rent and interest is available as set-off against
tax assessment of the year of assessment.
EXAMINER’S REPORT
The question tests the computation of assessable profit of a unit trust.
Candidates’ performance was very good as about 95% of the candidates that attempted the
question scored above 50% of the allotted marks.
Candidates lack understanding of the requirement for question 3a while 3b was well
understood though some got the calculation wrongly. About 80% of the candidates did not
understand part 3a of the question.
Page 9 of 65
The commonest pitfalls are:
Candidates’ mistaken “basis of assessment” of a foreign company engaged in cable or wireless
undertakings for steps involved in the computation of assessable profit; and candidates
provided formulas for computation rather than definition of terms and explanations of
calculations.
Candidates are advised to always read wide when preparing for future examinations.
4. (a) State the tax implications where a trade or business previously carried on in
Nigeria by a foreign company is carried on by a reconstituted company
incorporated under the Companies and Allied Matters Act. (5 Marks)
(b) East Limited and West Limited (two unrelated companies) merged in January
2014 to form a new enlarged company, East & West Plc. The trading results of
the companies, as adjusted for income tax purposes, were as follows:
East West East & West

Limited Limited Plc
N N N
Year to 31st December, 2011 2,100,000 3,300,000
Year to 31st December, 2014 5,000,000
Required:
Compute the assessable profits of the companies for the relevant years of
assessment. (10 Marks)
(Total 15 Marks)
(a) Where a trade or business previously carried on in Nigeria by a foreign company is
carried on by a reconstituted company incorporated under the Companies and Allied
Matters Act 2020 to carry on such trade or business and the assets employed in Nigeria
by the foreign company in the trade or business vest in the reconstituted company,
then the following provisions of section 29(10) of CITA shall have effect:
(i) the commencement and cessation provisions shall not apply to the trade or
business carried on by the reconstituted company;
(ii) the assets vested in the reconstituted shall be deemed to have been sold to it,
on the day of the incorporation of that company, for an amount equal to the
residue of qualifying expenditure thereon on the day following the day of
cessation of the foreign company’s trade or business;
(iii) the reconstituted company shall not be entitled to any initial allowance on those
assets and shall be deemed to have received all capital allowances given to the
foreign company in respect of those assets; and
(iv) any unrelieved loss of the foreign company in the trade or business previously
carried on by it in Nigeria shall be deemed to be a loss incurred by the
reconstituted company during the year of assessment in which its trade or
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business commenced. The loss shall be deducted from the assessable profits of
the reconstituted company provided that:
▪ the reconstituted company can prove to the satisfaction of the most senior
officer (i.e. director) in the Industrial Inspectorate Division of the Federal
Ministry of Industry that the loss was not the result of any damage or
destruction arising from the Nigerian civil war;
▪ if the loss was as a result of any damage or destruction arising from the
Nigerian civil war, the National Council of Ministers has directed that a
deduction should be made in respect of the loss to the extent specified in the
direction;
▪ within three years after the incorporation of the reconstituted company, a
claim for the loss relief is lodged by the reconstituted company with the
director and a copy of the claim is forwarded by the company to the FIRS;
and
▪ the loss shall be deducted from the assessable profits, if any, of the
reconstituted company for the first year of assessment and, so far as it cannot
be so made, then from the assessable profits of the next year of assessment,
and so on but no deduction shall be made against the assessable profits of
the company after the fourth year from the commencement of such business.
(b) Computation of Assessable Profits of the Companies

East Limited
Year of Basis Period Assessable Profits
Assessment
2012 (Penultimate Year) N N
Either preceding year basis: 1/1/11-31/12/11 2,100,000
Or actual year basis: 1/1/12 - 31/12/12 2,500,000 2,500,000
whichever is higher
2013 (Ultimate Year)
Actual year basis: 1/1/13 - 31/12/13 3,100,000
West Limited
Year of Basis Period Assessable Profits
Assessment
2012 (Penultimate Year) N N
Either preceding year basis: 1/1/11 - 31/12/11 3,300,000
Or actual year basis: 1/1/12 - 31/12/12 2,200,000 3,300,000
whichever is higher
2013 (Ultimate Year)
Actual year basis: 1/1/13 - 31/12/13 4,500,000
East & West Plc

(a) Original Assessment (without election)
Year of Assessment Basis Period Assessable Profits
2014 1/1/14 - 31/12/14 5,000,000
2015 1/1/14 - 31/12/14 5,000,000
2016 1/1/15 - 31/12/15 8,000,000
13,000,000
2017 1/1/16 - 31/12/16 9,000,000
Page 11 of 65
(b) Revised Assessment (on election)
If the right of election is exercised, the assessable profits for 2nd and 3rd assessment
years will be computed on actual or current year basis as follows:
N
2015 1/1/15 - 31/12/15 8,000,000
2016 1/1/16 - 31/12/16 9,000,000
17,000,000
The sum of assessable profits for the 2nd and 3rd assessment years under normal basis
of assessment amounted to N13,000,000 which is lower than N17,000,000 when the
right of election is exercised. Therefore, the company should not exercise its right of
election to avoid incurring a higher tax liability.
Summary of Assessable Profits

Year of East Ltd West Ltd East & West Plc
Assessment N N N
2012 2,500,000 3,300,000
2013 3,100,000 4,500,000
2014 5,000,000
2015 5,000,000
2016 8,000,000
2017 9,000,000
EXAMINER’S REPORT
The question tests candidates knowledge on reconstituted company and the tax implication of
such exercise.
Candidates’ performance was very poor. Although about 80% of the candidates attempted
the question, almost all the candidates that attempted the question scored less than the
average marks allocated.
Candidates exhibited lack of understanding of reconstitution of a foreign company.
Candidates’ commonest pitfall was that many of them have forgotten the principles of
cessation of business.
Candidates are advised to read wide when preparing for future examinations.
5. ABC Petroleum Limited has been a major player in the Nigerian oil and gas sector for
many years. The company has recently obtained a licence from the Oil and Gas Export
Free Zone Authority to engage in approved enterprises within the Oil and Gas Export
Free Zone. Furthermore, the company has decided to diversify into other areas such
as mining and processing of lead, zinc, iron ore and gold. The Managing Director of the
company has approached you as a Tax Consultant to advise him on the tax incentives
or reliefs the company could take advantage of for operating in the Oil and Gas Export
Free Zone and for being involved in the mining of solid minerals in Nigeria.
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Required:
Present your advice to the Managing Director on the tax incentives or reliefs available
to the company in line with the provisions of the Oil and Gas Free Zone Act, Cap 05,
LFN 2004 and the Nigerian Minerals and Mining Act, 2007. (15 Marks)
Yellow Sisi & Co.

(Chartered Tax Practitioners)
No. 2 Brass Street
Yenogoa
Bayelsa State.
14 April, 2021
The Managing Director

ABC Petroleum Limited
Kampe Avenue
Port Harcourt
Dear Sir,
RE: TAX INCENTIVES FOR OIL AND GAS EXPORT FREE ZONE AND MINING OF
SOLID MINERALS
In response to your request for our advice on the above subject matter, we state hereunder
the incentives that could be taken advantage of by your company.
(a) Incentives for Oil and Gas Export Free Zone

Approved enterprises operating within export processing zones in Nigeria are granted
the following incentives under the Oil and Gas Export Free Zone Act:
(i) Exemption from all federal, state and local government taxes, levies and rates;
(ii) Import of any capital goods, consumer goods, raw materials, components or
articles intended to be used for the purposes of and in connection with an
approved activity, including any article for the construction, alteration,
reconstruction, extension or repair of premises in the Zone or for equipping such
premises free of customs duty;
(iii) Exemption from legislative provisions pertaining to taxes, levies, duties and
foreign exchange regulations;
(iv) Repatriation of foreign capital investment in the Zone at any time with capital
appreciation of the investment;
(v) Remittance of profits and dividends earned by foreign investors in the Zone;
(vi) Exemption from the requirement for import or export licences;
(vii) Up to 25% of production may be sold in the customs territory against a valid
permit and on payment of appropriate duties;
(viii) Rent-free land at construction stage. Thereafter rent shall be as determined by
the Oil and Gas Export Free Zone Authority;
(ix) Up to 100% foreign ownership of business in the Zone allowable; and
(x) Foreign managers and qualified personnel may be employed by companies
operating in the Zone.
Page 13 of 65
(b) Incentives for Solid Minerals
Nigeria Minerals and Mining Act makes provisions for the following incentives for
companies or enterprises engaged in mining operations:
(i) In determining its total profits, any licence holder is eligible to deduct from its
assessable profits a capital allowance of ninety-five per cent of qualifying capital
expenditure incurred in the year in which the investment is incurred:
▪ all certified exploration, development and processing expenditure, including
feasibility study and sample assaying costs; and
▪ all infrastructure costs incurred regardless of ownership and replacement.
(ii) The amount of any loss incurred in mining operations shall be deducted as far
as it is possible from the assessable profits of the first year of assessment after
that in which the loss was incurred and in so far as it cannot be so made, then
from such amounts of such assessable profits of the next year of assessment
and so on up to a limit of four years after which period any unrelieved loss shall
become lapse;
(iii) Exemption from payment of customs and import duties in respect of plant,
machinery, equipment and accessories imported specifically and exclusively for
mining operations;
(iv) Expatriate quota and resident permit in respect of the approved expatriate
personnel;
(v) Personal remittance quota for expatriate personnel free from any tax imposed
by any enactment for the transfer of external currency out of Nigeria;
(vi) Where the holder of a mineral title earns foreign exchange from the sale of its
minerals it may be permitted by the Central Bank of Nigeria to retain in a foreign
exchange domiciliary account a portion of its foreign exchange earnings for use
in acquiring spare parts and other inputs required for the mining operations
which would otherwise not be readily available without the use of such earning;
(vii) Free transferability of funds through the CBN in convertible currency in respect
of:
▪ payments in respect of loan servicing where a certified foreign loan has been
obtained by the holder for his mining operations; and
▪ the remittance of foreign capital in the event of sale or liquidation of the
mining operations or any interest therein attributable to foreign investment.
(viii) A tax relief period of three years is available to a company granted mineral title
and starts from the date that the company commences operation. The tax relief
period may be extended by one further period of two years if the government is
satisfied as to:
▪ the rate of expansion, standard of efficiency and level of development of the
company in mineral operations for which the mineral title was granted;
▪ the implementation of any conditions upon which lease was granted; and
▪ the training and development of Nigerian personnel in the operation of the
mineral concerned.
(ix) Companies engaged in the exploitation of mineral resources shall establish a tax
deductible reserve for environmental protection, mine rehabilitation, reclamation
and mine closure costs, provided that the appropriateness of the reserve is
certified by an independent qualified person taking into account the
determination made under the provisions of the Act:
▪ the reserve is recorded in the audited financial statements of the companies;
▪ tax deductibility will be restricted to actual amount incurred for the purpose
of the reclamation; and
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▪ a sum equivalent to the reserve amount is set aside every year and invested
in dedicated account or trust fund managed by independent trustees
appointed pursuant to the provisions of the Act.
(x) An annual capital cost indexation, whereby the unclaimed balance of capital cost
is increased yearly by five per cent for mines starting production within five years
from the date of enactment of the Mining Act;
(xi) The Minister of Solid Minerals may reduce or waive royalty on any mineral which
the Minister is satisfied is being exported solely for the purpose of analysis or
experiment or as a scientific specimen, not being in greater quantity than is
reasonably necessary for that purpose;
(xii) The Minister of Solid Minerals may defer payment of royalty on any minerals for
a specific period, on the approval of the Federal Executive Council; and
(xiii) Pension fund contributions by mining companies are tax deductible.
We hope you will take advantage of these incentives. Please feel free to contact us if you
require further clarification or assistance.
Yours faithfully,
for: Yellow Sisi & Co.
Mrs Sisi Gokana

Managing Partner
EXAMINER’S REPORT
The question tests candidates presentation skills in letter form and advice to a client on the
tax incentives or reliefs available to the company in line with the Oil and Gas Free Zone Act.
Candidates’ performance was good as more than 90% attempted the questions and most
scored above 50% of the allocated marks. However some candidates mixed up the two parts
by not distinguishing one from the other.
Candidates are advised to always gather their thoughts together when answering questions in
future examination.
6. New Era Bank Plc has been in business for many years. Its profit or loss account for the
year ended 31 December, 2019 is as follows:
Income N’000 N’000

Interest on agriculture loans 27,000
Interest on export loans 12,000
Interest on overdraft, advances and other 286,500
loans.
Foreign exchange income 99,000
Lease finance income 21,000
Fee and commission 139,500
Profit on sale of fixed assets 450
585,450
Expenses
Interest expense 187,500
Page 15 of 65
Depreciation 20,400
Loans and advances written off 36,000
General provision for loan losses 12,300
Specific provision for loans losses 10,500
General and administrative expenses 225,900
492,600
Net profit 92,850
Additional information:
(i) The general and administrative expenses include the following:
N’000 N’000
Salaries and wages 138,000
Directors remuneration 13,800
Penalties for contravention of banking regulation 1,500
Audit fees 3,600
Office rent, rate and electricity 21,000
Stationery, postage and telephone 10,500
Repair and maintenance 16,800
Legal expenses:
Loan recovery 2,700
Fines for late filing of tax returns 600
Acquisition of landed property 900
Stamp duty on increase in share capital 150 4,350
Luncheon vouchers 9,750
Donations:
National library 300
Apapa social club 180
Sponsorship of Calabar carnival 6,000
University of Benin Teaching Hospital 120 6,600
(ii) Capital allowance and balancing charge for the year ended 31 December, 2019
amounted to N37.8million and N4.2million respectively.
(iii) All loans granted by the bank for agricultural trade or business had no
moratorium or grace period.
(iv) Schedule of interest on loans for manufactured goods for exports are:
Repayment period Grace period Amount

including moratorium of Interest
N000
Above 7years Not less than 2years 5,400
5 - 7years Not less than 1½years 1,950
2 - 4years Not less than 1year 1,650
Below 2years Nil 3,000
12,000
Required:
Compute the tax liability of the bank for the relevant year of assessment. (15 Marks)
Page 16 of 65
New Era Bank Plc
Computation of Tax Liabilities for 2020 Year of Assessment
N’000 N’000
Net profit as per profit or loss account 92,850
Add disallowable expenses:
Depreciation 20,400
General provision for loan losses 12,300
Penalties for contravention of banking regulation 1,500
Fines for late filing of tax returns 600
Acquisition of landed property 900
Stamp duty on increase in share capital 150
Donation to Apapa Social Club 180
Sponsorship of Calabar carnival 6,000 42,030
134,880
Less non-taxable income
Profit on sale of fixed assets 450
Interest on loans for export (W1) 4,725 5,175
129,705
Information technology levy (W2) 919
Assessable profit 128,786
Add balancing charge 4,200
132,986
Less capital allowance (37,800)
Total profits 95,186
Tax liabilities:
Income tax (30% x N95,186) 2,855.80
Tertiary education tax (2% x N128,786) 2,575.72
Information technology development levy 919 919
Workings
(W1) Interest on loans for manufacturing goods for export
Repayment Grace Period Amount of Rate of Amount

Period Interest Tax of Interest
Including Exemption Exempted
moratorium
N000 % N000
Above 7 years Not less than 2 years 5,400 70 3,780
1
5 - 7 years Not less than 1 /2 years 1,950 40 780
2 - 4 years Not less than 1year 1,650 10 165
Below 2 years Nil 3,000 Nil Nil
4,725
(W2) Calculation of national information technology development levy
N000
Net profit before tax as stated in the audited accounts 92,850
NITDL = 1 x 92,850 = 919.31
100 + 1
Page 17 of 65
EXAMINER’S REPORT
The question tests the computation of tax liability of a bank.
Candidates performance was good as about 90% of them attempted the question and about
50% scored above 50% of the marks allocated.
The commonest pitfall was that few candidates did not understand the requirements of the
question.
Candidates are advised to read wide towards future examinations.
7. Foremost Company Limited has been in the business of importing cement for a number
of years. Following the federal government’s threat to ban the importation of cement
into the country, the company decided to go into the production of cement. The
Managing Director of the company had read in the newspaper about the pioneer status
granted to the manufacturers of cement but did not fully appreciate the significance of
pioneer status and has, therefore, approached you as a tax consultant for clarification.
The company finally applied for and was granted a pioneer certificate effective from
1 July, 2013 (which coincided with the certified date of production). The pioneer status
was not extended after three years of operation. The four years of operation of the
company had the following results:
Accounting Year Ended 30th June

2014 2015 2016 2017
N’000 N’000 N’000 N’000
(a) Net profit 15,000 13,000 12,000 16,000
(b) Deductions charged before net profit:
Depreciation 1,350 1,650 1,400 1,300
Directors fees 500
Administration expenses 2,000 2,500 2,200 2,400
Distribution expenses 3,000 4,000 4,500 3,500
Loss on disposal of assets 680
Donations to:
Ikoyi Social Club 200 180 160 240
Federal University of Technology, Owerri 150 150 150 150
Audit fees 340 680 690 1,250
Legal expenses 500 600 540 820
Note that the sum of N300,000 was allowed by the FIRS as a reasonable charge for
directors’ fees for the accounting period ended 30 June, 2014.
Required:
(a) State two (2) benefits which a company can enjoy as a result of being granted
a pioneer status. (2 Marks)
(b) What is the accounting period of a pioneer company? (2 Marks)
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(c) Under what condition may the shareholders of a pioneer company be subject to
tax on the dividend received from the company during the tax relief period?
(2 Marks)
(d) If a pioneer certificate earlier issued to a company is cancelled, what is the

effective date of cancellation of the pioneer certificate? (2 Marks)
(e) Compute the assessable profits of Foremost Company Limited for the relevant
years of assessment. (7 Marks)
(Total 15 Marks)
(a) Benefits of pioneer status
The following reliefs are available to a company granted a pioneer status:
(i) The company’s profits from pioneer enterprises are exempted from companies
income tax for an initial period of three years but the tax relief period could be
extended for a further two years;
(ii) Dividends paid out of the exempted profits of a pioneer company are not liable
to tax in the hands of the recipient shareholders;
(iii) The net loss incurred during the pioneer period is deemed to have been incurred
on the day following the end of the pioneer period and is available for relief in
computing the total profits of the new trade or business of the company after
the pioneer period; and
(iv) The qualifying capital expenditure incurred during the pioneer period is deemed
to have been incurred on the day following the end of the pioneer period and
are eligible for capital allowances in the new trade or business of the company
after the pioneer period.
(b) Accounting period

In relation to a pioneer company, accounting period means:
(i) a period not exceeding one year commencing on its production day;
(ii) successive periods of one year thereafter; and
(iii) a period not exceeding one year ending at the date when its tax relief period
ends.
(c) Tax on dividend received from a pioneer company

Where a pioneer company distributes dividend or bonus to its shareholders in excess of
the credit balance in the account maintained for exempted profits as at the date of such
distribution, such excess dividend is subject to tax in the hands of the recipients
(shareholders).
A pioneer company is required to maintain an account (often called section 17 account)

which is to be credited with amount of profits of the company exempted from tax. Any
dividends paid out of the exempted profits is not subject to tax in the hands of the
recipient shareholders. Where the dividend paid is in excess of the exempted profits
credited to the account, the excess dividend would be liable to tax in the hands of the
recipient shareholders.
Page 19 of 65
(d) Effective date of cancellation of the pioneer certificate
The effective date of cancellation of a pioneer certificate of a company shall be:
(i) the pioneer date if the pioneer company has been in operation for less than one
year after the pioneer date; and
(ii) the date of the last anniversary of the pioneer date if the pioneer company has
been in operation for not less than one year after the pioneer date.
The pioneer date is the date from which a pioneer certificate takes effect.
(e) Foremost Company Limited
Computation of Adjusted Profits

Accounting Year Ended 30th June
2014 2015 2016 2017
N’000 N’000 N’000 N’000
Net profit 15,000 13,000 12,000 16,000
Add disallowable deductions:
Depreciation 1,350 1,650 1,400 1,300
Directors’ fees (500 – 300) 200
Loss on disposal of assets 680
Donations to Ikoyi Social Club 200 180 160 240
Adjusted profits 16,750 15,510 13,560 17,540
Computation of Assessable Profits of Pioneer Business

The company would prepare its accounts of the pioneer enterprise to cover the
following periods:
Assessable profits
N’000
1st Year 1/7/13 - 30/6/14 16,750
2nd Year 1/7/14 - 30/6/15 15,510
3rd Year 1/7/15 - 30/6/16 13,560
45,820
The company is not liable to tax in the first, second and third years of assessment
because of the pioneer status (tax relief period of 3 years) granted to the company.
The aggregate profits of N45,820,000 made during the tax relief period are exempted
from tax.
Computation of Assessable Profits of New Business

Year of Assessment Basis Period Assessable Profits
N’000
2016 1/7/16 - 31/12/16 (6/12 x 17,540) 8,770
2017 1/7/16 - 30/6/17 17,540
2018 1/7/16 - 30/6/17 17,540
The company is liable to tax on its assessable profits after the end of the pioneer period.
Hence, the company has to pay tax in 2016, 2017 and 2018 years of assessment.
Page 20 of 65
EXAMINER’S REPORT
The question tests the benefits of a company that is granted a pioneer status; the accounting
period, dividends policy, cancellation of certificate and computation of assessable profits.
Candidates’ performance was poor. About 90% of the candidates attempted the question but
more than 50% of those that attempted the question scored below average.
Candidates’ did not understand the requirements of the question hence the poor performance.
Candidates are advised to avail themselves with the Institute’s Pathfinders and Study Pack
when preparing for future examination. They are also advised to always read wide to cover
the syllabus.
Page 21 of 65
APRIL 2021: PROFESSIONAL EXAMINATION
PTE II: TAX AUDIT AND

INVESTIGATION
TUESDAY 13TH APRIL, 2021 EXAM NO…………………………….
1. You are a Senior Inspector of Taxes, working at the Ikeja Regional Office, Tax Audit
Section of the Federal Inland Revenue Service. Your work involves leading a team of
tax auditors to carry out audit assignment delegated to your team by the Director of
Tax Audit and Investigation. On receipt of instruction to carry out audit of a taxpayer,
the first thing is to call for the file of such taxpayer to enable you and your team
familiarise yourselves with the tax history of the taxpayer.
Your team has just been instructed to carry out a routine tax audit of Bonjour mon ami
Nigeria Limited, a company engaged in the manufacturing and distribution of plastic
products based in Ikeja Industrial Estate.
Your initial review shows that, like every other plastic company, Bonjour mon ami
imports 30% of its raw materials from Germany, while the balance is sourced locally,
mostly from plastic recycling plants.
From the company’s file in the office, you have extracted the following:
Extracts from the previous year (2018) financial statements:

Statement of Financial Position
₦’000
Property, plant and equipment 63,700
Receivables: Trade 4,300
Other 400
Inventory: Raw materials 1,740
Work in progress 900
Finished goods 3,220
Payables: Trade 2,940
Other 900
Page 22 of 65
Extracts from previous year (2018)
Income Statement
₦’000
Revenue 81,500
Cost of sales 58,880
23,420
Depreciation and loss on sale of non-current assets (4,020)
Other expenses (4,560)
Profit before taxation 14,840
Extracts from the company’s 2019 financial statements:

Statement of financial position
₦’000
Property, plant and equipment 65,120
Receivables: Trade 7,200
Other 500
Inventory: Raw materials 2,400
Work in progress 700
Finished goods 3,720
Payables: Trade 4,120
Other 1,000
Extract from 2019

Income Statement
₦000
Revenue 86,300
Cost of sales 58,360
27,940
Depreciation and loss on sale of non-current assets (6,900)
Other expenses (4,680)
Profit before taxation 16,360
Required:
(a) Prepare a plan for the audit, state the procedures you will follow and what will
be covered in your plan. (15 Marks)
(b) Prepare an analytical review of the extracts of 2018 and 2019 financial
statements, using ratios that will help you in determining areas that may result
in reduced tax liability that the audit team may need to focus on during the audit.
(10 Marks)
(c) State the procedures you will follow on imported raw materials of the company
and what you will look out for. (8 Marks)
(d) How will you verify that the company has complied with the provisions of the
laws on withholding tax? (7 Marks)
(Total 40 Marks)
Page 23 of 65
(a) As the team leader, my first assignment is to plan the audit and prepare an audit
planning memorandum. The following steps with be taken:
(1) The following basic information will be extracted from the taxpayer’s file:
(i) Name of the company;
(ii) Registered address;
(iii) Business address;
(iv) Date of incorporation;
(v) Date of commencement of business;
(vi) Tax file number;
(vii) Nature of business;
(viii) External auditors/tax consultants and their addresses;
(ix) Bankers/addresses;
(x) Solicitors and secretaries;
(xi) Share capital (authorised and issued);
(xii) Shareholding structure;
(xiii) Names of directors/number of shares held;
(xiv) Associated companies/addresses;
(xv) Litigation details, if any;
(xvi) Period covered during the last audit or investigation exercise; and
(xvii) Accounting year end.
(b) An analytical review of the company’s tax returns will then be prepared using the
following records to determine the taxpayer’s performance and areas of risks the tax
audit will focus:
(i) Last audit or investigation report (if any).

(ii) Financial statements:
• Chairman/directors/auditors’ reports;
• Statement of financial position and statement of comprehensive income;
• Cash flow statements; and
• Notes to the accounts.
(iii) Tax Returns
From the above, a spreadsheet of statement of financial position, profit or loss
statement and notes to the financial statements of the year will be prepared.
(2) Relevant accounting ratios would be computed and interpreted and areas of
unusual ratios will be noted to guide the audit team’s work.
(3) Audit team members will then be allocated to carry out specific areas for them
to audit during the field work.
(4) The time to be spent on the audit will be estimated.
(5) All the information so far gathered will be put together in a tax audit planning
memorandum. The memorandum should contain the following information:
- Background information on the taxpayer
- Taxpayer Identification Number (TIN)
- Type of audit
- Taxpayers history of tax compliance
- The audit team – Name and ranks
Page 24 of 65
- Approach to the audit and areas of special focus. In particular, note major
issues so far identified and how they would be addressed.
- Synopsis of information and records to be requested from taxpayers, his
bankers and other third parties. This should also include a list of all schedules
required for the audit.
- List of places to be visited, who to interview and arrangements being made
in this regard.
- List of applicable taxes and the year involved.
- List of items to be provided by the tax payer.
(6) The tax audit memorandum will be submitted to the head of audit department
for review and approval.
(b) The following ratios will be calculated:

Gross margin:
2017 = 23,420/81,500% = 28.7%
2018 = 27,940/86,300% = 32.4%
Net profit margin:

2017 = 14,840/81,500% = 18.2%
2018 = 16,360/86,300 = 19.0%
Inventory turnover:
2017 = 5,860/58,080 x 365 = 37 days
2018 = 6,820/58,360 x 365 = 43 days
Trade receivable days:

2017 = 4,300/81,500 x 365 = 19 days
2018 = 7,200/86,300 x 365 = 43 days
Trade payable days:

2017 = 2,940/58,080 x 365 = 18 days
2018 = 4,120/58,360 x 365 = 26 days
(c) Tax audit procedures on imported goods

(i) Ask for and collect the following documents:
• The bill of entry file for all imports in the year;
• The treasury receipt issued by the Nigerian Customs Service; together with
the bank payment tellers;
• The approved “Form M” used in importing the goods, this will give the rate
of exchange used; and
• The attested invoice issued by the manufacturer or the supplier or exporter
of the goods as the case may be – the commercial invoice.
• There are some companies that maintain separate files for all import, if that
is the case, ask for all the files for imports during the year. The file will
contain documents in respect of each import, therefore, check that the
following are complete for each import;
• The approved Form M together with proforma invoice, duly signed by the
bank;
Page 25 of 65
• The good in transit insurance certificate for the goods covered by the Form
M;
• The Customs Bill of Entry for the import, showing duty, surcharge and VAT
payable on the goods;
• The bank tellers for the payment of the amount payable to the Customs
together with the treasury receipt issued by the Customs;
• The attested invoice or commercial invoice, issued by the overseas’ supplier
of the goods;
(ii) Summarise the imports during the year on the basis of the following:
• The cost, and freight based on the amount on the commercial invoice
multiplied by the exchange rate on the approved Form M;
• The customs duty paid on the goods;
• The goods in transit insurance premium paid for the goods;
• Port charges on the goods;
• Clearance charges and transport expenses for bringing the goods into the
company’s warehouse; and
• Total of all the above, which represents the total cost of all imported goods
during the year.
• Vouch the above with the import ledger maintained by the taxpayer and trace
each import to the taxpayer’s inventory records and note any discrepancy;
• Discuss the discrepancy with the taxpayer’s management;
• Trace each import into the purchases used in determining cost of sales or
cost of manufactured goods during year.
(d) To verify that the company has complied with the provisions of the withholding tax
laws, the following procedures will be followed:
• Collect all the organisation’s payment vouchers (both cash and cheque payment
vouchers) month by month for the year;
• Arrange the vouchers serially or according to date order;
• Ensure that the vouchers are complete, either by seriality or according to date order;
• Ensure that attachments to the vouchers have not been detached from the
vouchers;
• Collect the revenue receipts for all withholding taxes remitted by the organization
to the Federal Inland Revenue Service during the year;
• Collect the following from the organisation;
• List of suppliers, contractors, consultants, etc;
• List of directors and their tax clearance; and
• Rent schedule including rent agreements.
• Vouch the payment vouchers one by one to identify withholding tax payable by the
organisation to incorporated companies, government agencies and parastatals;
• List the withholding tax payable under the following categories;
• Contract and supplies;
• Professional fees;
• Commissions;
• Directors’ fees;
• Dividends; and
• Rent and lease rentals;
• The summary of each of the categories of withholding tax above should contain;
• The date of the invoice/bill;
Page 26 of 65
• Name of the contractor/supplier/service provider;
• Description of the contract/supply/service;
• Gross amount on the invoice/bill;
• Rate of withholding tax payable; and
• Amount of withholding tax payable
• Summarise and determine the total withholding taxes payable under each category
and in total;
• Summarise the total withholding tax remitted by the organisation based on the
withholding tax receipts collected;
• Compare the total withholding tax you have calculated with the total withholding
tax remitted by the organisation. The difference represents outstanding withholding
tax liability or unremitted/under deducted withholding tax during the year.
However, where the total withholding tax payable, based on the above is not
satisfactory, considering the volume of transactions of the company, or the
organisation refused to give the auditor all payment vouchers, the tax auditor will
follow the following procedures:
• Collect all receipts for withholding tax remittances to all the state internal revenue
services and the Federal Inland Revenue Service;
• Summarise the receipts to determine the total withholding tax remitted, both to the
states and FIRS;
• Determine the value of all purchases of goods and services during the year by:
• Add wages and salaries together with depreciation, dividends, interest and profit
before tax for the year;
• Deduct the total you get above from the Revenue (Sales) for the year;
• The difference represents the value of goods and services bought by the
company during the year;
• Apply withholding tax rate of 10% to determine the withholding tax payable;
• Deduct the total remittances of withholding tax during the year, as calculated
earlier;
• The balance represents outstanding withholding tax liability for the year.
EXAMINER’S REPORT
The question tests issues on the preparation of a plan for the audit; an analytical review of
financial statements by using ratios and compliance with the provisions of the laws on
withholding tax. A compulsory question attempted by over 95% of the candidates.
About 20% scored above 40% of marks obtainable.
Candidates demonstrated lack of understanding of procedures to be followed on imported raw

materials and how to verify compliance with provision of withholding tax laws.
Candidates are advised to prepare well for future examinations. They should make adequate
use of the Institute’s study pack and previous examination’s pathfinders.
2. You are the tax consultant of Tom & Jerry Nigeria Limited. The company’s chief
accountant has just informed you that he has received a letter from one of the State’s
Internal Revenue Service for a tax audit.
Page 27 of 65
Required:
Discuss your role as the company’s tax consultant, before, during and after the audit.
(15 Marks)
Usually, when the company receives a letter from the State Internal Revenue Service
intimating the company of its intention to carry out a tax audit or investigation exercise in the
company, the company will send the letter to its tax consultant. The roles of the tax consultant
are:
(a) Before the tax audit

On receipt of the letter, the tax consultants will carry out the following activities:
(1) The tax consultants will visit the company, discuss with the management and
agree on the date the company would be ready for the audit;
(2) The tax consultants will get in touch immediately with the team coming for the
audit, always listed on the letter of audit, to discuss and agree the date for the
audit;
(3) If need be, the tax consultant will write a letter to the revenue service seeking
for an extension of time, if the company has a genuine reason why the audit
could not take place within the time stipulated on the letter of audit;
(4) The tax consultant and his staff will visit the company before the date agreed
with the tax auditor to:
• Carry out a tax audit of the company’s books and generate the outstanding
liability, based on the audit;
• Discuss the liability with the company’s management; and
• Arrange the documents required for the audit, a list of this is usually attached
to the letter of audit.
(b) During the audit

(1) On the first day of the audit, the tax consultants, with his staff, will arrive earlier,
before the tax audit team, at the company to:
• Secure and arrange the place the audit will take place;
• Arrange all the documents required for the audit;
• Receive the audit team on arrival;
• Arrange a pre-audit meeting with the company’s management, himself and
the audit team; and
• Arrange for all other things for smooth audit e.g. logistics.
(2) The tax consultants or his staff must be on ground throughout the duration of
the audit, to answer any question from the audit team and or provide further
information the audit team may ask for;
(3) On completion of the audit, the tax consultant will hold an exit meeting with the
tax audit team and the company’s management, where further clarifications
could be sought by the audit team from the management regarding their
findings, to clear any doubt that may arise;
Page 28 of 65
(c) After the audit
(1) On receipt of the notice of additional tax liability, based on the audit, from the
State Internal Revenue Service, the company will send this to the tax consultant
for advise;
(2) If the liability is within the expectation of the tax consultant, in the light of the
pre-audit exercise he had earlier carried out, he may advise the company to pay
the additional liability, which will bring the audit exercise to a close;
(3) A letter of clearance would be bought by the consultant from the SIRS;
(4) However, if the liability is more than the expectation of the tax consultant, he
will write a letter of objection to the liability to the State Internal Revenue
Service, within the stipulated time frame, attaching:
• His own computation of the additional liability; and
• A cheque for the undisputed liability, as computed by the tax consultant;
(5) The tax consultant will liase with the State Internal Revenue Service to fix a date
for the reconciliation of the two liabilities i.e. the revenue’s liability and the one
computed by the tax consultant. This meeting is called, tax reconciliation
committee (TARC):
(6) If the disagreement is resolved during the meeting, the tax consultant and the
representative of the State Revenue Service will sign the agreement, which will
form a basis of revised liability from the Revenue Service to the company;
(7) On receipt of the notice of revised liability, the consultant will advise the company
to pay the balance liability i.e., the difference between the new liability and the
one paid with the notice of objection. This will bring the audit exercise to a close
and the tax consultant will liase with the State Internal Revenue Service to write
a letter of clearance to the company. This letter will indicate that the company
has settled its tax liability to the state up to the date the audit covered;
(8) If the company and the tax consultants are still not in agreement with the revised
liability, the tax consultant will write a new letter of objection to the State
Revenue Service, enclosing additional evidence to help the Revenue Service to
revise the liability;
(9) There will be another TARC meeting to resolve the dispute and for the Revenue
Service to revise the liability;
(10) If the disagreement could not be resolved, either party can refer the dispute to
the Tax Appeal Tribunal for adjudication;
(11) If the company is still not satisfied with the ruling of the Tax Appeal Tribunal,
the case will be referred to the Federal High Court for settlement;
(12) If the company or Revenue Service is not satisfied with the ruling of the Federal
High Court, the party will appeal to the Court of Appeal; and
(13) If either party is still not satisfied with the decision of the Court of Appeal, the
party could appeal to the Supreme Court. The decision of the Supreme Court is
final on the dispute.
EXAMINER’S REPORT
The question tests issues on role of tax consultant before, during and after tax audit. About
90% of the candidates attempted the question, and about 50% of them scored above 40% of
marks obtainable.
Commonest pitfalls in answering the question was the inability of the candidates to discuss
the tax consultant’s role in the audit.
Page 29 of 65
Candidates should endeavor to prepare well for future examinations. They should also make
use of the Institute’s Study Pack and previous examination Pathfinders.
3. Discuss the tax audit procedures a tax auditor will follow when carrying out Pay As You
Earn (PAYE) audit. (15 Marks)
The tax audit procedures for PAYE audit are:
• Collect the organisation’s nominal roll (list of staff) with the payroll for the year;
• Collect evidence of payment of salaries to staff, such as, letter of authority to the bank to
credit the accounts of the staff for their salaries, for the whole year;
• Select some employees from the nominal roll and request for their letter of employment or
letter of salary increase (especially the expatriates staff);
• For employees stated in the payroll to have spent less than 12 months in a year request
for their employment or resignation/termination letter.
• Request for the company’s bank statement and trace payment of salary debited to the
accounts.
• Compare the above with the net pay on the payroll for selected staff so as to ensure this
agrees with the payrolls;
• Summarise the total salaries month by month for the year;
• Compare the summary above with the payroll journal monthly;
• Compare the total wages and salaries, as summarized above with the organisation’s trial
balance and financial statements and note any difference;
• The difference, as calculated above should represents off payroll payment of
allowances/salaries to staff;
• Vouch the organisation’s payment vouchers, both cash and cheque payment vouchers
(100% of the population) to identify and list out the following:
• Rent and or payment in lieu of accommodation;
• Leave/vacation allowances;
• Medical allowances;
• Dressing allowances;
• Telephone allowances;
• Lunch allowances; etc
• Summarise the individual total salaries for the year, either paid through the payroll or
through payment vouchers;
• Ask for the company rent schedule and the occupier of each house to enable you determine
benefit in kind on accommodation;
• Ask for schedule of motor vehicles and the name and designation of users to enable you
calculate benefit in kind on the use of vehicles;
• Verify pension deductions and their remittance to the appropriate Pension Fund
Administrators. Determine total pension deducted from each staff salary;
• Reconcile the total salaries and wages paid to all staff, based on your calculation, with the
total personnel emolument on the financial statements and note the difference;
• The difference, as calculated above, will be used to increase each staff’s total salaries based
on the ratio of their basic pay;
• Calculate the tax payable by each staff and for the whole staff, using an excel tax
calculation template;
• Summarise the Internal Revenue receipts for remittances by the organization during the
year;
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• Deduct the total remittances, summarized above, from the total tax payable calculated
above. The difference represents the organisation’s outstanding paye liability unremitted
/under deducted tax:
EXAMINER’S REPORT
The question tests the candidates’ understanding of tax audit procedures for Pay As You Earn
(PAYE) audit. Less than 40% of the candidates attempted the question and well over 60% of
them scored below 40% of the marks allocated. The commonest pitfall was the inability of
most candidates to differentiate between general audit procedures and “Specific” PAYE Audit
Procedure.
Candidates are advised to prepare well for their future examination and make use of the
Institute’s Study Pack and previous examination’s Pathfinders.
4. The tax authorities have been given adequate power by the various tax laws so as to
be able to collect all revenue due into the government covers.
Required:
(a) Discuss the powers available to tax authorities to recover outstanding tax
liabilities. (10 Marks)
(b) List the contents of the form of Warrant of distraint. (5 Marks)

(Total 15 Marks)
(a) The powers of tax authorities to recover outstanding tax liability are:
(i) Power of distraint
Distraint means a process whereby force is applied to collect the tax due by
seizing the movable properties of the debtor taxpayer and sealing the office
premises thus forcing him/her to pay the owed tax. Also distraint is a legal
process which allows the Tax Authority to seize a taxpayer’s possessions and, if
necessary, sell them to settle a debt owed to the Inland Revenue.
Also distraint is an effective method of enforcement which is usually carried out

where all administrative procedures have failed.
The provision of power of distraint are contained in the:

• Federal Inland Revenue Establishment Act, LFN 2007, section 33 and the
fourth schedule;
• Companies Income Tax Act Cap LFN 2007, section 86, subsections 1 to 2 and
the fourth schedule;
• Personal Income Tax Act LFN 2007 as amended by the Amendment Act 2011,
section 104; and
• Casino Taxation Act Cap C3, section 16.
(ii) Power to prosecute tax defaulters for recovery of tax

Tax may be sued for and recovered in a court of competent jurisdiction with full
cost of action from the taxpayer as a debt due to the government. Section 87
(2) Companies Income Tax Act provides that a court of competent jurisdiction
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provided that the amount claimed in any action does not exceed the amount of
the jurisdiction of the magistrate concerned with respect to action for debt.
However, The Federal Inland Revenue Service (Establishment) Act, 2007

establishes the Tax Appeal Tribunal under section 50 to settle disputes from the
operations of the Act as well as the administration of the legislations listed in the
First Schedule to the Act. The Tribunal has power to adjudicate on disputes and
controversies arising from the following legislation:
(a) The Companies Income Tax Act;

(b) Personal Income Tax Act;
(c) Petroleum Profits Tax Act;
(d) Capital Gains Tax Act;
(e) Stamp Duties Tax Act;
(f) Value Added Tax Act; and
(g) Any other law contained in or specified in the schedule to this Act or other
laws made or to be made from time to by the National Assembly.
Either the Tax Authorities or the taxpayers may appeal to the tribunal. The tax
authority can appeal to the tribunal for the non-compliance of the taxpayer with
the provisions of the tax laws, while the taxpayer can appeal on the assessment,
demand notice or any action made against him by the tax authority with respect
to payment of tax.
(b) The contents of the form of Warrant of distraint are:

(i) The name of the officer of the Revenue Board who is authorized to execute the
warrant of distress;
(ii) Name of the company/taxpayer and place of business;
(iii) Amount of tax to be levied by distress;
(iv) Details about arrears of tax due for the relevant assessment years;
(v) Year of assessment;
(vi) Amount of tax due;
(vii) Signature of Executive Chairman of FIRS/SIRS;
(viii) Date of signing; and
(ix) Amount of tax outstanding against the company and which amount is to be levied
by distress.
EXAMINER’S REPORT
The question tests options available to tax authorities to pursue collection of outstanding tax
liabilities. About 70% of the candidates attempted the question. Less than 20% of them
scored above 40% of marks obtainable. The commonest pitfall was the inability of most
candidates to state other methods of collecting outstanding tax liabilities.
Candidates are advised to prepare more adequately for subsequent examination and they
should make use of the Institute’s Study Pack and previous examinations’ Pathfinders.
5. As part of tax audit planning process, a tax auditor is required to carry out risk
assessment procedures. One of the means of achieving this is taxpayer and industry
profiling.
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Required:
Discuss briefly the concept of taxpayer’s and industry profiling in tax audit. (15 Marks)
Taxpayer and industry profiling are risk assessment technique in risk-based tax audit. It
involves an understanding of the taxpayer and its industry environment. Taxpayer profiling is
defined as the development of a thorough understanding of the taxpayer’s compliance
behavior and their business. It involves carrying out of the following tasks by the tax auditor:
(a) Review of basic tax information which includes determination whether:

• The return was filed by due date;
• Required schedules were completed;
• Taxes were overdue; and
• Financial statements have been filed with other statutory authorities.
(b) Review the taxable income and tax payable calculated by the taxpayer, which include
determination whether:
• Carry over loss, exempted income and deducted income were properly applied;
• Accumulated income tax is properly calculated; and
• The tax payable and tax credit are properly calculated.
(c) Review financial statements, which should include:

• Trend analysis on major accounts; and
• Calculation of important ratios.
(d) Review changes in paid-in capital and major shareholders.
(e) Review inventories movements between affiliated companies.
(f) Review of transfer pricing issues if the taxpayer is a member of multinational, which
involves:
• Review transfer pricing;
• Review the flow of funds to or through tax havens;
• Examine arm’s length dealings; and
• Research any advance pricing arrangements.
(g) Review the tax taxpayer, which includes examination of the taxpayer’s:
• Organisation chart;
• Major products;
• Functions of each department of enterprise;
• Documentation relating to tax planning strategies
• Taxpayer’s use of e-commerce
(h) Review third party information, which includes, quarterly returns from banks, returns
from customs, etc.
(i) Review of the current industry environment of the taxpayer, which includes:
• The current market trend of the products;
• The position of the taxpayer in the market place; and
• The average industry indices.
The level of other pre-contact work will largely depend on the complexity of the affairs of the
customer concerned, and the tax risks identified during risk assessment. However, these can
be categorized into four general headings:
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• Reviews of unreported income;
• Intelligence gathering;
• Review of prior compliance history; and
• Returns preparer performance, i.e. that tax consultant of the taxpayer that filed the
returns.
EXAMINER’S REPORT
The question tests issues on the concept of taxpayers and industry profiling in tax audit. About
60% of the candidates attempted the question. Only about 40% of them scored above 40%
of marks obtainable.
Candidates demonstrated lack of understanding of what constitute profiling in tax audit

planning process.
Candidates are advised to prepare adequately for future examination and avail themselves of
the Institute’s Study Pack and previous examinations’ Pathfinders.
6. As a tax auditor, your objective is to gather evidence from your audit of a taxpayer’s
financial records. However, such evidence must be sufficient and appropriate.
Required:
(a) What do you understand by sufficient and appropriate audit evidence? (4 Marks)
(b) Discuss the factors that will affect your decision on what you think is a sufficient
and appropriate audit evidence. (5 Marks)
(c) You are expected to exercise judgement on what you will consider to be a
sufficient relevant and reliable audit evidence. Give six (6) factors that will
influence your judgement? (6 Marks)
(Total 15 Marks)
(a) Sufficiency and appropriateness of audit evidence are interrelated and both apply to
tests of controls and substantive procedures. Sufficiency is the measure of the quantity
of audit evidence while appropriateness refers to the measure of the quality or reliability
of the audit evidence.
(b) Factors that may influence the sufficiency of audit evidence are:
• Materiality of the item being tested;
• Level of audit risk involved;
• Persuasiveness of the audit evidence obtained;
• Population of the item – how large the item is;
• Client’s accounting and internal control system; and
• Client’s financial condition
(c) The auditor’s judgement will be influenced by factors such as:

• The auditor’s knowledge of the business and its environment;
• The risk of misstatement the auditor has identified;
• The persuasiveness of the evidence;
• The nature of the accounting and internal control system;
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• The materiality of the item being examined;
• The experience the auditor gained during previous audit;
• The results of audit procedures; and
• The source and reliability of information available.
EXAMINER’S REPORT
The question tests issues on the sufficiency and appropriate audit evidence. Less than 40%
of the candidates attempted the question. The performance was very poor as only about 10%
scored above 40% of marks obtainable.
Commonest pitfalls in answering the question was the inability of many candidates to
understand the meaning of “Sufficient” and “Appropriate” evidence in auditing a client.
Candidates are advised to prepare well for subsequent examination. They should also make
adequate use of the Institute’s Study Pack and previous examinations’ Pathfinders.
7. Explain the similarities and the differences in the objectives, work and report of:
(a) An internal auditor
(b) An external auditor
(c) A tax auditor (15 Marks)
The similarities and distinction of the purpose and works of an internal auditor, an external
auditor and a tax auditor is presented in tabular form below:
S/N Internal Auditor Statutory Auditor Tax Auditor

1. Internal auditor is an Statutory auditor is an Tax auditor is an
employee of the firm external body/firm employee of Federal
Government/FIRS/SIRS
2. The management of the Statutory Auditors works Tax audit is carried out
organization determines the according to the rules and to enable the tax
work to be undertaken by the regulations of Companies auditor to ascertain
Internal Auditor and Allied Matters Act. whether the taxpayers
has complied with the
provisions of the
relevant tax laws.
3. Internal auditor will examine The external auditor Tax audit is to
issued related to company examines the financial determine the correct
business practices and risks records and produce a amount of tax payable
report expressing his in accordance with the
opinion on the truth and relevant tax laws, rule
fairness of the financial and regulations.
statements.
4. Internal audit are carried out The statutory audit conduct The frequency of tax
throughout the year a single annual audit. audit is determined by
The Corporate Affairs the management of the
Commission (CAC), FIRS relevant tax authority.
and others require
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companies to submit their
audited financial
statements to them on a
yearly basis.
5. Internal auditors are hired by The statutory auditors are Tax auditors are
the company appointed by the employees of the
shareholders relevant tax authority
6. Internal auditors does not The statutory auditors must There is no provision in
necessarily have to be be qualified chartered the tax laws that say a
qualified chartered accountant and must have tax auditor must be a
accountants. practicing license certificate chartered accountant
7. Internal auditors are The statutory auditors are Tax auditors are
responsible to the responsible to shareholders responsible to the
management of the firm management of
relevant tax authority
8. Internal auditors can issue Statutory auditors must use Tax auditor’s report
their findings in any type of specific templates (formats) must be in the format
report format for their audit opinions and prescribed by the
management letters. relevant tax authority
9. Internal audit report are used Statutory audit report is Tax audit report is
by management addressed to the members addressed directly to
– shareholders of the the management of the
company relevant tax authority.
10. Internal auditors can provide Statutory auditors are The tax auditor can be
professional advice and legally constrained from assigned any other
consulting assistance to engaging in other advisory duty by the relevant tax
employees and management services to this client authority.
of the firm.
11. An effective system of To examine the internal Tax audit is to
internal checks to prevent or controls and to ascertain determine the correct
detect errors and fraud and that they safeguard the amount of tax payable
necessary corrections are put company assets against in accordance with the
in place fraud, embezzlement and relevant tax laws.
theft
12. The duties of an internal The duties, rights, powers Tax auditors powers
auditors are governed by the etc. of the statutory auditor and authority are
operational activities of the are governed mainly by the governed by the
company provisions of Companies provisions of the
and Allied Matters Act, relevant tax laws.
Accounting Standard,
Auditing guidelines,
Professional regulations
etc.
EXAMINER’S REPORT
The question test candidates’ understanding of similarities and differences in the objectives,
work and report of internal auditor, external auditor and a tax auditor.
About 80% of the candidates attempted the question. And about 60% scored above 40% of
total marks obtainable.
Page 36 of 65
The commonest pitfall in answering the question was their inability to explain the similarities,
objectives, work and report of external, internal and tax audit.
Candidates are advised to prepare well for subsequent examinations and read the Study Pack
and Pathfinders very well.
Page 37 of 65
PTE II: INTERNATIONAL

TAXATION
TUESDAY 13TH APRIL, 2021 EXAM NO…………………………….
TIME: 3 HOURS.
1. Swagger Inc. is tax resident in Swag, a country known for innovative IT products. The
company’s world-wide income for 2019 year of assessment was assessed to tax in
Swag.
Little Swagger Ltd, a 100% subsidiary of Swagger Inc., is tax resident in Little where it
undertakes software development activities on behalf of the group, and also runs call
centres.
Officials of Little Revenue Service (LRS) agreed that the dealings between Swagger Inc.
and Little Swagger Ltd were at arm’s length and that Swagger Inc. did not directly
execute any contract in Little.
After a tax audit exercise, the LRS established the following facts concerning the
Swagger Group’s activities in Little:
(i) 40% of the group’s employees were based in Little;
(ii) All of the group’s call centres and software development centres were situated
in Little;
(iii) Swagger Inc. was essentially performing only marketing functions while its
contracts with clients in Little were assigned or sub-contracted to Little Swagger
Ltd;
(iv) Under the service agreement between Little Swagger Ltd and Swagger Inc.,
complete control of Little Swagger’s personnel rests with Swagger Inc; and
(v) Little Swagger Ltd carried out its functions for the group using only the
proprietary database and software of Little Swagger Inc. The software and data
were provided free of cost to Swagger Ltd.
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The LRS contended that some of Swagger Inc.’s profits were attributable to and taxable
in Little because Swagger Inc. had a permanent establishment (PE) in Little at all
material times. The LRS further argued that the income earned and taxed in the hands
of Little Swagger Ltd was materially different from the income attributable to the PE of
Swagger Inc. as the latter included some of Little Swagger Ltd.’s tax base.
You have been nominated to analyse the case in a public discuss within the context of
article 5 of the UN Model Tax Convention.
You are to particularly address the following issues:
(a) The possibility of Swagger Inc. having a permanent establishment (PE) in Little
under each type of PE available in the UN Model Tax Convention. (30 Marks)
(b) Whether or not Swagger Inc. (a non-resident company) can still be liable to tax
in Little considering that the worldwide income of its subsidiary (Little Swagger
Ltd) is wholly taxable in that county. (10 Marks)
(Total 40 Marks)
(a) The possibility of Swagger Inc. having a permanent establishment (PE) in Little under
each type of PE available in the UN Model Tax Convention.
The types of Permanent Establishment (PE) available under the UN Model Tax
convention are fixed place, construction site, service and dependent agency. The
applicability of each form of the circumstance of Swagger Inc. is discussed below:
Fixed Place PE
The basic concept of PE is essentially a fixed place PE as can be seen in the definition
of a PE that is a fixed place of business through which the business of an enterprise is
wholly or partly carried on.
The most common type of PE is the fixed place PE considering that business operations
still depend largely on physical presence. As such, a fixed place PE include following:
(i) A place of management;

(ii) A branch;
(iii) An office;
(iv) A factory;
(v) A workshop;
(vi) A mine, an oil or gas well, a quarry or any other place of extraction of natural
resources;
(vii) Farm or forest; and
(viii) Long-term building site.
In order to establish the existence of a fixed place PE, the main tests are:
(i) Existence of a fixed place, that is, a specific geographical location in a

jurisdiction;
(ii) The place is at the disposal of the foreign enterprise; and
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(iii) The business of the foreign enterprise is carried on wholly or partly at the
location.
The is no direct information that Swagger Inc. had physical presence in Little. However,
existence of contracts which were either assigned or sub-contracted to Little Swagger
Ltd. raises the question as to how Swagger Inc. solicited for, negotiated and signed
those contracts. If its personnel did this directly, it might be possible to argue that
there was fixed place PE.
Secondly, all software development activities and call centres were located in Little. If
these facilities were placed at the disposal of Swagger Inc. for the purposes of its
marketing operations, then it may be implied that the company had taxable presence
in Little.
Construction Site or Project PE

A building site, a construction, assembly or installation project or supervisory activities
in connection therewith will constitute a PE provided relevant conditions of time
threshold are met.
The business operations of the Swagger Group did not include construction, as such
this is not applicable in its case.
Service PE
According to the UN MTC, the furnishing of services, including consultancy services, by
an enterprise through employees or other personnel engaged by the enterprise for such
purpose, shall constitute a PE for the foreign company if relevant time threshold is met.
Swagger Inc. had contracts with local clients which were subcontracted to Little
Swagger Ltd. The foreign company is the service provider notwithstanding that it
subcontracted the work to its subsidiary. There is the possibility that the employees of
Little Swagger Ltd might constitute a service PE for Swagger Inc. by carrying out the
services on its behalf.
Note that in relation to who provides the service, it might not be necessary for
employees of Swagger Inc. to have been physically involved in rendering the service.
Dependent Agency PE
The UN MTC in article 5(5) provides that where a person is acting in a Contracting State
on behalf of an enterprise, that enterprise shall be deemed to have a permanent
establishment in that state in respect of any activities which that person undertakes for
the enterprise. The situation is referred to as dependent agency PE (DAPE).
Swagger Inc. won some contracts in Little which were either assigned or sub-contracted
to Little Swagger Ltd. In the case where some other persons negotiated the contracts
on its behalf, those persons may create a dependent agency PE for Swagger Inc.
(b) Whether Swagger Inc. (a non-resident company) can still be liable to tax in Little
considering that the worldwide income of its subsidiary (Little Swagger Ltd) is wholly
taxable in that county.
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A non-resident company can be taxed in the country where it has a subsidiary on the
profits attributable to the PE formed by the company. The fact is that the subsidiary
(in this case Little Swagger Ltd) is being taxed in Little.
The subsidiary is an independent and a distinct entity which is taxable on its income.
The foreign entity (Swagger Inc.) is equally taxable on the profits that are attributable
to its PE in the country, notwithstanding that the subsidiary is situated therein.
The income of the subsidiary is not taxable in the hands of the non-resident principal
and vice-versa. Thus, there is no double taxation. In any case, the above stated
principle requires that a PE be found to exist.
EXAMINER’S REPORT
The question tests candidates’ knowledge of the basic rules of permanent establishment and
a situation when a non-existent company can be taxed in a country where it has a subsidiary.
Candidates’ performance was poor as most of them that attempted the question scored less
than 20% of the allocated marks.
Most of the candidates displayed poor knowledge of the basic rules of permanent
establishment.
Candidates are advised to read the Institute’s Pathfinders, Study Packs and other relevant
texts in their preparations for the Institute’s examinations.
2. (a) From an international tax perspective, explain “nexus”. (5 Marks)
(b) How would you determine the “nexus” status of a company or an individual?
(10 Marks)
(Total 15 Marks)
(a) From an international tax perspective, explain “nexus”.
“Tax Nexus” or “genuine link” refers to the existence of sufficient connection between
a taxing state and a person, property or transaction for that state to exercise its taxing
rights.
Nexus describes whether for a given transaction, the taxpayer, property or activity has
a sufficient connection with the taxing state for it to come within that state’s tax
jurisdiction.
Now that the world economy has become extremely digitalised, tax nexus, essentially,
depends on physical presence for persons, property or transaction.
Generally, nexus can be classified into two namely: personal nexus (e.g. residence) and
a territorial nexus (e.g. source). This principle is applicable to individual and corporate
taxpayers.
(b) How would you determine the “nexus” status of a company or an individual?
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The nexus status of a company is determined thus:
(i) Ascertain the place of incorporation – generally, a company is deemed to have
tax nexus in the country in which it was incorporated. Such companies are
deemed ordinarily resident in that country and the country would exercise taxing
right over its worldwide income;
(ii) Ascertain the place of effective management – the place of effective

management of a company refers to that place where critical or strategic
decisions concerning the existence and operations of the company are taken.
Having the place of effective management of a company in a country may give
that country the taxing right over its income depending on the tax laws of the
country; and
(iii) Ascertain the place of principal activity – the place of principal activity is where
the main business of the company is carried out. In the case of a foreign
company, the place of principal activity would be the PE. The country in which
the place of principal activity is sighted would ordinarily claim taxing right over
the profits attributed to that activity carried on in the country.
The nexus status of an individual is determined thus:

(i) Ascertain the location of the person’s permanent home or abode; and
(ii) Ascertain if the individual was present in the jurisdiction for the minimum time
threshold prescribed by the relevant tax law.
EXAMINER’S REPORT
The question tests candidates’ knowledge of “tax nexus” with emphasis on the determination
of the nexus status of a company or an individual.
Candidates’ commonest pitfall was their inability to define “nexus”, let alone determine the
“nexus status” of a company or an individual.
Candidates are advised to make use of the Institute’s Study Packs, Pathfinders and other
relevant texts when preparing for future examinations.
3. A debate is currently going on in the international tax arena on the need to introduce a
regime of mandatory binding arbitration for the purposes of achieving timely,
effective and efficient tax dispute resolutions.
(a) List Five (5) possible benefits of such dispute resolution regime. (5 Marks)
(b) Discuss briefly Five (5) reasons why developing countries may be disadvantaged
under such a regime. (10 Marks)
(Total 15 Marks)
(a) The advantages of such tax dispute resolution regime include:
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(i) Uniform and even application of tax rules;
(ii) Global tax certainty;
(iii) Timely dispute resolution;
(iv) Avoidance of double taxation;
(v) Conducive global investment environment;
(vi) Reduced cost of compliance;
(vii) Improved voluntary tax compliance; and
(viii) Improved confidence in the tax system globally.
(b) Reasons why developing countries may be disadvantaged under such a regime include:
(i) Loss of tax sovereignty: developing countries may lose the ability to apply their
tax rules as intended since they must accept the rulings pronounced by the
international arbitrators;
(ii) Capacity: many developing countries do not have developed adequate capacity
to participate in international arbitration. As such, they may not be able to
effectively present or defend cases before the international arbitration;
(iii) Costs: most arbitration sittings are done outside the jurisdictions of developing
countries. As such, cost of travelling to participate at the arbitration sittings may
become prohibitive;
(iv) Justice or fairness: there are concerns that the rulings of an arbitration
conducted outside the shores of developing countries and by persons of other
lands may be skewed in favour of developing countries; and
(v) Delayed dispute resolution: International arbitration process is an additional
layer to the domestic dispute resolution system.
As such, referral of tax disputes to international tax arbitration may prolong the
time it takes for such disputes to be resolved.
EXAMINER’S REPORT
The question tests candidates’ understanding of international tax dispute resolution
mechanisms.
The candidates’ performance was poor as most of them that attempted the question scored
less than 30% of the allocated marks.
The commonest pitfall of the candidates was their inability to explain the reasons why
developing countries may be disadvantaged under such a regime.
Candidates are advised to read widely before sitting for the Institute’s examinations.
4. Explain briefly the following:
(a) Controlled Foreign Corporation (CFC) (3 Marks)
(b) Active Income (3 Marks)
(c) Passive Income (3 Marks)
(d) Tax race to the bottom (3 Marks)
(e) Fiscal evasion (3 Marks)

Page 43 of 65
(Total 15 Marks)
(a) Controlled Foreign Corporation or Company (CFC)
A controlled foreign corporation is any company that is resident in one country but
effectively owned or controlled by persons resident in another country. Ownership or
control of the company of the company is based upon the ownership and control of the
company’s equity.
For example, if a group of Nigeria tax residents (individuals or corporate) control the
majority of the shares of a company registered and operating in Ghana, such a company
is a CFC.
(b) Active Income

Active income refers to income earned by rendering a service or producing a valuable
article. Active income is income earned for the amount of work done or value created.
As such, exertion of physical or mental effort is required in order to generate active
income.
Business profits, technical, management or professional service fees, wages, salaries,

commissions, etc. are examples of active income.
(c) Passive Income

Passive income refers to regular earnings from a source other than employment or
business operations. It is income generated without carrying out business, trade or
vocation; in other words, there is no exertion of physical or mental effort.
Examples of passive income include dividend, interest, rent, royalty and the like.
(d) Tax Race to the Bottom

Tax race to the bottom refers to a competitive state where a company or nation
attempts to undercut competitors. The race to the bottom results from cutthroat
competition.
With respect to tax, it is a race among countries to entice companies to move their
operation to their jurisdiction by relaxing tax rules instead of refining them. Relaxing
tax rules involves lowering tax rates, granting tax holidays, etc.
A country engaged in tax competition would cut rate, grant tax holidays, relax tax
compliance rules, etc. in order to attract companies. The result of such practice is loss
of tax revenue that would have accrued to the country.
The bottom is reached when retaliatory rate reduction or tax waivers effectively among
nations reduces tax revenue to a level where the countries involved are unable to
provide relevant public goods to their citizens. As such, the countries would head
downwards or fall.
(e) Fiscal Evasion

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Fiscal evasion is the same as tax evasion. It is an illegal activity in which a person or
entity refused, neglected or otherwise or otherwise failed to pay the true amount of tax
liability. In other words, it refers to the efforts by individuals, firms, and other entities
to evade the payment of taxes by illegal means.
Tax evasion usually entails taxpayers deliberately misrepresenting or concealing the
true state of their affairs to the tax authorities to reduce their tax liability. Acts of tax
evasion include dishonest tax reporting (such as under-declaring income, profits or
gains; or overstating deductions), refusal or failure to pay tax due.
EXAMINER’S REPORT
The question tests candidates’ knowledge of key terminologies, such as controlled foreign
corporation (CFC), active and passive income, tax race to the bottom and fiscal evasion.
The commonest pitfalls of the candidates were their inability of explain “Controlled Foreign
Corporation” and “Tax race to the bottom”.
Candidates are advised to read all the topics in the syllabus before sitting for the Institute’s
examinations.
5. Within the context of corporate income tax, explain briefly the following terms and their
relationships, if any:
(a) Place of incorporation (3 Marks)
(b) Place of central management (3 Marks)
(c) Place of seal (3 Marks)
(d) Place of head office (3 Marks)
(e) Place of principal activity (3 Marks)

(Total 15 Marks)
(a) Place of incorporation
The place of incorporation refers to the country where a company was incorporated.
Essentially, a company is a corporate citizen of the country under whose laws it was
incorporated.
The place of incorporation is one of the factors used in determining whether or not a
company is liable to tax in a country, for example, a company incorporated in Nigeria
is liable to tax on its worldwide income in Nigeria.
(b) Place of central management

Place of central management refers to the location (in a country) where the operations
of a company or a group of companies are centrally managed and coordinated. Critical
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and strategic policy or operational decisions concerning a company or group are taken
at the place of central management.
The place of central management may as well be the place of effective management if
all decisions pertaining to the company’s existence are taken there.
Where the central management results into effective management of the company in
that place, the company may become liable to tax in the country on that basis.
(c) Place of seal

The place specified on a document where a seal is located or is to be located. It is
usually the corporate headquarters of the company or where the company secretariat
is located.
If there is no other business activity of the company carried out at the place of seal,
the place of seal may not be enough for a company to become liable to tax in the
country where the place of seal is located.
(d) Place of head office

The place of head office is the country where the head office of a company is located;
it is not necessarily the place of incorporation.
The head office generally controls and coordinates the activities of a company. As such,
depending on the facts and circumstances, the place of head office may be the place
of effective management. In the event that effective management takes place at the
head office, the company may become liable to tax on its worldwide income in the
country.
(e) Place of principal activity

The place of principal activity is that place where a person carries out his business,
trade, vocation or profession. In order words, the place where the person generates
its income.
In the case of foreign company, the place of principal activity would be its permanent
establishment (PE).
The concept of place of principal activity is central to the exercise, by a source country,
of jurisdiction over the income of a foreign company or non-resident individual.
EXAMINER’S REPORT
The question tests candidates’ understanding of key terminologies relating to the basic rules
of permanent establishments.
The candidates’ performance was poor as most of them that attempted the question scored
less than 40% of the allocated marks.
The commonest pitfall of the candidates was their inability to explain how each of the
terminologies is used in determining whether or not a company is liable to tax in a country.
Candidates are advised to prepare adequately for the Institute’s examinations to ensure good
performance.
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6. Discuss each of the transfer pricing methods prescribed by the Income Tax (Transfer
Pricing) Regulations, 2012 and 2018, highlighting one relative strength and weakness
of each method with regard to the arm’s length principle. (15 Marks)
SOLUTIONT O QUESTION 6
The transfer pricing methods prescribed in the Income Tax (Transfer Pricing) Regulations 2018
are:
(a) Comparable uncontrolled price method (CUP)
The CUP method compares the price charged for property or service transferred in a
controlled transaction (i.e. between associated enterprises) to the price charged for
property or services transferred in a comparable uncontrolled transaction (i.e. between
independent persons).
Any difference between the two prices may indicate that the conditions of the
commercial and financial transactions of the associated enterprises are not at arm’s
length, and that the price in the uncontrolled transactions may need to be substituted
for the price in the controlled transaction.
Strengths:
(i) The CUP method is relative simple to apply.
(ii) It is not affected by differences in accounting treatment or reporting of other
transactions.
Weaknesses:
(i) The application of the CUP method requires a high degree of comparability of
product as such, comparable may be hard to find.
(b) Resale price method (RPM)

The RPM is a method whereby by resale margin that a purchaser of a property in a
controlled transaction earns from reselling the property in an uncontrolled transaction
is compared to the resale margin earned in a comparable uncontrolled purchase and
resale transaction.
Appropriate arm’s length resale price margin is subtracted from the sale price to arrive
an arm’s length price for the original transfer of property between the associated
enterprises. This method is probably most useful where it is applied to marketing
operations.
Strengths:
(i) The RPM can be effectively applied with less product comparability if there is
functional comparability.
(ii) Only the financial indicator of one of the parties to the controlled transaction (the
tested party) is required for examination; as such, it can still be applied where
one of the parties has complex or interrelated activities.
Weaknesses:
(i) It is difficult to apply where the reseller performs additional functions such as
alteration to the product resold.
(ii) It be difficult to obtain comparable gross margin data.
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(iii) Being a one-sided method, it is possible for either party to the controlled
transaction to be left with an extreme or improbable profit result.
(c) Cost plus method (CPM)

The CPM is a method in which the mark up on the costs directly and indirectly incurred
in the supply of goods, property or services in a controlled transaction is compared with
the mark up on those costs directly or indirectly incurred in the supply of goods,
property or services in a comparable uncontrolled transaction.
The cost plus method begins with the cost incurred by the supplier of property (or
services) in a controlled transaction for property transferred or services provided to an
associated purchaser. An appropriate mark-up that would guarantee an appropriate
profit, in the light of functions performed and market condition, is then added to the
cost. What is arrived at after adding the mark-up to the costs would be regarded as an
arm’s length price of the original controller transaction.
This method is most useful where semi-finished goods are sold between associated
parties, where associated parties have concluded joint facility agreements or long-term
buy-and-supply arrangements, or where the controlled transaction is the provision of
services.
Strengths:
(i) The CPM is simple to apply.
(ii) It can be effectively applied with less product comparability provided there is
functional comparability.
(iii) Only the financial indicator of one of the parties to the controlled transaction (the
Weaknesses:
(i) Difficult in obtaining comparable mark-up data.
(ii) Being a one-sided method, it is possible for either party to the controlled
(d) Transactional net margin method (TNMM)

The TNMM is a method in which the net profit margin relative to the appropriate base,
including costs, sales or assets that a person achieves in a controlled transaction is
compared with the net profit margin relative to the same basis achieved in a comparable
uncontrolled transaction.
The TNMM operates in a similar manner to the cost plus and resale price methods. A
functional analysis of the controlled and uncontrolled transactions is required to
determine whether the transactions are comparable and what adjustments may be
necessary to obtain reliable results.
Strengths:
(i) Net profit indicators are less affected by transactional differences than is the case
with price, as used by the CUP method.
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(ii) Net profit indicators may be more tolerant to some functional differences
between the controlled and uncontrolled transactions than gross profit margins.
(iii) Only the financial indicator of one of the parties to the controlled transaction (the
Weaknesses:
(i) TNMM is easily influenced by some factors that would either not have an effect,
or have a less substantial or direct effect, on price or gross margins between
independent parties.
(ii) It requires information on uncontrolled transactions that may not be available at
the time of the controlled transactions and enough specific information on profits
attributable to controlled transactions including operating expenses, may not be
readily available.
(iii) Net profit indicators may be affected by forces operating in the industry.
(iv) It is difficult to apply where both parties to the controlled transaction make
unique and valuable contribution to the transaction.
(v) It cannot be applied in the event of highly integrated operations.
(vi) Being a one-sided method, it is possible for either party to the controlled
(e) Transactional profit split method (TPSM)

TPSM is a method in which the division of profit or loss that a person achieves in a
controlled transaction is compared with the division of profit or loss that would be
achieved when participating in a comparable uncontrolled transaction.
The profit split method seeks to eliminate the effect on profits of special conditions
made or imposed in a controlled transaction by determining the division of profits that
independent enterprises would have expected to realise from engaging in the
transaction. It may also be a split of losses.
Strengths:
(i) A main strength is that it offers a solution for highly integrated operations for
which a one-sided method would not be appropriate.
(ii) It is applicable when both parties make valuable contributions to the transaction.
(iii) With TPSM, it is less likely that either party to the controlled transaction will be
left with an extreme or improbable profit result.
Weaknesses:
(i) Difficulty in accessing relevant information residing with offshore affiliates.
(ii) Determining appropriate basis for allocating operating expenses.
EXAMINER’S REPORT
The question tests candidates’ knowledge of transfer pricing methods, strengths and
weaknesses of each method, and arm’s length principle.
than 331/3% of the allocated marks.
Most of the candidates’ displayed poor understanding of the strengths and weaknesses of each
transfer pricing method.
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Candidates’ should endevour to read all the topics in the syllabus when preparing for the
Institute’s examinations.
7. (a) Under the Income Tax (Country-by-Country Reporting) Regulations, 2018,

ultimate parent entity of a Multinational Enterprise (MNE) Group has the primary
responsibility to file Country-by-Country Reports (CbCR).
Required:
Under what conditions will a constituent entity of an MNE be required to file the
CbCR report instead of the ultimate parent entity? (9 Marks)
(b) Explain briefly what the tax authorities use the CbCR information for?
(6 Marks)
(Total 15 Marks)
(a) The conditions, under which a constituent entity of an MNE may be required to file the
CbCR instead of the ultimate entity include:
(i) Where, the ultimate parent company of the group is not obliged to submit CbCR’s
in its home jurisdiction;
(ii) Where FIRS and the tax authority in the ultimate parent company’s home
jurisdiction have not activated the CbCR exchange relationship as at the time the
disclosures are due; and
(iii) Where the tax authority in the ultimate parent company’s jurisdiction has
suspended automatic exchange of CbCRs with Nigeria.
(b) (i) The Service shall only use the Country-by-Country Report for purposes of
assessing high level transfer pricing risks and other base erosion and profit
shifting related risks in Nigeria.
(ii) It assists tax authorities in ascertaining global allocation of income and taxes
within MNEs by the calculation of certain financial ratios.
EXAMINER’S REPORT
The question tests candidates’ knowledge of the Income Tax (Country – by Country Reporting)
Regulations, 2018, in relation to the filing of Company – by – Company Reports (cbcRs) by
constituent entities of multinational enterprises (MNEs) instead of ultimate parent entities.
Candidates are expected to state the reasons why tax authorities usually expect relevant
taxpayers to file these reports at the tax office.
Most of the candidates were not able to explain the conditions when a constituent entity of an
MNE is required to file the CbCR instead of the ultimate parent entity. They could also not
explain what tax authorities use the CbCR information for.
Candidates are advised to read the Institute’s Pathfinders and Study Packs when preparing for
future examinations.
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PTE II: FINANCIAL AND

TAX ANALYSIS
WEDNESDAY 14TH APRIL, 2021 EXAM NO…………………………….
1. The five year summarized financial statements of Libra Drinks Nigeria Limited is shown
below:
Income statements:
Years 2015 2016 2017 2018 2019
N’m N’m N’m N’m N’m
Revenue 489.8 583.5 665.4 716.6 797.3
Cost of sales 286.8 (332.7) (381.5) (400.5) (419.6)
Gross profits 203.0 250.8 283.9 316.1 377.7
Marketing and distribution expenses (72.7) (94.3) (104.6) (108.4) (129.5)
Administrative expenses (22.7) (26.6) (30.1) (36.7) (38.5)
Finance expenses (1.7) (4.7) (10.8) (23.8) (22.1)
Profit before tax 105.9 125.2 138.4 147.2 187.6
Income tax expense (8.5) (19.5) (18.9) (11.0) (27.9)
Profit after tax 97.4 105.7 119.5 136.2 159.7

Years 2015 2016 2017 2018 2019
N’m N’m N’m N’m N’m
Assets:
Non-current assets:
Property, plant and equipment 275.1 310.8 329.4 337.6 345.7
Current assets:
Inventories 49.5 43.9 49.3 54.8 54.0
Trade receivables 54.9 67.3 89.4 111.6 122.3
Prepayments 1.3 1.5 1.5 2.0 2.6
Cash and cash equivalents 5.3 19.1 33.2 18.5 64.7
Total current assets 111.0 131.8 173.4 186.9 243.6
Total assets 386.1 442.6 502.8 524.5 589.3
Equity:
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Share capital 2.0 2.0 2.0 2.0 2.0
Retained earnings 113.5 139.2 162.7 194.9 244.5
Total equity 115.5 141.2 164.7 196.9 246.5
Liabilities:
Long term loans 129.4 117.8 132.3 91.9 62.6
Employee benefit 3.6 5.4 9.1 9.2 11.9
Deferred tax liabilities 15.3 24.8 30.5 26.3 32.8
Total non-current liabilities 148.3 148.0 171.9 127.4 107.3
Current liabilities:
Bank overdraft -- 24.7 -- 6.2 1.5
Current liabilities 11.9 11.8 14.0 17.4 25.2
Short term loans 13.3 17.3 4.7 63.6 85.6
Trade payables 95.6 97.7 145.4 110.3 120.1
Provisions 1.5 1.9 2.1 2.7 3.1
Total current liabilities 122.3 153.4 166.2 200.2 235.5
Total equity and liabilities 386.1 442.6 502.8 524.5 589.3
Note:
Inventories:
Inventories comprise:
Finished goods 5.1 4.7 4.6 4.3 4.3
Raw materials:
Concentrate 15.0 12.6 12.5 16.0 15.5
Sugar 8.0 4.2 7.1 7.7 7.5
Components:
Plastic bottles 20.3 21.2 24.0 25.2 25.2
Covers 1.1 1.2 1.1 1.6 1.5
49.5 43.9 49.3 54.8 54.0
Required:
(a) Discuss the steps necessary to carry out a financial statements analysis.
(5 Marks)
(b) Prepare a common size analysis of Libra Drinks Nigeria Limited for 2015 to 2019.
(10 Marks)
(c) What is the company’s net operating cycle in 2019? (10 Marks)
(d) Show the trend analysis of the company’s performance, efficiency and short and
long term financial position, using ratios. (15 Marks)
Note: Your solutions should be to one decimal place.

(Total 40 Marks)
(a) The steps necessary in carrying our financial statements analyses are:
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(i) Determining the user of the analysis. This is done by asking the following
questions:
• Who is the user?
• What information is the user interested in?
• Why was the user requested for this report?
• How should the information be presented to the user?
(ii) Establish some background information about the entity you are analysing its
financial statements. This is done by asking the following questions:
• What industry does the company operate in?
• When is the entity’s financial year end?
• Is the entity’s business seasonal?
• Have there been any key transactions during the year that affect comparisons
with previous years?
(iii) Carry out accounting analysis. This is done by performing a thorough review of
the financial transactions and events that result in the financial statements to
determine whether the figures in the financial statements reflect the economic
reality of the entity. It includes the evaluation of the entity’s accounting risks
and earnings quality, estimating the entity’s earnings power and making
necessary adjustment to the financial statements to both better reflect the
economic reality and make the financial statements useful for financial analysis.
(iv) Carry out your financial analysis on the adjusted financial statements.
(b) Libra Drinks Nigeria Limited common size members Libra Drinks Nigeria Limited
Common size analysis 2015 – 2019
Years 2015 2016 2017 2018 2019
Revenue 100.0 100.0 100.0 100.0 100.0
Cost of sales 58.6 57.0 57.3 55.9 52.6
Gross profit 41.4 43.0 42.7 44.1 47.4
Marketing and distribution expenses 14.8 16.2 15.7 15.1 16.2
Administrative expenses 4.6 4.5 4.5 5.1 4.8
Finance expenses 0.3 0.8 1.6 3.3 2.8
Profit before income tax expenses 21.6 21.5 20.8 20.5 23.5
Income tax expenses 1.7 3.4 2.8 1.5 3.5
Profit after tax expenses 19.9 18.1 18.0 19.0 20.0
Assets
Non-current assets
Property, plant and equipment 71.2 70.2 65.5 64.4 58.7
Current assets:
Inventories 12.8 9.9 9.8 10.4 9.2
Trade receivables 14.2 15.2 17.8 21.3 20.7
Prepayments 0.3 0.3 0.3 0.4 0.4
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Cash and cash equivalent 1.4 4.3 6.6 3.5 11.0
Total current assets 26.8 29.8 34.5 35.6 41.3
Total assets 100.0 100.0 100.0 100.0 100.
Equity:
Share capital 0.5 0.5 0.4 0.4 0.3
Retained earnings 29.4 31.5 32.4 37.2 41.5
Total equity 29.9 32.9 32.8 37.6 41.8
Liabilities
Non-current liabilities
Long term loans 33.5 26.6 26.3 17.5 10.6
Employee benefit 0.9 1.2 1.8 1.7 2.0
Deferred tax liabilities 4.0 5.6 6.1 5.0 5.6
Total non-current liabilities 38.4 33.4 34.2 24.2 18.2
Current liabilities:
Bank overdraft -- 5.6 -- 1.2 0.3
Short term loans 3.1 2.7 2.8 3.3 4.3
Trade payables 24.8 22.1 28.9 21.0 20.4
Provisions 0.4 0.4 0.4 0.5 0.5
Total current liabilities 31.7 34.7 33.1 38.2 40.0
Total equity and liabilities 100.0 100.0 100.0 100.0 100.0
(c) Net operating cycle for 2019

Net operating cycle is calculated as follows:
Net operating cycle = Number of days of inventory + Number of days receivables –
number of days payable
Calculation of number of days in inventory:

= Inventory
Average list of goods sold per day
= Inventory
Cost of goods sold/365
= 54
419.6/365
= 47 days
Calculation of number of days in receivables

= Accountings receivables
Average days of sales on credit
= Accounting receivables
Sales on credit/365
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= 122.3
797.3/365
= 56 days
Calculation of number of days in payable
= Accounts payable
Average days purchases
= Accounts payable
Purchases/365
Purchases = cost of sales – opening stock + closing stock.

= 419.6 – 54.8 + 54 = 418.8
Number of days payable

= 120.1
418.8/365
= 105 days
Therefore, act operating cycle

= {(47 + 56) – 105} days
= -2days
(d) Trend analysis using ratios

2015 2016 2017 2018 2019
Performance:
(i) Gross 203.0 250.8 283.9 316.1 377.7
% % % % %
profit 489.9 583.5 665.4 716.6 797.3
margin
= 41.44% 42.98% 42.67% 44.11% 47.37%
(ii) Net profit 105.9 125.2 138.4 147.2 187.6
% % % % %
margin 489.8 583.5 665.4 716.6 797.3
= 21.62% 21.46% 20.80% 20.54% 23.53%
(iii) Returns on 102.6 129,9 149.2 171.0 209.7

% % % % %
capital 263.8 289.2 336.6 324.3 353.8
employed
= 40.79% 44.92% 44.32% 52.73% 59.27%
Efficiency:
(i) Net asset 489.8 583.5 665.4 716.6 797.3
% % % % %
turnover 263.8 289.2 336.6 324.3 353.8
= 1.9 2.0 2.0 2.2 2.3
(ii) Inventories 286.8 332.7 381.5 400.5 419.6
% % % % %
turnover 49.5 43.9 49.3 54.8 54.0
= 5.8 7.6 7.7 7.3 7.8
(iii) Receivable 489.8 583.5 665.4 716.6 797.3
% % % % %
turnover 54.9 67.3 89.4 116.6 122.3
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= 8.9 8.7 7.4 6.1 6.5
(iv) Payable 286.8 332.7 381.5 400.5 419.6
% % % % %
turnover 95.6 97.7 145.4 110.3 120.1
= 3.0 3.4 2.6 3.6 3.5
Position
(i) Current 111.0 131.7 173.4 186.9 243.6
% % % % %
ratio 122.3 153.4 166.2 200.2 235.5
= 0.90:1.00 0.86:1.00 1.04:1.000 0.93:1.00 1.03:1.00
(ii) Acids test 61.5 87.8 124.1 132.1 189.6
% % % % %
122.3 153.4 166.2 200.2 235.5
= 0.50:1.00 0.57:1.00 0.75:1.00 0.66:1.00 0.81:1.00
(iii) Gearing 148.3 148.0 171.9 127.4 107.3
% % % %
ratio 263.8 289.2 336.6 324.3 353.8
= 0.56 0.51 0.51 0.39 0.30
(iv) Interest 107.6 129.9 149.2 171.0 209.7
cover 1.7 4.7 10.8 23.8 22.1
= 63.3 27.6 13.8 7.2 9.5
EXAMINER’S REPORT
The question is in four parts. Part (a) test candidates’ knowledge of steps necessary to carry
out financial analysis, part (b) is to prepare common size ratio, part (c) is on computation of
operating cycle while part (d) is preparation of trend analysis using financial performance
ratios.
The candidates show clear understanding of the question since the question is straight
forward, however, the candidates could not perform well, therefore, performance was
average.
The commonest pitfalls of the candidates were:

(i) In part (a) of the question most candidate cannot list the requirements of financial
analysis;
(ii) In part (b) of the question, majority of the candidates exhibit inadequate knowledge of
the question; and
(iii) In part (d) of the question majority of the candidates were unable to compute the ratios
correctly.
Candidates are advised to study diligently for good performance in future examination.
2. Each corporate organisation must plan so as to reduce its overall tax liability.
Required:
(a) Itemise Seven (7) components of corporate tax planning. (7 Marks)
(b) List Eight (8) objectives of corporate tax planning. (8 Marks)

(Total 15 Marks)
(a) Corporate tax planning includes:
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(i) Proper understanding of the provisions of the tax laws;
(ii) Analysis of, management and optimisation of the effective tax rate (ETR);
(iii) International tax strategy, that is, choice of the method used to open
offices/plants and determine location;
(iv) Tax management;
(v) Computation of taxable income
(vi) Handling of challenges associated with tax consolidation;
(vii) Optimisation of financing and management of debt ratios;
(viii) Management of flow of dividend, interest and royalties;
(ix) Optimisation of tax losses/securing the deductibility of interest expenses and
acquisition costs;
(x) Taking benefits of tax agreements, international double taxation, etc;
(xi) Taking into consideration tax effect of acquisition, disposal of business and/or
business restructuring;
(xii) Management of relationship with the tax authorities for tax optimisation by
avoiding late filings, late payment of taxes, etc; and
(xiii) Giving consideration to all tax incentives available with a view to take advantage
of these incentives as much as possible.
(b) Objectives of tax planning are:

(i) Lower current year’s tax;
(ii) Defer current year’s tax to future years;
(iii) Reduce tax in future years;
(iv) Maximise tax saving from allowable deduction;
(v) Taking advantage of all available tax incentives;
(vi) Maximise the amount of wealth that stays in your family;
(vii) Free up cash for investment, business or needs by deferring your tax liability;
and
(viii) Manage cash flow by projecting when tax payments will be required.
EXAMINER’S REPORT
The part (a) of the question tests candidates on the component of tax planning while part (b)
was on the objectives of tax planning. About 95% of the candidates attempted the question.
Majority of the candidates understood the requirements of the question and performance was
average. The commonest pitfall of the candidates was their inability to distinguish between
objectives and components of tax planning.
Candidates need to read very well and identify the distinguishing features of component of tax
planning and objectives of tax planning.
3. It is a common knowledge that there are always gaps in accounting profits and tax
profits.
Required:
Discuss the various reasons for gap in company’s accounting profit and tax profit.
(15 Marks)
Accounting profit is calculated based on revenues and related costs of doing business. There
are several components that go into calculating accounting profit. Gross profit is the difference
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between revenue and cost of sale, or cost of producing the goods. Companies subtract all
other expenses from gross profit to arrive at accounting profit before tax expense.
Operating expenses include rent, utilities, interest depreciation amortisation, salaries and other
day-to-day costs of running the business. The matching principle is followed in reporting
accounting profit. This principle ensures that income generated by on output and the expenses
incurred for that output are recognized in the same period whether they were paid for or not
during the period.
Each company is allowed under the tax law to select the date for its financial reporting, i.e. its
accounting period which sometimes differ from the government fiscal year. Corporate financial
reporting is required to follow accounting standards that have been set by independent
accounting standard body. The purpose of these standards is to ensure uniformity of
companies’ financial statements and accounting methods.
However, tax rules are contained in tax laws as promulgated by the country’ legislature and
are mostly different from the requirements of accounting standards. Therefore, it is possible
for the financial report of a company to differ from the tax returns submitted to tax authority
because of the different accounting methods.
The gap or difference between accounting and tax profit generally results from three
categories of difference. These are:
(i) Temporary differences;
(ii) Permanent differences; and
(iii) Loss carry forward/carry backs
Temporary differences are defined by the accounting standard as being differences between
the carrying amount of an asset (or liability) within the statement of financial position and its
tax base, i.e. the amount at which the asset (or liability) is valued for tax purposes by the
relevant tax authority.
Permanent differences occur as a result of differences between income as reported in the

financial statement and income as reported based on tax law, as a result of some expenses
that are disallowed for tax purpose but included in the determination of income in the financial
statements. Also, there are some expenses and or income reported on the tax return which
are never reported on the statement.
EXAMINER’S REPORT
The question tests the candidates’ knowledge of the various reason why accounting profit
differs from tax profit. The question is very straightforward. Only about 40% of the candidates
attempted the question and performance was below average. The commonest pitfall was that
the candidates mistook the factors that can cause difference as only depreciation and capital
allowance.
Candidates are advised to read the study pack and study very well for future examination.
4. (a) There are many provisions for tax incentives under the Nigeria tax laws.
Required:
List Five (5) tax free dividends incentives under the Nigeria tax law. (5 Marks)
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(b) Many countries, including Nigeria, always go into tax agreements, called treaties.
Required:
List Three (3) reasons why government enters into tax treaty. (3 Marks)
(c) There are many anti-avoidance regulations under the Nigeria tax laws.
Required:
Discuss anti-avoidance scheme on payment of dividend to shareholders under
the Nigerian Companies Income Tax Act. (4 Marks)
(d) Discuss how profits are taxed and distributed to shareholders of limited liability
companies. (3 Marks)
(Total 15 Marks)
(a) The incentives on tax free dividend in the Nigeria tax laws are:
(i) Three years tax free dividend on foreign currency equity ordinary shares
imported into Nigeria;
(ii) Five years tax free dividend for companies in priority sectors in Nigeria such as
agricultural production and processing, petrol chemical or liquefied natural gas
production;
(iii) Tax free dividends for pioneering companies for the period of tax holidays;
(iv) Dividend distributed by unit trust companies;
(v) Five years tax incentive for dividends from companies in the manufacturing
sector;
(vi) Dividends received from investments in wholly export oriented businesses.
(vii) Dividend, interest, rent and royalty derived from foreign companies; and
(viii) Profit of the Nigerian company in respect of goods exported from Nigeria
provided that the proceeds are repatriated to Nigeria and used for the purchase
of raw materials, plant equipment and spare parts.
(b) Reasons only government enters into tax agreement are:

(i) To eliminate double taxation through the granting of credit for the tax paid by a
Nigeria company in the other country;
(ii) To protect tax incentive legislations of the government which would otherwise
be nullified by the tax measure of the other country;
(iii) To allow for stable tax regime; and
(iv) The concession of treaty-rules for investment income which are lower than
domestic rates and are available to treaty partners only.
(c) Under the Nigerian Companies Income Tax Act, section 19(a) and (b), we have
provision for anti-avoidance in respect to dividends payment. It provides that:
“Where a dividend is paid out of profits on which tax is not payable due to:
- No total profit; or
- Total profits which are less than the amount of dividend which is paid, whether or
not the recipient of the dividend is a Nigeria company.
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The company paying the dividend shall be charged to tax at normal company rate
(which is 30%) as if such dividend is the total profits of the company for the year of
assessment.
(d) A limited liability company is a separate legal entity from its owners, called shareholders.
A limited liability company is assessable to tax on the profit it made on yearly basis. It
is the after tax profit that is available for distribution between the shareholders.
However, a limited liability company may choose not to distribute any part of the after
tax profit. The company’s board, subject to the approval of the shareholders determine
how much of the after tax profits that would be distributed to the shareholders and the
form they will be distributed.
A company can distribute profits to shareholders in two forms:

(i) Cash distribution is the form of dividends, where cash is distributed as dividend,
a tax of 10% is deducted inform of withholding tax which is treated as a final tax
in the hands of the shareholders. This is paid to the relevant tax authorities.
(ii) Capital distribution in form of bonus shares or script issues. In this case, cash is
not paid to the shareholders, but the amount that could have been paid as
dividend is used to credit the accounts of the shareholders with additional shares
in proportion to their shareholdings. In this case, a shareholder who is in need
of cash can early sell the additional shares on the stock exchange. At present,
the gain from such disposed of is not subject to capital gain tax.
EXAMINER’S REPORT
The question was in four parts. Part (a) test the candidates’ knowledge about free dividend
incentive, part (b) was on tax treaties, part (c) on anti-avoidance regulations while part (d)
was on how profit are taxed and distributed to shareholders of limited liability company.
Majority of the candidates did not understand the part (a) of the question while about 70%
understood part (b) and (c) of the question. And less than 50% understood part (d) of the
question. However, the performance on this question was below average.
The commonest pitfall was candidates’ inability to highlight the various free dividend incentives
and reasons for tax treaty.
Candidates are advised to prepare adequately for future examination and use the Institute’s
study pack and pathfinders of past examinations.
5. A Corporate entity can grow its business using many strategies.
Required:
(a) List Five (5) ways of growing business. (5 Marks)
(b) Discuss Five (5) barriers that must be taken into consideration when expanding
business internationally. (10 Marks)
(Total 15 Marks)
Page 60 of 65
(a) The various ways of growing business are:
(i) Increasing sales and products in existing market;
(ii) Introducing a new product offering in a new market;
(iii) Offering existing products in a new market segment;
(iv) Start a chain, e.g. a restatement chain, a super market chain, etc;
(v) Franchising
(vi) Strategic alliance and acquisition; and
(vii) Going global
(b) The barriers to be taken into consideration when expanding business internationally
are:
(i) Language barriers: Although it may seem simple at the outset to translate the
features of a given product or service into local language, marketing the product
or service may present unforeseen difficulties of the concept itself does not
“translate well the target country’s standards for humor, accepted puns or
jargon, or even subtle gestures may not be the same as your domestic country’s
norms or idioms and may need to be adjusted accordingly.
(ii) Marketing barriers: These types of barriers most frequently go to the deepest
cultural levels. For example, whereas many overseas markets have developed a
taste for “Cart Food” buyers and hot dogs, differences in culture may dictate that
the speed aspect in less important. Many cultures demand the leisure to be able
to relax on the premises after eating a meal rather than taking a meal to go.
These cultural norms can, in turn, be affected by factors such as the cost and
availability of retail space. Direct and subtle messages in advertising campaigns
may need to be modified. The appeal of using a particular celebrity in a
campaign may vary, and the channels for promotion may also need to be
modified, to meet the educational patterns and needs of the local consumer.
Even marketing methodologies need to be modified.
(iii) Legal barriers: The company or its counsel must research tax laws, customs laws,
import restrictions, corporate organisation, and agency liability laws. Domestic
legislation needs to be examined as well for issues arising under labour law,
immigration law, customs law, tax law and other producer/distributor liability
provisions.
(v) Access to raw materials and human resources. Not all countries offer the same
levels of access to critical raw materials and skilled labour that may be needed
to offer the service or enjoy the product. The growing company may want to
consider what changes without sacrificing the core business formal.
(vi) Government regulatory barriers: The foreign government may or may not be
receptive to foreign investment or expansion. A given country’s past history of
expropriation, government restrictions and limitations on currency repatriation
may all prove to be decisive factors in determining whether the cost of market
penetration is worth the benefits to be potentially derived.
(vii) Intellectual property and quality control concerns: Protection of trademarks,

trade names, and service marks are vital for the ability of an emerging growth
Page 61 of 65
company to operate abroad. The company needs to have a strategy in place for
both protecting its intellectual property rights and enforcing them if violation are
discovered.
(viii) Dispute resolutions: The forum and governing law for resolution of disputes must
be chosen. On an international level, these issues become mostly negotiated
due to the inconvenience and expense to the party who must come to the others
forum.
EXAMINER’S REPORT
The question tests the candidate knowledge of ways to grow business and the barriers that
must be taken into consideration in expanding business internationally. The question is very
straightforward despite this, majority of the candidates could not highlight ways to grow
business and expand it internationally. Therefore, performance of majority of the candidates
was below average.
Candidates are advised to read and prepare very well for future examination.
6. One of the decisions corporate entity must make is financing decision.
Required:
(a) Discuss entity’s financing decision and the Two (2) types of financing open to an
entity. (6 Marks)
(b) Apart from outright cash purchased, discuss Three (3) ways a company may
acquire non-current assets. (9 Marks)
(Total 15 Marks)
(a) Financing decision is decisions as to when, where, from and how to acquire foods to
meet an entity’s investment needs. The focus of the finance manager here is
determination of the appropriate proportion of equity and debt. Financing describes
the sourcing of all funds a company uses for acquiring assets and paying expenses.
These are only two kinds of sources of funds, equity and debts funding. The company’s
financial structure describes the fractions funds, of total funding that comes from each
source. Equity comes from two sources-paid up share capital and retained earnings
the after tax profits retained by the company in the business after paying dividends to
shareholders. Debits are funds acquired through debt financing and come primarily
from bank loans and sales of debenture stock or loan notes. The company’s debts,
however, also includes short term obligation such as short term loan, loan notes payable
within the year, account payable, etc.
(b) Assets finance is a type of finance used by businesses to obtain the equipment they
need to grow. Apart from outright cash purchase, a company can acquire assets in the
following ways;
(i) Leasing: This is a form of asset finance where a leasing company (called the
lessor) buys and sometimes, hiring the asset on behalf of the customer (called
Page 62 of 65
the lessee). The lessee pays a rental for the use of the asset over a
predetermined period. There are two types of lease:
- Finance lease: Under finance lease, the lessee owns the asset and the asset
appears on the statement of financial position of the lessee. The lessee pays
rental, which is the addition of the principal amount and the interest element
over a period of time. In finance lease, the lessor is responsible for all the
risks of ownership and also maintains the asset. At the end of the lease
period, the lessee will pay a token to the lessor and the asset become that of
the lessee permanently. It is almost like taking a loan to buy the asset
needed.
Under the Nigerian tax laws, the lessee will claim capital allowance for the
cost of the asset while the interest claims is charged to the income statements
the cost of the assets is treated as non-current asset in the statement of
financial position of the lessee.
- Operating Lease: This is a situation where the lessee do not own the asset
but is allowed to use the asset over a period of time by paying a regular rental
to the finance company or lessor. The asset does not appear on the
statement of financial position of the lessee and rental paid is charged into
the income statement against profit.
Under the Nigerian tax laws, the lessee cannot claim capital allowances on
the asset, since he does not own the asset. However, rental payment is an
allowable expense for tax purpose. The lessee does not assume risk for the
asset and may not be responsible for maintaining the asset.
(ii) Hire Purchase: Hire purchase agreement allows a firm to buy an asset on credit.
The finance company will buy the asset on behalf of the customer and the
finance instalment is paid. Under hire purchase agreement, the hirer will use
the asset and is given as option to buy the asset at the end of the hire period by
paying a nominal sum for the asset.
Under hire purchase agreement, the finance company can re-possess the asset
if the hirer default in its instalmental payment.
A hire purchase agreement is a credit sale agreement by which the owner of the
asset or supplier grant the purchaser the right to take possession of the asset
but ownership will not pass until all the hire purchase payments or instalments
have been made. The hire purchase payments consist partly of capital payments
towards the purchase of the asset and partly of interest charges.
Under the tax law, the hirer can only claim capital allowance on the capital
amount of the asset that have been paid while the interest element will be
charged to the income statement as an allowable expense.
(iii) Credit Purchases: A company can buy an asset on credit from the supplier based
on agreement. The credit period may be one or more months. Under credit
purchase, the asset belong to the purchaser and the supplier is simply treated
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as account payable. The supplier cannot take re-possession of the asset, he can
only sue for the payment of amount owing.
Under the tax law, the purchaser is treated as having purchased the asset and
all capital allowances due will become claimable.
EXAMINER’S REPORT
The question tests the candidates’ knowledge of finance decision and ways to finance the
acquisition of assets. The question is a straight forward question with no ambiguity. Ninety
percent of the candidates attempted the question. However, only about 50% understand the
requirements of the question and performance was average.
The commonest pitfall was candidates’ inability to know how to finance the acquisition of
assets.
Candidates are advised to read the Study Pack of the subject and study Pathfinders of past
examinations when preparing for future examination.
7. The conceptual framework, underpinning regulation of published financial statements,

states that information contained in the statements should have certain specified,
qualitative characteristics.
Required:
Discuss these characteristics. (15 Marks)
According to the conceptual framework information in the financial statements should have
the following qualitative characteristics:
(i) Appropriateness: Appropriateness means the efficiency of financial statements and

reports, and their success in serving their users through their ability to provide adequate
and appropriate information to make appropriate decisions, so that this information is
recognized for being suitable for decision-making and is presented properly and timely.
(ii) Reliability: Reliability is associated with the information integrity and the ability to rely
on it. Accounting information is characterised as being reliable or can be relied on if it
has the ability to express the veracity of the information, to be free from error and bias,
and to represent it fairly and honestly.
(iii) Consistency: This characteristic is realised when the company uses the same accounting
treatment for the same event from one period to another for easing comparison of
organisational performance over a period of time.
(iv) Understand ability: It is a qualitative accounting information characteristic that helps a
prudent user to identify the meaning and importance of financial reporting.
(v) Comparability: This characteristic enables users of financial reports to identify
similarities and differences between economic phenomena and events. The use of an
incomparable accounting standard results in increased differences in the expression of
economic phenomena and events.
Page 64 of 65
EXAMINER’S REPORT
The question tests candidates’ knowledge of qualitative characteristic of published financial
statements. Candidates understood the question and about 80% of the candidates attempted
the question. Over 50% of the candidates performed above average. Few candidates did not
fully understand the quantitative characteristics of financial statements.
Candidates are advised to create time to prepare for future examination adequately and make
use of the Institute’s Study Pack and Pathfinders of past examinations.
Page 65 of 65

April 2021 Pathfinder For PTE 2 Level

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THE CHARTERED INSTITUTE OF TAXATION OF NIGERIA

APRIL 2021 PATHFINDERR FOR PTE II.

INCOME TAX FOR

WEDNESDAY 14TH APRIL, 2021 EXAM NO…………………………….

ATTEMPT QUESTION ONE AND ANY OTHER FOUR QUESTIONS.

SHOW ALL WORKINGS. TIME: 3 HOURS.

1. Rivers Oil Producing Company Limited is engaged in petroleum operations. Following a

(c) Expenses incurred by the company:

(d) Losses in respect of petroleum operations brought forward are as follows:

(e) Capital allowances brought forward 14,356,000

(f) Schedule of qualifying capital expenditure with years of acquisitions:

Asset Year Onshore Between Above

Note: All computations should be in Naira.

The Managing Director,

Value of crude oil sold N N

(W2) Computation of Tertiary Education Tax N

(W4) Computation of Annual Allowance

2. (a) Within the context of mining and solid mineral operations.

(i) Explain the term “deferment of royalty”. (2 Marks)

(ii) Under what circumstances will deferment of royalty be granted.

(b) Chinedu Mining Company Limited commenced granite mining operations in

The following information were also provided:

(a) The figure of donations include N20,000 made to a non-charitable

You are required to calculate:

(ii) The royalty payable. (3 Marks)

(ii) > Circumstances under which deferment of royalty can be granted

(b) Chinedu Mining Company Limited

Tax liability = N62,687,019 x 30% = N18,806,106

Education tax = Assessable profit x 2%

(ii) Computation of Royalty for the year ended 31/12/2015

Value of tonnage sold = 48,500 x N5,500

Royalty payable is 5% x N266,750,000

(b) Prosperity Unit Trust Scheme

East West East & West

(b) Computation of Assessable Profits of the Companies

East & West Plc

Summary of Assessable Profits

Candidates exhibited lack of understanding of reconstitution of a foreign company.

Yellow Sisi & Co.

The Managing Director

(a) Incentives for Oil and Gas Export Free Zone

Mrs Sisi Gokana

Income N’000 N’000

Repayment period Grace period Amount

Repayment Grace Period Amount of Rate of Amount

Candidates are advised to read wide towards future examinations.

Accounting Year Ended 30th June

(b) What is the accounting period of a pioneer company? (2 Marks)

(d) If a pioneer certificate earlier issued to a company is cancelled, what is the

(b) Accounting period

(c) Tax on dividend received from a pioneer company

A pioneer company is required to maintain an account (often called section 17 account)

(e) Foremost Company Limited

Computation of Adjusted Profits

Computation of Assessable Profits of Pioneer Business

Computation of Assessable Profits of New Business

PTE II: TAX AUDIT AND

TUESDAY 13TH APRIL, 2021 EXAM NO…………………………….

ATTEMPT QUESTION ONE AND ANY OTHER FOUR QUESTIONS.