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MODULE 11

11.00 TAX FOR SPECIALIZED BUSINESS

11.01 Learning Outcomes

On successful completion of this Module, Students should be able to:

i. Deconstruct the tax procedures for specialized businesses such as Banks

Insurance Companies, Airline Companies and Shipping Companies;

ii. Appraise the tax implication of Mergers and Acquisitions;

iii. Understand the basis of assessment and mode of cessation of business for

specialized businesses in Nigeria.

11.02 Banks Banks are assessed like any other company.

Section 43(1) and 44 CITA cap 60 (Sec. 61 of ACT 2004) provides that “every person

engage in banking shall prepare a quarterly returns specifying all transactions at the end

of each month specifying the names and address of new customers of the bank and shall

not later than seventh day of the next following month deliver the return to a tax

authority of the area where the bank operates, or where such customer is a company, to

the Federal Inland Revenue Service (Section 44 (1) of CITA).

Section 61 CITA Cap c 21 provides that “every person engage in banking shall prepares a

quarterly return specifying all transaction involving the sum of one million naira

(N1,000,000) and above the names and addresses of all customers of the bank connected

with the transaction and deliver the return to the service.

11.03 Insurance Business

Taxed at 30% of taxable profit on the preceding year basis

Basic Rules of companies' taxation are applicable.

2 types of Insurance Business, Life Insurance and Non - Life Insurance Business

Section 2(1) of Insurance Act No. 2 of 1997, categorizes insurance business into two main classes, that is,

a. Life insurance business, and b. General insurance business.

Life insurance business is further sub-divided into

a. Individual Life insurance; and

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b. Group life insurance business.

General insurance business is sub-divided into

a. Fire Insurance; b. Accident Insurance; c. Motor Vehicle Insurance, Marine Insurance Stock Insurance; d. Oil and Gas Insurance etc.

The new Insurance Act graded insurance companies according to their paid up capital

and prescribes N 150Million for life business, N350 million for composite insurance and

also N350 million for re-insurer.

The major income of an insurance agent is commission, insurance brokers receives

brokerage fee. Withholding tax and VAT are to be recognized and remittance made to

appropriate tax authority in respect of the commission and the fees.

For Nigerian income tax, premium income and surpluses on actuarial valuations are not

to be considered as income that is chargeable to tax. The surplus on actuarial valuation

that would be subjected to tax is restricted to the dividend distribution to shareholders.

From 1995 assessment year, any profit that accrues from the life business cannot be

utilized to reduce any loss made from the non-life business because as from 1995, a life

business is to be considered as an entirely different line of business, from the non-life.

The following under listed reserves ought to be established and maintained by a general

insurance according to section 24 of insurance Act, 1997.

a. Reserves for unexpired risks.

b. Reserves for outstanding claims and contingency reserves to cover

fluctuation in securities and variation in statistical estimates.

11.04 Life Insurance Business

Section 14(b) of CITA determines the profit on which tax may be imposed on the life

insurance as investment income less management's expenses including commission.

It should be noted that any amount distributed as dividend from the actuarial

revaluation of unexpired risks or from any other revaluation shall be deemed to be a

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part of the total profit of the company.

In a situation where an insurance company engages in life insurance business plus

insurance of any other class, the life insurance business shall be treated as a separate

business from any other class of business carried on by the company in accordance

with the provision of CITA Cap 60. In life assurance Company, amount paid as

commissions is an allowable deduction in accordance with section 14 of CITA cap 60.

11.05 Non-Life Insurance Business

> Section 14 (a) of CITA, Cap 60 LFN 1990, determines profit on which tax may be

imposed on non- life insurance of Revenue Accounts;

If a non-Nigerian insurance company has a permanent establishment in Nigeria,

the applicable amount shall be those rising from its Nigerian operations. A

reasonable proportion of the company's head office expenses are allowable as

deductions for tax purposes. Likewise, agency expenses in Nigeria are allowable.

> For a Nigeria company, the income chargeable to tax is the global income

irrespective of whether or not there are branches outside Nigeria.

> The adjusted profit on which tax may be imposed shall be determined as follows:

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Step 1 aggregate all premiums to arrive at the gross premium

Step 2 deduct payments on reinsurance and returns to the insured to obtain the net

premium.

Step 3 from the net premium, add investment incomes, commissions received and other

taxable income

Step 4 then deduct commissions, agency fees, claims, share of head office expenses,

administration expenses and other allowable expenses.

Format of Tax Computation N

Investment Income

Other Taxable Income

Total Income

XX

Deduct

Management Expenses X

Commissions

Other Allowable expenses

Adjusted Profit

Capital Allowance

Relieved

Taxable Profit

In a situation where the portion of the profits is derived from abroad then the income

chargeable to tax in Nigeria shall be the proportion of the total investment income of the

company as the premiums receivable in Nigeria and a fair proportion of the head office

expenses.

Income taxable in Nigeria = Nigeria Premium x Total Investment Global Premium

X (X)

XX

X

(X) (X)

XX

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11.06 Shipping and Airline Companies

The tax liability for these types of businesses will generally arise on the profit in the

normal way for any other company. However, the following crucial points should be

noted when preparing the returns for the class of companies.

For a Nigerian company, the income chargeable to tax is the global income irrespective of

whether or not there are branches outside Nigeria. This means that for a Nigerian

shipping and Air transport business, the global income is charge to tax after giving effect

to the global expenses.

For a company other than a Nigerian company which carries on the business of transport

by air or sea, the amount of profit chargeable to tax in Nigeria should be based on the

profit derived from the carriage of passengers, mail, livestock or goods shipped or loaded

on to an aircraft in Nigeria. The significance is that no cognizance is given to profit

derived from operation outside Nigeria or where Nigeria is merely a transit point in the

course of its operation. Section 12 CITA Cap C 21.

Section 12 (2) CITA Cap C 21 provides further that where there is a reciprocal

arrangement such that the tax authority of the home country of the foreign company

assesses companies engaged in transportation by sea or air in that country in a manner

that is not materially different from the practice of the Board, the tax computation may

be based on the use of two ratio i.e.

a. The adjusted profit ratio which is obtained by dividing the global adjusted

profit by the global income received or receivable in respect of the carriage

of passengers, mails goods or livestock.

b. The depreciation ratio which is obtained by dividing the global depreciation

in the accounts by the global income receivable.

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The tax payable is obtained as follows:

a. The Assessable profit for Nigerian tax purpose is obtained by multiplying the

adjusted profit ratio by the Nigerian income.

The Nigerian income is the income derived from the carriage of good, passenger, mails or

livestock onto a ship or load an aircraft in Nigeria.

b. The capital allowance to be claimed for Nigeria income Tax purpose is

obtained by multiplying the depreciation ratio by the Nigerian income.

c. The taxable profits are the difference between (a) and (b) the tax payable is

obtained by multiplying the corporate tax rate, currently 30 percent by the

amount obtained in (c) above.

Format of tax computation

N N

Gross Premium

Deduct: payment on reinsurance

Returns to the insured Premium

Add:

Investment Income

Commissions received

Provision for unexpired risks at

The beginning of the year

Minus

Provision for unexpired risk at the end of the year

Agency Expenses

Claims and Commissions

Administration Expenses

Head office expenses

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Other allowable expenses

Adjusted profit

11.07 Companies in Partnership

This is a situation whereby two or more companies enter into a joint venture

agreement or partnership. The following should be borne in mind:

> The joint venture or partnership is not chargeable to tax itself;

> The profit chargeable to tax in the hand of each of the partners is the share

of profit from the partnership;

> Capital allowance on the assets of the partnership shall be shared in the

agreed profit and loss sharing ratio;

> Where any of the companies involved in the partnership has another line

of business, the loss generated from the business will not be available for

relief against the profit generated from partnership.

11.08 Conversion of a Partnership into a Limited Liability Company

The following should be borne in mind;

a. Since a new business is deemed to have come into existence for the newly

formed company, commencement rule shall be applied to the company;

b. Cessation rule shall be applied to the individual partners of the deemed

partnership which has ceased operation;

c. All qualifying capital expenditures transferred are deemed to have been

transferred at the agreed value;

d. Capital allowance computation shall be based on the unexpired tax life of the

asset.

A company may be sold or transferred to another either for the purpose of better

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organization or transfer of management. Where this happens, the tax consultant or

the tax payer should take note of the following.

a. There will be no application of either the commencement or cessation rules.

b. All the qualifying capital expenditure transferred are deemed to have been made

at their tax written value. The balancing adjustment may be computed.

c. In the computation of capital allowance, no initial allowance may be computed

while the annual allowance would be based on the unexpired tax life of the

qualifying capital expenditure.

d. The re-constituted company shall be assumed to have received all the capital

allowances given to the foreign company.

e. Any unrelieved losses transferred are deemed to have been incurred on the first

day of reconstitution. Such a loss is avail for relief against the taxable profit of the

year of reconstitution and the three subsequent tax years.

11.09 Mergers and Acquisitions

There are broadly two types of business combination, mergers and acquisitions.

The Financial Reporting Standards No. 6 on Acquisitions and Mergers contained in

the 2004/2005 Accounting Handbook of the Association of Chartered Certified

Accountants (ACCA) defines “Merger” as “a rare type of business combination in

which two or more parties come together for the mutual sharing of benefits and

risk arising from the combined business, in what is in substance an equal

partnership, each sharing influence in the new entity”.

No party can be regarded as acquiring control over another, or becoming

controlled by another; and the reporting entity formed by the combination must

be regarded as a new entity rather than the continuation of one of the combining

entities, enlarged by its having obtained control over others”. Acquisition on the

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other hand is defined by Companies and Allied Matters Act (CAMA) 1990 “as the

purchase of the shares of one company by another with the ultimate intention of

acquiring a controlling interest in the company so targeted”. Where a new

company emerges from a merger process, the new company should render its

returns

11.10 Basis of Assessment

Commencement rule will normally apply as provided under Section 25(3) except

where any of the following circumstance arise;

> Where the merging companies are connected the Board may

direct that the new company should file its returns as an on-going

concern and its assessment will be determined on preceding year

basis.

> Where the new business is a reconstituted company

The company that survives a merger may retain its old name or a new name to

inherit the assets, liabilities, reserves and the entire operations of the merging

companies. In this case;

> The surviving company must file its returns in accordance with the

provisions of section 41 (3) (a) of CITA.

> There will be no application of the commencement rules as the

surviving company will be regarded as an existing company.

> The surviving company can both claim initial allowance nor

investment allowance on the assets transferred to it.

> Annual allowance can be claimed only on the tax written Down

Value of the assets transferred to it.

> All merger expenses paid by the surviving company should be

regarded as capital and therefore not deductible for tax purposes.

> All fees payable in respect of the merger are liable to WHT and

VAT.

> Stamp duties is payable on the increase in share capital.

> The new company must obtain its staff pension scheme approval

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from the Joint Tax Board.

11.11 Ceased Business

Where a merger results in the cessation of business for any of the merging parties,

cessation rule will apply to the company that has ceased business permanently

except where the merging companies are connected or a reconstituted company

is formed to take over the trade previously run by its foreign parent company.

11.12 A Unit Trust Scheme

A unit trust scheme is established for the purpose of providing facilities for its

participation member, as beneficiaries under the trust, scheme the profits or

income arising from the acquisition from the holding management or disposal of

securities or an authorized unit trust have effect;

a. As if the trustees were a company whose business consists mainly in the

making of investment and the principal part of whose income is derived there

from.

b. As if the rights of unit holders were shares in the company

c. As if so much of the income accruing to the trustees as is available for

payment to the unit holders were dividends on such shares.

The adjusted profit of a unit trust scheme is obtained by deducting Management

expenses and unit Trust manager' remuneration from investment income

Format

Investment Income

Other taxable incomes

Deduct:

Trust managers Remuneration

Management Expenses

Other allowable expenses

Adjusted profit

Capital allowance Relieved

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Taxable Profit

Dividends distributed by unit Trust in Nigeria are free of tax and no withholding tax is

deducted there from since such incomes have suffered tax in the first instance.

11.13 Review Questions

Bank

Oyebanji Bank Ltd was established many years ago. The financial position of the bank for

the year ended 31st March 2006 is given below.

N,000 N,000

Gross earnings from Foreign exchange

Transactions 25,000

Interest on Loans and advance 35,000

Leasing Business 15,000

Commission on turnover 5,000

Other 10,000

90,000

Less: expenses

Interest paid 10,500

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General Administration

Depreciation of Assets Repair &

Maintenance Miscellaneous Net

profit for the year

The following additional information is provided.

1. General administration expenses includes:

a. Donation to Ikoyi club of which the Managing Director is a member N250,000

b. Donation to ANAN building fund of N250,000.

2. Included in the loans and advances interest is an amount N1,200,000 earned on the

loan granted to Agriculture based business Limited on Agricultural Company. The

Loan has a repayment period of 3 years with a grace period of 15 months.

3. The capital employed by the bank is as specified below.

N

Paid up Capital 40,000,000

Capital and Statutory Reserve 25,000,000

General Reserve 12,000,000

Long term Loan 20,000,000

4. Capital Allowance which were agreed with FIRS amounted to N3,500,000

5. The Repairs and maintenance figure included a sum of N750,000 expended in the

refurbishing of 875KVA generating sets at the head office.

6. During the year the bank contravened PRIR provision and paid N55,000 which

included in the miscellaneous.

You are required to compute the tax liability of Oyebanji bank Ltd for the relevant

year of Assessment

20,000

7,500

6,500

13,000 57,500

32,500

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INSURANCE

1. Ayomide Insurance Nig PLC, a company engaged in Non-life business, has the following

details of its transactions for the year Ended 30th April, 2006.

N

Premium Received 1,350,000

Dividend Received (Net) 12,700

Profit on sale of Fixed Asset 5,500

Re - Insurance Premium 345,000 Subscription as member of the Nigeria

Insurance Association 5,000

Contribution to State Education fund 15,000

Unexpired Risks 1/5/05 - 30/4/06 275,000

Claims 120,000

Amount Recovered under reinsurance 75,000

Salary and other Administrative Expenses 145,000 Capital Allowance was:

Initial Allowances 40,000

Annual 78,000

Balancing Charge 5,500

You are required to compute the tax payable by the company for 2007 Year of

Assessment.

(Assume company rate of tax as 30%)

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OJOKULE INSURANCE COMPANY LIMITED

............................. }

} DIRECTORS } ............................. }

ASSETS Note 2005 N

2004 N

Cash in Hand and

At Bank

6,761,646 167,069,919 Short Term Deposit

854,768,847 126,046,926

Debtors/Prepayment 1 174,616,356 282,025,26 Stock 2 - 12,101 Statutory Deposit 3 35,000,000 35,000,000 Fixed Assets 4 526,593,466 13,399,721

1,597,741,315 522,553,932

LIABILITIES

Creditors/Accruals 5 198,197,527 130,245,373 Outstanding Claims 6 11,004,226 314,633 Insurance Fund 7 23,633,237 39,327,291 Deferred Taxation 13 21,147,595 3,067,200

(253,982,585) (172,954,577)

NET ASSETS 1,343,758,730 349,599,355 CAPITAL AND RESERVES

Share Capital 8 773,698,430 350,000,000 Capital Contribution 10 447,694,550 - Contingency Reserve 9 18,995,541 6,718,901 Revenue reserve 11 103,370,209 (7,119,546) Shareholders Fund

1,343,758,730 349,599,355

BALANCE SHEET AS AT 31ST DECEMBER, 2005

2.

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OJOKULE INSURANCE COMPANY LIMITED PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31ST DECEMBER, 2005

INCOME Note

Gross written premiums Outward re-insurance premium Net Premium Income Decrease/(Increase) in reserve For unexpired risks Earned premiums Other Income

EXPENSES Commissions allowed Claims paid less recovery Management expenses Outstanding claims Total expenses

Profit before taxation 12 Taxation 13 Profit after Taxation

Appropriations: Share capital increase expenses Contingency reserve 9 Profit/(Loss) for the year Transferred to revenue reserve

2005 =N= 2004 =N=

279,893,888 95,213,921

(645,198) (2,035,860)

279,248,690 93,178,061

23,694,055 (4,133,666)

302,942,745 89,044,393 8,119,039 12,032,239

311,061,784 101,076,632

37,083,551 (19,517,876) 18,252,945 (5,236,443) 103,874,273 (75,948,224) 11,004,226 1,763,574

170,214,995 98,938,969

140,846,789 2,137,663

(18,080,394) (976,329)

122,766,395 1,161,334

(12,276,640) (2,856,418)

110,489,755 (1,695,084)

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You are required to Compute Ojokule tax payable

(AS AT 31ST DECEMBER 2005/2006 YEAR OF ASSESSMENT.)

OJOKULE INSURANCE COMPANY LIMITED CASH FLOW STATEMENT FOR THE YEAR ENDED 31ST DECEMBER 2005.

CASH FLOW FROM OPERATING ACTIVITIES

Profit before taxation

2005 =N=

140,846,789

2004 =N=

2,137,663

ADJUSTMENT FOR NON-CASH MOVING ITEMS

(Profit) Loss on sale of Asset 813,417 - Depreciation 9,823,259 4,766,030 Decrease/increase in reserve

For unexpired risks/outstanding

Claims (5,004,461) 2,370,094 Operating cash flow before

Changes in Working Capital 146,478,904 9,273,787

WORKING CAPITAL CHANGES Decrease (Increase) in Stock Decrease (Increase) in Debtors Increase (Decrease) in Creditors Net cash flow from operating activities

12,101 192,276 6,408,909 (107,971,536)

67,952,154 28,688,824 220,852,068 (69,816,649

)

CASH FLOW FROM INVESTING ACTIVITIES

Statutory Deposit Proceed on sale of Asset Fixed assets Acquisition

125,000 (523,955,401)

(523,830,401)

(14,500,000)

(9,782,025) (24,282,025)

CASH FLOW FROM FINANCING ACTIVITIES

Share capital Capital Contribution

Net cash flow for the year Cash Balance Jan 1 Cash Balance Dec.31

423,698,430 250,000,000 447,694,550 (5,105,948)

871,392,980 244,894,052

568,414,647 150,795,37

8 293,116,845 142,321,46

861,531,492 293,116,845

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SHIPPING COMPANY

ATLANTIC MARINE SHIPPING COMPANY LIMITED

Atlantic marine shipping Company limited engage in the business of transport by sea. The

Profit and Loss account of the Company for the year ended 30th June, 2004 is as follows:

N N

AIRLINES

The profit and Loss account of George Airways Limited, a company Incorporated in

Germany in 2007 show the following in respect of the year ended 31st December, 2008.

N N

Income from passenger Flight

Out of Nigeria 150,000

Income from passenger Flight

to Nigeria 500,000

Income from passenger flight

on other Routes 1,800,000

Global Income 2,450,000

Administration Expense 810,000

Financial Expenses 170,000

Depreciation 294,000

Other disallowed Expenses 90,000 1,364,000

Carried solely on transport terms 50,000

Income from passenger flight into Nigeria 150,000

Income from passenger flight out of Nigeria 50,000

Less: Administration Expenses

Depreciation

Other Disallowable Expenses

Net profit for the year

1,300,000

1,550,000

1,000,000

75,000

24,500 1,100,000

450,000

Income from passenger flight

Income from passenger flight on other Routes

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Net profit for the year

1,086,000

The Federal Inland Revenue Service is satisfied that the tax authority in Germany

compute and Assesses the profits of the company operating Aircrafts on substantially

similar bases as in Nigeria.

You are required to:

Calculate the profits of George Airways which would be subjected to Nigerian tax.

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