THE CHARTERED INSTITUTE OF TAXATION OF NIGERIA … 2.pdfTHE CHARTERED INSTITUTE OF TAXATION OF NIGERIA (Chartered Institute by Act No. 76 of 1992) ... PROFESSIONAL 2: CASE STUDY

Page 1 of 56

THE CHARTERED INSTITUTE OF TAXATION OF NIGERIA

(Chartered Institute by Act No. 76 of 1992)

STUDENTS’ COMPANION APRIL 2012 PROFESSIONAL

EXAMINATION PROFESSIONAL 2:

QUESTION AND SUGGESTED SOLUTIONS

Page 2 of 56


APRIL 2012: PROFESSIONAL EXAMINATION

PROFESSIONAL 2: CASE STUDY

ATTEMPT ALL QUESTIONS. SHOW ALL WORKINGS.

TIME: 3 HOURS

EMCHOL Nigeria Limited

Introduction

On the morning of January 23, 2011 at about 8:15am, you were called into the office of one of the

partners of your firm, Ojutaiye & Co (Chartered Accountants), a professional firm duly registered to

carry out specifically the services of Assurance, Business Advisory and Tax practice. On getting to the

partner’s office, you met an elderly man in his early sixties who is well dressed in flowing agbada made

of superior Guinea Brocade material. The man radiated an aura of wealth and his carriage portrayed

him as someone within the top echelon of the society. Except that his countenance betrayed a dint of

confusion and anxiety, you would have been taken aback by the presence of such an August visitor in

your office at that time of the day.

Usually, the practice of your firm is that the first two hours of the day are for serious office work.

Clients are allowed to come in from 10:00 am. This is to enable staff complete the routine morning

assignment which inter-alia consists of meeting of team before departure to clients’ offices, planning

meeting for new engagement, review of new proposals, call over and completion of audit working

paper file for Manager and Independent Partner’s review, attendance to audit query, briefing by tax

management team on the handling of tax queries from Tax Offices across the country where clients’

operations are located. Your schedule for this morning is the review of tax issues and legal

interpretation of a section being relied upon to answer a serious tax query from one of the a rea offices

of the Federal Inland Revenue Service (FIRS) in Kwara State and another tax returns to be filed in FIRS

office at Nasarawa State for a new client recently secured for the firm in the State.

As you entered into the office, you hesitated momentarily and walked towards the partner’s table.

When he raised up his head to recognize your presence, he immediately introduced you to the visitor.

Chief, he said stretching his hand towards you, this is our tax man, Mr. Bemiwo Ankoh. I am very sure

he will be interested in your case and would definitely have a solution that will satisfy you. The only

thing about him sir, he retorted with mid laughter, he works better when he is confident that his

Page 3 of 56

service would give the needed solution and happiness to the clients. The partner then beckon on you

to sits with the Chief at the conference table in his office and he, immediately, sits beside you to place

the chief in a position directly facing the two of you. The partner then turned to the Chief and said sir

could you please start the story all over, beginning from where you started before I called our Tax

Manager. The following conversation thereafter took place at the tripartite meeting of the Partner

(Ojuwade), yourself (Bemiwo) and the Chief (Ogboluaje).

Personal Profile

Chief – I am Chief Emmanuel Aboyede Ogboluaje of Ibafon-Imefu area of Ajilete in Edo State. Before l

retired from paid employment few years ago, l had done very close to 30 years in the oil and gas sector

overseas and within the Nigerian economy. To begin with, l read economics in the early 60s at

University of Ibadan where l graduated with First Class. This performance qualified me for a non-

bonded scholarship award for postgraduate studies in the University of London’s LSE. On getting to

London early 1967, l enrolled for M.Sc. degree in Econometrics because of my grade at the

undergraduate level. In all, we were eight in my class and l was the youngest and the only one with a

first degree. Others have s degree in their respective fields mostly in Mathematics and Statistics. The

course was tough and the weather was killing, but sheer determination for success and the

indefatigableness of youth energy enabled me to complete the course in 30 months. Only three of us

completed the program within three years, two withdrew after the third while the remaining three

who stayed to complete the program spent more than four years each before they met the University’s

condition for the award of the master’s degree.

My foray into Petroleum Economics which eventually culminated in spending my working life in the Oil

and Gas industry was by accident. It happened by chance a few days to my return journey to Nigeria

from London. One afternoon, at the office of my supervisor, where l went for the last time to exp ress

my appreciation for her understanding and the devotion she gave to the supervision of my research

work, she asked if I would like to go to the United States of America to take up a scholarship for the

study of Petroleum Economics, in our slots in the take-off program at the University of Texas at Austin

that would admit only 20 students spread across the globe. Nigeria being an oil producing country was

given a slot and the arrangement provided that the student must have completed a Masters degree in

Economics at LSE and could be recommended by the Academic Board of Trustee of the School.

According to her, she would like to know my view before she meets the Provost to discuss the issue. I

immediately consented and she advised that I should delay my re turn journey until the result of her

Page 4 of 56

discussion came out after the meeting of the Board of Trustee in a week’s time. She also asked me to

apply formally for the offer which I did and submitted to her before leaving the office that day. While

waiting for the outcome of my application I decided to carry out information search about the school

and the offer. Exactly one week after, I received a note from her to see her in her office that afternoon

which I did. When I arrived at the office, she told me that my application has been accepted and I

have been recommended for the offer. In her calculation, I should be ready to depart for my study

within the next two weeks. During this period, all necessary documentation about my travelling permit

and ticket should have been settled.

About a fortnight thereafter l was in Austin, Texas where within three years I successfully completed

another Masters degree and a Ph. D in Petroleum Economics. My program was fast because I engaged

both the normal session and the holiday period to pursue my course. I completed more than two

normal semester’s work during these holiday periods. That was the opportunity then in American

education system which is yet to be implemented in this country despite the adoption of the course

unit system.

On completion of the program, I was engaged by the oil company that sponsored the program at its

head office in Houston, Texas. I worked there for four years after which I was posted to head the

Procurement Unit of its operations in Nigeria. In all I spent 12 years with the company before I had

opportunity to take up an appointment with OPEC through NNPC when a position was opened for a

Nigerian in the Organisation. My going to OPEC in Vienna, Austria, compelled my involvement with

NNPC to which I returned after 10 years of two postings. I returned to head the Strategic Planning and

International Unit of the corporation (NNPC). Twice I had to break my service at OPEC to answer the

national call in Nigeria under the auspices of NNPC. At the first time I spent a minimum of 18 months

before I returned to continue my work at OPEC headquarters. At the end of my second posting, I came

to Nigeria in answer to urgent national call to work with NNPC for the next four and a half years before

I decided to retire from active service.

One day in my official residence at VI before I retired from service, two officials of the corporation

visited me and discussed the possibility of establishing a company to provide services to the operators

in the oil and gas industry. The two officials who were both junior to me in rank jointly appeal to me

and persuaded me to accept to head the proposed company as Executive Chairman. I concurred with

their suggestion since there appears nothing too serious I will be doing after retirement which in my

expectation then, would take place within the next six months. But surprisingly I stayed in active

service for the next two and a half years beyond the date of my initial expected retirement because I

http://en.wikipedia.org/wiki/Vienna

http://en.wikipedia.org/wiki/Austria

Page 5 of 56

had another posting to head the major subsidiary which is the sole investment arm of the corporation.

However, before they left that day we agreed on the name of the company using the initial alphabets

of our names as EM from Emmanuel, CH from Charles who hails from Cross River State and OL from

Olomagha from Benue State. Thus in the sitting room of my official residence that evening, EMCHOL

Nigeria Limited was conceived after about two and half hours’ meeting. It was due to my prolonged

stay in the office that made the company remained dormant for three years after its incorporation.

Incorporation and Commencement of Operations

EMCHOL was incorporated with an authorized share capital of one million ordinary shares of N1 each.

The three promoters were registered as the subscribing directors. I subscribed to four hundred

thousand shares and the remaining two, who initiated the idea of establishing the company, shared

the balance equally. Except for the filling of the form and appending their signature to the initial

documents we filed to register the company, the other two directors have not shown any interest in

the company from that time up to the present moment. The company was incorporated on March 25,

2005 but did not start operation until May 1, 2008. All the expenses incurred in incorporation were

borne personally by me. I retired from active service in July, 2007 and immediately left for Netherlands

for a six months contract service with a popular oil exploration company whose main work is

concentrated at the North Sea oil area.

The contract appointment started in August, 2007 and ended at the end of January, 2008. I returned to

the country early March, 2008. About two weeks later, one of my old time friends visited me in my

owner occupied residence built and completed before leaving active paid employment in July, 2007.

The friend was an expatriate and the CEO of a major oil marketing company in Nigeria. Emman, he

said, it will be a disservice to your country if after the retinue of qualifications and working experience

you have acquired, you retired into seclusion without giving the generation after you the benefit to tap

from your wealth of experience. I asked him how; he said I should go into training and consulting for

operators in the Oil and Gas industry. I told him that I don’t know how to go about it, he then

informed me that he would like me to come and take a training contract offer his company is about to

give out. The training is to have nine sessions and a session is expected to last for one week. He even

gave me guidance on how to go about delivering qualitative training on the contract. Two days later, I

visited him in his office to express my interest to take up the offer. He, then, directed me to the office

of the contract holder who gave me a form to fill and then informed me that I would be communicated

within the next three days. Two days later Richard my friend brought an offer letter to my house in

which I was given a week to prepare for the commencement of the course. A cheque for mobilization

Page 6 of 56

fee of 40% of contract fee was attached to the letter to enable me commence work immediately. The

training started a week later with most of my old school mates at Unibadan who equally had training

experience in the field as the resource personnel.

Exactly two weeks to the end of the nine week training session, Richard my expatriate friend called me

to his office and expressed deep satisfaction on the handling of the training based on report he

received from the seven groups which had completed their training. He told me that his company has

already decided to award another contract on training to me. The contact will be for thirty six weeks.

However, I will need to register a company to which the contract will be awarded because the value of

contract exceeded the limit on which it can deal with individuals. I then told him about EMCHOL which

was incorporated more than 3 years earlier. A week later, I presented to him all documentation

needed including the registration certificate with Department of Petroleum Resources (DPR). This was

how EMCHOL entered into full fledge operating existence and limelight.

Early Years Of Operations

EMCHOL started operations with four staff including myself as the Executive Chairman. Two months

later, I engaged an Accounting officer introduced to me by one of my old time friends. The Accounting

officer, a young man of 28 years with Distinction grade in his HND in Accountancy was employed. I

assured myself that with an officer of such high intelligence, the company would have no problem with

managing the operations of its accounting system. Indeed, the company obtained its VAT registration

certificate within six months of its commencement of operating activities and we have met with the

payment of accruing VAT to the tax office where we were registered. But we lagg ed behind in the

preparation of our annual accounts and failed to submit annual returns to the FIRS for a very long time.

The operation of the financial affairs of the company revolves around me as the Executive Chairman

and the sole signatory to the company’s accounts with its three bankers. The company operates solely

on cheque in disbursements and our clients directly pay to our nominated bank accounts. Daily routine

expenses are discharged from monthly allocation I committed to the hand of my Secretary and the

amount was formerly N40,000. It is now N70,000 per month. Records of how this amount was spent

are presented to me at the end of each month and I take it upon myself to cross check and be satisfied

that it has been judiciously utilized before I will endorse to the Accountant and also issue a cheque for

the same amount for the next period of one month. The checking is only for second assurance because

my consent must be sought and secured before the Secretary can take or give out any amount from

Page 7 of 56

the allocation. With such a tight control on our finances, it is in my opinion, nothing could go wrong

and our accounting records could not be less than perfect.

We commenced the execution of the thirty-six week contract on May 4, 2008 and had four sessions for

the month and a total of thirty four session by December 2008. Two other contract were won, one

from ELF-Total and the Chevron. The total income from the three contracts as at the end of December,

2008 was about N34.7million.. The company adopted accounting period that runs from January to

December each year in consonance with the government fiscal year in Nigeria. At the end of 2009

financial year, the total value of contract billed for and accepted by clients was about N92. 5million. At

the end of 2010 financial year, we grossed about N229.6million in total undisputed billings to our

clients.

Before December, 2008, our staff strength was 10 personnel, rose to 35 in 2009 and 60 by the end of

2010. Our operations depended more on hired professional experts to the main thrust of our

operations. Apart from preparation, typing and other logistics, all our training materials are written by

outside resource professional. In the area of EIA (Environmental Impact Assessment) our staff

accompanied soil scientists and geologists to the field to provide support service but the core

operating activity is carried out by these professionals. This practice enabled us to maintain low

personnel overhead without any negative effect on the quality of our service delivery. There is

however the question of rising professional fee which is the sacrifice we had to make if we must

remain competitive in the industry.

Federal Inland Revenue Service

Exactly one year ago, we received a letter from the Federal Inland Revenue Service (Obalende

Integrated Tax Office), claiming that EMCHOL has failed to render annual tax returns of its operating

activities to the Tax Office. We were given about two months to do so. I called on the Accounting

Officer to meet with the officials of the Revenue Authority and let me know what we are to do. The

young man came back and had nothing specifically to say except that there is someone who offered to

assist if we are ready to pay. When I asked what we are going to get in terms of values for sum

demanded, my Accounting Officer said that the man would prepare our Accounts and file the tax

returns on behalf of the company. His reply infuriated me and I asked him, if after employing someone

of your grade and have paid your agreed remuneration for upward of eighteen months yet, you find it

difficult to put our accounts in order, it implied that you are ready to be relieved of your employment.

My reaction ignite fire into his bosom and about a month later he came up with summarized details of

our transactions which he submitted to the Tax Office.(Appendix 2)

Page 8 of 56

QUESTIONS

1 What in your opinion are the tax implications of negligence on the part of EMCHOL to produce

and submit its accounts to FIRS within the stipulated time? Briefly state the penalties if any.

(20 marks)

Solution to question 1:

The tax implication of negligence on the part of EMCHOL to produce and submit its account to FIRS

within the stipulated time are contained in section 41 of the Act

a) Any company which fails to comply with the provision of sub section 2 (filing of returns) shall

be liable to pay as penalty for late filling as follows:

I. ₦25,000 in the first month in which the failure occurs; and

II. ₦5000 for each subsequent month in which the failure continues

b) Subsection 5 says that any director manager, secretary or other similar officer, servant or agent

of the company ( or person purporting to act in any such capacity) of the company shall be liable

to a fine of ₦100,000 or imprisonment of a term of 2years or to both such fine and

imprisonment

c) Section 4 of the Act allows the Board raises a Best of Judgement Assessment (BOJ) on the

company.

2 What documents and information would you expect the company to furnish FIRS when the

Accounting Officer of EMCHOL submitted the details of transactions to the Service six months

ago? (20 marks)

Assessor’s Comment

The requirement of this question is for students to list documents and information usually

submitted to Tax office while filing tax returns. For professional Students at this stage, this

question is very cheap for 20 marks.

Page 9 of 56

The solution provided by the examiner focused on documents / information during registration

with FIRS as opposed to filling of returns (from the way the question is framed and the facts in

the case study).

The high population of the candidates scored above average demonstrating good knowledge of

filing of returns requirements. Although some of the students misconstrued the requirements of

the question and listed documents/ information supplied for registration to FIRS.

For student companion purpose, we recommend the usage of alternative solution prepared by

Assessor during the marking exercise for this question.


This question is ambiguous since the company has registered for VAT, it can be assumed that it has also

registered for CIT only that it has not been filling annual returns, if this is also, then the document and

information the company is required to submit to FIRS as stated in Sec tion 41 of CITA, in Sub section 1

a) The audited, tax and capital allowance computations.

b) A duly completed self- assessment form.

c) Evidence of payment of the whole or part of the tax due into a bank designated for the

collection of tax.

3 What are the tax implications of the overall operations of EMCHOL and its Executive Chairman

since May 2008 to December 31, 2010?

(20 marks)


The Tax implication of the overall operation of EMCHOL and its Executive since May 2008 to

December 31, 2010 are:

a) The company since it has not registered with FIRS for CIT will be liable to a penalty for not

registering and for not filing annual returns.

Page 10 of 56

b) The company has not been deducting withholding tax from payment made to suppliers and

contractors, including the professional working for them. The tax authorities will collect the tax

plus:

- 150% of the amount of tax to be withheld

- Interest of 5% above the CBN re- discount rate

c) The company was not filed returns for Education Tax (EDT). The company will be liable to pay

the tax with penalty.

d) The company is not up to date in filling VAT returns to the company will be liable to pay VAT

returns , so the company will be liable to pay a penalty of ₦5,000 per month the returns remain

outstanding

e) If the company has not been deducting aid remitting Personal Income tax below relevant tax

authorities, the company will be liable to pay the necessary tax plus

- 10% penalty

- Interest at commercial rate.

4 Having submitted the accounts for the relevant years to the Revenue Authority for tax purposes,

compute the following:

i) Adjusted Profits for the relevant tax years. (5 marks)

ii) State the basis periods and the relevant years of assessment as presented in appendix 1.

(5 marks)

iii) Compute the total tax liability for each relevant year of assessment showing clearly the

Capital Allowances computation.

(5 marks)

iv) Briefly explain the steps that can be taken by the company to reduce the burden of cash

outflow that could arise from the failure to file returns for many years. (5 marks)

(Total: 20 marks)


1. Nature of the question

Question 4 is the only technical question testing candidates‟ knowledge of: (a) Tax Computation (b) Capital Allowance Computation

Page 11 of 56

(c) Commencement rule (d) Application of Tax rates and restriction specified in CITA

1979, as amended.

2. Performance

It was expected that a good student should be able to perform well, given that they need to

prepare for the examinations.

All the students attempted the question as the only computational one, where they hoped to score

marks. Only about 10% scored between 10 -15 marks, many performed poorly. This could be as

result of poor preparation, or lack of materials relevant to the topic tested.

3. Notes for Students

Students need to study well, attend lectures in approved / registered tuition centres. The question

is cheap for an average, well prepared student. It is the technical side of the paper that tests

computational ability of a good qualifying CITN Student.


Year 2008 2009 2010

Net profit/loss as per account

₦56,000 ₦6000 ₦733,000

Add back:

Disallowable expense

Depreciation 348,000 720,000 720,000

Donation - 300,000 -

Interest on loan 125,000 146000 237,000

47300

₦1,166000

₦957,000

i. Adjusted profit ₦417000 1,166000 ₦957,000

Less relief (if any) - - -

Assessable profit ₦417000 122600 1690000

ii. Commencement

Rule: Operation started

01/5/08

BASIS PERIOD FOR ASSESSABLE PROFIT

Page 12 of 56

1ST Year: 2008 1/5/08 - 31/12/2008 = ₦417,000

2nd Year: 2009 1/5/08 30/4/09 = ₦417000 x(4/12 x122

=₦825,667

3rd Year: 2010 1/1/2009 31/12/2009 = =₦825,667

Above assessable profits, based on basis period indicated above are used in computing the tax payable

by the company including Education tax at 2% of Assessable.

EMCHOL NIGERIA LIMITED

Computation of Tax Payable

2008 2009 2010

Assessable project

₦417000 ₦825667 ₦122600

Less Capital ₦ ₦ ₦

B/forward - 1405942 1258078

CA for the year 1683919 402,575 402575

Total CA 1683919 1808,517 1660,653

Restricted to 66

2/3

277,977

(277977)

550439 (550439) 817325

(81732)

Unabsorbed CA forward

1405942 1258,078 843,328

Chargeable

profit

₦139,003 ₦275,228 408,675

C.I. Tax @

30% of

chargeable

profit

₦41,701 ₦82, 568 ₦122,603

Education Tax

at 2% of

assessable

₦8,340 ₦16,513 ₦24,520

Page 13 of 56

profit

EMCHOL NIGERIA LTD

CAPITAL ALLOWANCE COMPUTATION

Motor Vehicles

Furniture and Fitting

Plant and Machineries

Total

IA 50% 25% 50%

AA 25% 20% 25%

Acquistion

25/5/08 - 350,500 - 350,500

03/7/08 2500,000 - - 2,500,000

02/10/08 - - 300,000 300,000

At cost 31/12/08

2,500,000 350,500 300,000 3,150,00

CA

IA 1250,000 87,625 150,000 1,487625

AA 156,250 30,669 9,375 196,294

Total CA 1406,250 118,294 159,375 1, 683,919

TWDV 2008 1093, 750 232,206 140,625 1466,581

CA 2009

IA - - - -

AA 312,500 52,575 37,500 402,575

Total CA 312,500 52, 575 37,500 402,575

TWDV 09 781,250 179631 103125 1064,006

CA 2010

IA - - - -

AA 312500 52575 37500 402,575

Total CA 312500 52575 37500 402,575

2010 468750 127056 62625 661431

Page 14 of 56

5 As a Tax Consultant, advise the management of EMCHOL on the position of Nigerian tax law on

issues of business operation profits exempted from tax liability in Nigeria.

(20 marks)

Appendix 1

EMCHOL NIGERIA LIMITED

INCOME STATEMENTS FOR 2008, 2009 & 2010

Notes 2008 2009 2010

N’000 N’000 N’000

Turnover (i) 10,450 12,932 15,803

Direct Costs (ii) (4,159) (5,126) (6,403)

Gross Profit 6,291 7,806 9,400

Administrative Expenses (iii) (6,133) (7,494) (8,311)

Financial Charges (iv) (214) (252) (356)

(Loss)/Profit before Tax (56) 60 733

Taxation Provision - (18) (220)

Retained (Loss)/Profit (56) 42 513

Notes

i. Turnover: Training 8,420 9,510 10,840

Business Advisory 1,465 2,607 3,917

Software Sales 565 875 1,046

10,450 12,932 15,803

Page 15 of 56

ii. Direct Costs: Facilitation fees 3,368 3,804 4,653 Professional fees 366 652 1,025

Software Cost 425 679 725 4,159 5,126 6,403

Notes 2008 2009 2010

N’000 N’000 N’000

iii. Administrative Expenses Local Transportation 450 1,070 950

Staff Salaries & Wages 2,640 2,800 3,080

Utility Expenses 240 280 304

Rent 500 500 500

Depreciation 348 720 720

Motor Running 165 230 314

Medical Expenses 85 45 62

Business Promotion 800 1,250 1,400

Audit & Accountancy - - 300

Donations 350 500 600

Repairs & Maintenance 135 27 46 General Office Expenses

420 72 85

6,133 7,494 8,311

iv. Financial Charges: Bank Charges 65 82 95

Interest on Loan 125 146 237

Insurance Premium 24 24 24

214 252 356

The following additional information were available:

1. Fixed Assets were acquired as follows: a) Motor Vehicle purchased on 3rd July 2008 for N2,500,000. b) Furniture and Fittings acquired on May 25, 2008 amounted to N350,500.

c) Electricity Generating set (10 KVA) purchased on 2nd October 2008 for N300,000.

2. Depreciation rates have been agreed at

Page 16 of 56

i. Motor Vehicle 25% ii. Furniture and Fittings 10%

iii. Equipment 20% 3. Donation made in 2009 included a gift of N300,000 made by the Chief Executive Officer to his

former colleague who solicited for his assistance through the company. 4. The Interest on Loan was in respect of a loan secured by the company to purchase a car for the

Chief Executive in July 2008.

Appendix 2 Extract from the letter of FIRS to EMCHOL

Dated……………

Gentlemen,

Reference to our numerous letter and subsequent meetings in my office over the delayed and non-filling

of annual returns by your company since the commencement of operations.

It is disheartening that a business entity, with such operations as yours, still relies on outdated mode of

keeping his financial records. The records of your transactions submitted more than six months ago by

your Accounting Officer could go for anything other than a conjured assemblage of self-constructed

figures except that it was accompanied by copies of you invoice on which you have paid VAT which we

confirmed from our records. It was this that made us to delay action and give you benefit of doubt that

you should be able to come up with the result of your company‟s operation for the purpose of assessing

its operation for due tax liability

May I inform you that as at now your company has contravened Section 345 of Companies and Allied

Matters Act CAP 20 LFN and Section 40A of Companies Income Tax Act CAP 60 LFN on filling of its

annual returns. Such a contravention of law carries penalty and the Revenue is empowered to impose

maximum penalty in such cases as it deemed fit.

If your company failed to submit its accounts for the three years of operations and the computation of its

tax liability based on the accounts within the next 30 days to the date of receipt of this letter, we would

be compelled to demand N30 million from your company as the assessed tax based on figures obtained

from the VAT office on respect of your annual turnover.

While I await your immediate response, I remain,

Yours faithfully,

Signed

Page 17 of 56

Deputy Mananger For: Chairman

Federal Inland Revenue Service

Solution to question 5: Steps to reduce the burden of cash outflow

iv) Section 59,subsection 5 of CITA 1979 as amended to date , provides that a company filling self -

assessment shall pay the tax due within two months from the date of filing the assessment in one lump

sum or such number of monthly installment (not being more than six), as may be approved by the

board.

Provided that where a request for installmental payment has been made, the request shall be

accompanied with payment of the first installment to the designated bank.

In essence, EMCHOL NIGERIA LIMITED may apply to the board requesting that it shall pay the tax

liability for the relevant years in six installments, attaching evidence of payment of the first installments



PROFESSIONAL 2: OIL, GAS & OTHER MINERALS TAXATION

ATTEMPT ALL QUESTIONS. SHOW ALL WORKINGS TIME: 3 HOURS

Page 18 of 56

1. a. Explain four fiscal regimes operating in the Oil and Gas Industry in Nigeria.

(12 marks)

b. Write short notes on the following with regards to production sharing ratio:

i. Royalty Oil

ii. Cost Oil

iii. Tax Oil

iv. Profit Oil (8 marks) (Total: 20 marks)


The candidate performance was very poor. The commonest pitfall was candidates‟ poor understanding

of basic terms in the Petroleum Industry. Candidates are advised to read widely when preparing for

future examinations.


1. FISCAL REGIMES

i. Joint Venture

This an agreement in which the federal government through NNPC enters into a joint

operating agreement with the multinational Oil companies as joint ventures partners.

The foreign technical partners are usually designated the operator. The operator‟s duty

includes the implementation of the work programme. Each partner is expected to make

contribution to cash calls through exploration, development and production activities.

Each partner can separately lift and dispose its share of crude based on their equity

participation and also separately account for PPT and royalty. They are subject to that

under the PPT Act and the 2000 MOU.

ii. Production Sharing Contract

In this regime, NNPC who is the owner of the mineral right (concessional) enters into a

contract with foreign technical partners designated as contractors to carry out exploration

and development activities on its behalf.

The contractor provides the necessary funds and bears all the risks. Contractor is entitled

to recover quality operating cost from the cost oil allocation.

Page 19 of 56

Royalty oil is lifted by NNPC for payment of royalty. NNPC also lift tax oil for payment

of PPT

Profit on oil is shared by the partners at a pre-determined equity contribution ratio. All

equipment‟s /assets become property upon arrival in Nigeria.

Production Sharing Contract is subject to tax under the PPT Act and the deep offshore

Inland Basing Production Sharing Contract Act

Applicable PPT is at a flat rate of 50%. They enjoy investment tax credit (ICT) at 50% of

qualifying capital expenditure incurred in the year for contract executed. Prior to 19 th July

1998 and Petroleum Investment Allowance (PIA) for subsequent contract;

Royalty are payable are as follows

Water Debt Royalty Base

201 to 500 meter water debt - 12%

501 to 800 ,, ,, - 8%

801 to 1000 ,, ,, - 4%

Beyond 1000 meter water debt - 0%

Inland Basin ,, ,, - 10%

iii. Sole Risk/ Independent/Marginal field operators.

These are operators that operate on field that were discovered by the Multinational Oil

Companies but left unattended to for a period of not less than 10 years and compulsorily

acquired by the Federal Government and re-allocated to indigenous concession holders to

boost indigenous participation in the oil and gas industry.

They are subjected to tax under PPT Act.

iv. Service Contracts Operators:

Under this regime the contractor undertakes exploration, development and production

activities for and on behalf of NNPC which is the concession holder. The contractor

provides the capital and technical expertise and is reimbursed in cash or in kind.

Contractor is entitled to operate one block at a time. The contractor has first option to buy

fixed quantity of crude Oil. The proceed of the contractor is a fee and is subject to tax

under CITA.

Royalty Oil

b. This is the quantum of Oil lifted by NNPC to pay for royalty for Oil produced in the

contract area.

Cost oil

Page 20 of 56

This is the quantity of Oil lifted by the contractor to reimburse the cost of exploration,

and development and production in the contract area. It is lifted by contractor after

certification by NNPC.

Tax Oil

This is the quantity of Oil needed to pay the PPT due on the production in the contract

area. It is lifted by the NNPC.

Profit Oil

This is the quantity of Oil that remains after royalty oil, cost oil, and tax oil, have been

lifted. The profit oil is shared between NNPC and contractor in pre-agreed ratio.

2. From the audited data regarding period ending 31st December, 2010 below, you are required to prepare

the tax liability of Munirua Petroleum Limited, which also operates two oil tankers for transportation of crude oil from the Nigeria port of export.

Income :-

N

Proceeds of Chargeable Oil:

- 4.4 million barrels (Export) 237,600,000 - Local Sales 21,800,000

Freight for Transportation of Crude Oil 15,000,000

Value of natural Gas Sold 33,745,000

Other Oil related income 1,127,400

Expenses:-

Salaries & Wages 12,496,020

Rent on Staff Accommodation 9,674,046

Compensation to host communities 920,500

Royalties on Export Crude 8,674,076

Royalties on Local Sale of Crude Oil 1,674,926

Royalties on Local Disposal of Natural Gas 4,375,000

Interest on loan from parent company 1,645,920

Bad debts written off 849,750

Page 21 of 56

Depreciation 13,849, 200

Exploration & Drilling Costs:

1st Appraisal Well 3,749,250

2nd

Appraisal Well 1,160,494

3rd

Appraisal Well 3,849,250 8,758,994

Contribution to Pension Fund 3,074 920

Custom Duties on Essentials 1,579,250

Administration Expenses 13,949,920

The summary of qualifying expenditure incurred is as follows:

Location N Year

On shore operations 4,279,200 2003

Territorial waters within 100 meters of water depth 3,564,500 2005

Off shore between 100 & 200 meters depth 3,564,500 2005

Off shore beyond 200 meters water depth 4,928,750 2005

Assume that one quarter of administration expenses and qualifying expenditure for on shore operations relate to the transportation of crude oil by Ocean – going Vessel and that the rate of Petroleum Profit Tax is 85% . (20 marks)


Candidates‟ performance was fairly good. The commonest pitfalls were:

i. Inputing income and expenses changeable under CITA in PPTA computation.

ii. Most candidates were unaware that ICT and CA computations on the listed assets should be Nil

as they were more than 5 years as at 2010.

iii. Third appraisal well expenses should be disallowed and capitalized; ICT and CA could be

claimed in 2010.


2. MUNIYA PETROLEUM LTD.

Computation of Petroleum Profit Tax 2010 YOA

N N

Proceeds of chargeable Oil Exporter 237,600,000

Page 22 of 56

Local Sale 21,800,000

Others 1,127,400

260,527,400

Staff Salaries 12,496,020

Rent of staff Accommodation 9,674,046

Compensation to host communities 920,500

Royalties on Export Crude 8,676,076

Royalties on Local Sale of Oil 1,674,926

Bad Debt Written off 849,750

Exploration & Drilling Cost

1st Appraisal Well 3,749,250

2nd Appraisal Well 1,160,494

Contribution to Pension Fund 3,074,920

Custom Duties on Essentials 1,579,250

Administration Expenses

¾ x 13,949,920 10,462,440

54,317,672

Education Tax 4,043,328 58,361,000

Adjusted Profit 202,166,400

Loss Relieved -

Assessable Profit 202,166,400

Deduct the Lower of

Capital allowance 769,850

And 85% 0f Assessable Profit 171,841,440

Less 170% of Tax OffSets 327,187

171,514,253

Chargeable Profit 769,850

201396550

Assessable Tax at 85% 171,187,068

Less Tax Offset-ITC 192,463

Chargeable Tax 170,994,605

N

Chargeable Tax 170,994,605

Education Tax 4,043,328

Computation of Companies Income Tax

N

Page 23 of 56

Freight for Transportation of Crude Oil 15,000,000 Value of Natural Gas

Sold 33,745,000

48,745,000

Expenses

Royalties for Gas 4,375,000 Admin Cost 3,487,480 7,862,480 Assessable Profit 40,882,520

Less Loss Relief Nil Chargeable Profit 40,882,520

Tax Liability at 30% 12,264,756 Education Tax at 2% 817,650

COMPUTATION OF CAPITAL ALLOWANCE AND INVESTMENT TAX CREDIT

LOCATION YEAR AMOUNT ITC CA

On Shore 2003 4,279,200 - -

Within 100m deep water 2005 3,564,500 - -

Between 100 - 200m Water Depth 2005 3,564,500 - -

Offshore beyond 200 water depth 2005 4,928,750 - -

Drilling cost Capitalized 2010 3,849,250 192,463 769,850

192,463 769,850

Note

i. Section 10(1)(iii) of the PPTA allows deduction in respect of the first two

appraisal wells only at the same oil field. Hence, the drilling cost on third

appraisal well has been disallowed.

Having been disallowed, it was capitalized and capital allowance claimed in that

respect.

Page 24 of 56

ii. No investment Tax credit was granted for the qualifying expenditure incurred in

2003-2005 .Since investment tax credit was granted only once in the year in

which the expenditure was incurred.

The rate of investment tax credit adapted in the solution was:

On Shore operations 5%

3. a. Briefly discuss the following:

i. Exploration Well

ii. Appraisal Well

iii. Investment Tax Credit

iv. Petroleum Investment Allowance

(16 marks)

b. Outline four legislations that regulate the activities in the Oil and Gas Industry in Nigeria.

(4marks)


The performance was poor, the commonest pitfalls were:

i. Very many candidates erroneously wrote Petroleum Profit Tax Act and Company Income Tax

Act instead of Petroleum Profits Tax Act and Companies Income Tax Act as provided by the

relevant tax legislations.

ii. Most candidates were not conversant with the provisions of Investment Tax Credit and

Petroleum Investment Allowance.


3. a. i. Exploration well: This is otherwise known as wildcat

well. It is well that is used to establish whether oil or gas is present/ exist in the

field .Exploration well can result in proved reserves or dry holes. A wildcat well

that has discovered a commercial field is known as discovery well.

Page 25 of 56

Appraisal Well on the other hand is drilled after successful exploration drilling.

Appraisal well is drill to confirm the commercial quantity / potential of an oil and

gas reservoir where oil and gas been confirm to exist. This type of drilling is

called appraisal drilling.

ii Investment Tax Credit (ITC): This is allowance granted to a crude oil producing

company which executed a production sharing contract (PSC) with the NNPC in

1993. The applicable rate is 50% flat rate of the qualifying capital expenditure

(QCE). The ICT allowance shall be offset against the chargeable tax in

accordance with the provisions of production sharing contact.

Petroleum Investment Allowance (PIA) on the other hand is an allowance granted to an E & P Company in the first year a qualifying capital expenditure (QCE) is incurred for the purpose of

its operation. The applicable rate depends on the fiscal regime under which The E & P companies operate. However, for the production in sharing contract after 1993, the applicable

rate is 50%.PIA shall be added to the annual allowance.

Assessor‟s comment:

Candidate did not prepare ahead of this examination. They did not meet the expectation of the Examiner and most of them performed poorly

b. The following are the list of legislations that regulate the oil and gas industry in Nigeria

i. Petroleum Act 1995

ii. Petroleum Profit Tax 1990 as amended.

i. Memorandum of Understanding MOU

ii. Deep offshore and Inland Basin Production Sharing contract Act 1999

iii. Production Sharing contract PSC

iv. Companies Income Tax Act CITA- for Gas operations and Services companies

v. Petroleum (Drilling and Production) Regulations

vi. Associated Gas Re- Injection Act.

4. Ado Petroleum Co. Ltd, a company in JV with NNPC since 2000 and operating offshore at water

depth of 90m, incurred the following qualifying capital expenditure for the year ended 31st

December 2008:-

i. Plant Expenditure $10,500,000

ii. Pipeline and Storage $15,750,000

Page 26 of 56

iii. Tangible Drilling Costs $27,450,000

Tax written down value of qualifying capital expenditure at 1 st January, 2008 amounted to

$6,800,000 for plant expenditure and $10, 400,000 for Tangible drilling costs.

You are required to compute

i. Petroleum Investment Allowances

ii. Annual Allowances. (20 marks)


The candidates‟ performance was good. The commonest pitfall of few candidates was their

inability to use the relevant petroleum investment allowance and annual allowance rates in

the computation of capital allowances.


4. ADO Petroleum Co. Ltd.

Computations of capital Allowances for year the year ended 31st December, 2008.

Plant Pipeline Storage Tangible Drilling

B/f $ $ $

B/f 6,800,000 - 10,400,000

Addition Cost 10,500,000 15,750,0000 27,450,000

17,300,000 15,750,000 37,850,000

PIA-10% 1,050,000 1,575,000 2,745,000

Munt 2% 3,460,000 3,150,000 7,570,000

4,510,000 4,725,000 10,315,000

Page 27 of 56

5. a. Distinguish between Estimates and Final Petroleum Tax Returns.

b. Molad Petroleum Development Co. Ltd submitted it 1st estimate to FIRS for 2008 on 27th

February 2008 with tax payable of $60m. In July 2008, it submitted its 2nd estimate with

tax payable of $84m. In November 2008, it also submitted a 3rd estimate with tax payable

of $90m.

You are required to:

i. Indicate the due dates for payment of the monthly installments payable.

ii. Compute the monthly installments payable.

iii. If the final returns showed tax payable of $113.65m, determine the 13 th installment

payable.


The candidates‟ performance was good. Few candidates were unable to prepare the relevant

payment schedule with the due dates.


5. i. Estimated tax sector are made by E & P Company to share annual that will be paid on 12

Installment. Estimated returns can be raised as offer as necessary. The first estimate is

expected to fill on or before 28th February of the actual year and the first installment is

expected to be paid on or before 31st march of that year.

Final return is the statutory returns field by E & P at the end of the year31st December. The

returns are expected to be filled on or before 31st May of the year following the year of

return. It will increase the amount of additional PPT on or the 13 th installment after payment

of the 12th installment base on estimate or whose applicable return due to the company where

there is overpayment.

ii. Due date for payment for installment

Page 28 of 56

MONTH DUEDATE

January 2008 March 2008

February 2008 April 2008

March 2008 May 2008

April 2008 June 2208

May 2008 July 2008

June 2008 August 2008

July 2008 September 2008

August 2008 october2008

September 2008 November 2008

October 2008 December 2008

November 2008 January 2008

December 2008 February 2008

iii. Monthly Installment Payable

1. March 2008 $5m

2. April 2008 $5m

3. May 2008 $5m

4. June 2008 $5m

5. July 2008 $8m

6. August 2008 $8m

7. September 2008 $8m

8. October 2008 $8m

9. November 2008 $9.5m

10. December 2008 $9.5m

11. January 2009 $9.5m

12. February 2009 $9.5m

$90m

Note: 1st estimate $60/12 = $5m

Page 29 of 56

March – June (4 Months)

2nd estimate = $84 – $20m/8

= 64/8 = $8m

July – October (4 Month)

3rd estimate 90 – (20 + 32) =38 4 4 = $9.5m

November 2008 – February 2009 (4Months)

iv. 13th Installment payable $ Fiscal tax 113.65 Estimate/ installment Paid 90.00

13th Installment 23.5



PROFESSIONAL EXAMINATION 2: TAX AUDIT AND INVESTIGATION


TIME: 3 HOURS

1. Ibberiem Nigeria Limited is a trading company based in Uyo. For the past two years, the Tax

Office has been having a running battle with the company on its self-assessment tax returns.

Intelligent report continuously received by the FIRS office revealed that the company has been in

good business and that other companies in the same industry with it may likely follow its step

regarding payment of taxes. The tax office thereafter recommended the company for

investigation as a result of which a letter was received by the Managing Director informing the

Company of the intending visit of the Tax Investigation team.

As a recently engaged Tax Consultant of the Company, you are to explain the following to the

company‟s top management team:

(a) Differences between Tax Investigators and Tax Auditors.

(6 marks)

(b) The stages usually involved in the Tax investigation. (10 marks)

Page 30 of 56

(c) Circumstances where Tax investigation could be terminated.

(4 marks)

(Total: 20 marks)


The question is on distinguishing the differences between Tax Investigators and Tax Auditors, stages

involved in the Tax Investigation and the circumstances that could lead to the termination of Tax

Investigation. More than 96% of the candidates that sat for the paper attempted the question and they

performed fairly.

Though, majority of the candidates could not distinguish between Tax Investigator and Tax

Investigation; Tax Auditor and Tax Audit. Many of the candidates wrote on Tax Audit when they meant

to write on Tax Auditor and on Tax Investigation instead of Tax Investigator.

Candidates are advised to be diligent in understanding the requirements of the examiner.


1a. Differences between Tax Investigators and Tax Auditors

Tax Investigators

Tax Investigators are staff of the Revenue Authority well equipped and trained. They are

powerful tax officials with investigative minds and well- focused. Their aims are to establish

whether or not the company has committed fraud or involved in tax evasion. They have the right

to call for any relevant document or information that could assist in carrying out their duties

which could result in prosecuting the taxpayer in Nigeria Law Court. They are also trained to

unravel taxes evaded for onward payment to the government accounts. They could also

forcefully remove any evidence or relevant documents from the company‟s premises. At times,

depending on the situation, they could lock up the company.

Tax Auditors

Tax Auditors are also staff of the Revenue Authority but with milder minds. Their aims are to

examine the company‟s books and records with a view to ensuring that it pays the right tax and

ensure tax compliance. They have limited time to operate unlike the tax investigators and are not

to carry their assignment forcefully.

b. Tax Investigation Steps:

Page 31 of 56

The following are the stages involved in tax investigation:

i. Information Collation and Analysis Stage : This involves collation and analysis of

information received on the taxpayer. It includes checking and cross checking of

information, proper analysis of it and documentation to establish the purported tax evasion

or fraud. These are discretely done without the knowledge of the taxpayer being

investigated.

ii. Evidence Gathering Stage: This is the stage where the investigators are in the company‟s

premises to carry out in depth work with relevant books and records, documents, reports

removed from the premises for safe keeping and future analysis to confirm the intelligent

reports received. Where necessary, they can seal the premises to protect evidences. They

also interview and arrest individuals, where necessary, to secure evidence, but with warrants

obtained.

iii. Case Preparation Stage: This is a stage where gathering and collection of witnesses is

carried out. It also involves interrogation of suspects and careful examination and analysis of

seized documents. However, where in the opinion of the tax investigators that the evidences

are not strong enough for conviction, the investigation can be stopped at this stage.

iv. Arrangement Stage: Where the evidences available are considered strong enough for the

case, the suspect is charged to court for criminal prosecution. The processes go on until the

necessary judgment is passed and the tax investigators will be available in the court to testify

as expert witnesses.

c. Termination of Tax Investigation:

The tax investigation into a tax fraud or tax evasion could be terminated at any stage under the

following conditions:

i. Where there are insufficient evidences to make a strong case against the suspect.

ii. Where criminality is not involved e.g. tax planning / avoidance wrongly taken as Tax

evasion.

iii. Where the suspect has medical or legal insanity.

iv. Where the suspect dies.

2. Manja Bank Plc. has recently submitted its current self-assessment returns to the relevant tax

authority. The Tax Controller, after a careful review of the returns, observed some anomalies in

the returns hence the bank‟s file was referred to the Tax Audit Team for necessary action. Some

of the anomalies are:

i. Inadequacy of data provided in the returns;

ii. Decline in the computed tax liability when compared with the previous year‟s tax as a result

of some adjustments in respect of tax exempt incomes.

iii. Under-assessment of National Information Technology Development Levy (NITDL);

Page 32 of 56

As the Tax Manager for the bank, you are required to educate your Tax Assistant who will be

available during the audit exercise:

a) What constitutes Valid Tax Returns under the self-assessment regime?

(10 marks)

b) Mention four incomes of a bank that are exempted from tax.

(4 marks)

c) Briefly discuss Companies that are liable to pay National Information Technology

Development Levy (NITDL) and its computation.

(6 marks)

(Total: 20 marks)


The Question tests self-assessment

A content of self-assessment was well attempted. Some candidates confused self-assessment under

PITA with self-assessment under ITMA cap 21 of 2004.

Exemption of bank interest income from tax as it affects Bonds, Treasury Bills and Foreign Loans were

missed out, as well as the details of National Information Technology Development Levy. Candidates

are advised to be more diligent in future examinations.


2a. Contents of Self-Assessment Tax Returns under Income Tax :

The Companies Income Tax Act, section 55 (1) CAP C21 of 2004 provides that every

company, including a company granted exemption from incorporation shall at least once in a

year without notice or demand, file self-assessment returns with the Federal Inland Revenue

Service. A valid tax returns under the self-assessment regime will contain the following:-

i. Original copies of financial statements for the relevant financial year.

ii. Capital allowances computations.

iii. Income tax computations including minimum tax (where applicable) in comparison with

the normal tax computation.

iv. Relevant schedules to the financial statements e.g. fixed assets, debtors, creditors, etc.

v. Duly completed self-assessment forms for the relevant tax types (Income tax, Education

tax, etc.). A principal officer of the company must endorse the forms.

Page 33 of 56

vi. Evidence of payment of the full amount of tax assessed or part thereof, in the case of an

earlier approved installmental payment arrangement.

b. Possible income tax exempted adjustments in a bank tax computations:

i. Interest on foreign loans

ii. Interest income of an export granted loans.

iii. Interest income on agricultural loans

iv. Interest on bonds

v. Interest income on Treasury Bills (Recently introduced)

c. Companies liable to pay National Information Technology Development Levies (NITDL):

The levy was introduced into the Nigeria Tax System in 2007 by the National Information

Technology Development Act, 2007.

The following category of companies are liable to pay the levy which Federal Inland Revenue

Service is empowered by the Act to assess, collect, monitor and also collect penalties where

necessary.

a. Banks and other Financial Institutions including Capital Market operators, Mortgage

Institutions and Micro finance institutions.

b. Pension Fund Administrators, Pension Managers and Pension related companies / services.

c. Cyber companies and internet service providers.

d. Insurance Companies including Insurance Brokerage firms.

e. GSM services providers and all Telecommunication Companies.

3. You are the Managing Partner of Ignatius Agbonifoh and Associates, a firm of Chartered Tax

Practitioners and in the course of your consulting; you came across Withholding Tax Credit Notes

of Ewu Shipping Agency Limited for Withholding taxes deducted at source.

a. What is Withholding Tax? Briefly state your understanding of Withholding Tax Credit

Notes. (4 marks)

b. What are the uses of a Withholding Tax Credit Note? (2 marks)

c. Explain the time limit for the remittance of Withholding Tax deductions and the related

penalty for failure to withhold it.

(4 marks)

d. Write a proposal to Young Stars Shipping Agency Limited sensitizing the company on the need for a

Tax Consultant to assist her in the collection of Withholding Tax Credit Notes, explaining the

benefits derivable from your appointment in this direction. (10 marks)

(Total: 20 marks)

Page 34 of 56


The question is on Withholding tax.

More than 98% of the candidates attempted this question. The (a) to (c) part of the question was re-

tested in (d).

Candidates‟ performance was on the average. However, candidates could not be definite in the definition

of terms which shows lack of in depth studies. The candidates need to expose themselves beyond their

familiar terrain as the proposal writing was poorly attempted.


3a. Withholding Tax (WHT):

Withholding tax is tax withheld i.e. it is an advance payment of tax in respect of an assessment

that is yet to be determined. Therefore it is a credit which the taxpayers can use as a set-off

against the relevant assessment when this is determined in the future.

Withholding Tax Rates:

Individual

Transactions Rate

Dividend 10%

Rent 10%

Interest 10

Contract of Supply 5%

Contract of Construction 5%

Technical Fees 5%

Managerial fees 5%

Consultancy 5%

Company

Building / Construction Rate

Contract 5%

Consultancy / Professional Charge 10%

Managerial Services

Technical Services 10%

Commission 10%

Dividends , Rents, Interest 10%

Page 35 of 56

Withholding Tax Credit Notes:

Withholding tax credit notes are credit notes given by the FIRS or SIR to the taxpayer for

withholding tax so deducted at source from transactions made. For example, where company „A‟

makes sales (that is subjected to Withholding tax-WHT) to company „B‟. At the point of

payment, company „B‟ would deduct the applicable WHT rate usua lly 5% or 10% and pay over

such deductions to the relevant Tax Authority. Upon the receipt of such Withholding Tax, the

relevant Tax Authority will issues a withholding Tax Credit Note to Company „A‟ that actually

suffers the withholding tax.

b. Uses of Withholding Tax Credit Note:

Withholding tax credit Note is used to offset the actual income tax of the company that suffers

the withholding tax. This means that withholding tax is paid in advance.

c. Time limit for remittance of WHT and the related penalty for failure to deduct WHT:

The time limit for the remittance of WHT to the Revenue Authority should be within 30 days of

the deductions or within 30 days the duty to deduct arises, whichever is earlier.

The penalty imposed is ₦5,000 or 10% of the amount either not deducted or remitted whichever

is higher.

d.

Ignatius Agbonifor & Associates

(Chartered Tax Practitioners and Management Consultants)

35, Jejelaiye Street, Oke – Ira, Ikeja, Lagos.

April 10, 2012.

The Managing Director,

Young Star Shipping Agency,

Isolo, Lagos.

Dear Sir,

CONSULTANCY ON WITHHOLDING TAX CREDITS

We have the pleasure of introducing our firm, Ignatius Agboifoh & Associates, a firm of Chartered Tax

Practitioners and Management Consultants.

Our experience in the field of Taxation and its allied professional services span over ten years.

Page 36 of 56

Withholding tax is an advance tax, though deducted at source from certain sources of income at

specified rates, withholding tax is not another form of tax, rather it is just a method of collecting tax,

which when credit is granted, is available for tax off-set.

The engagement of our services in this area by some companies has substantially reduced the actual tax

paid out by such clients while some of them have their final tax liability completely set-off by the

withholding tax credits we collected on their behalf.

It is our sincere belief that our engagement by your company will have a possible effect on your final tax

liability because it is our responsibility to ensure that withholding tax credit notes are obtained from

Federal Inland Revenue Service in respect of all deductions from your invoices.

We are readily available for further clarification on any aspect of this proposal.

Yours faithfully,

For Ignatyius Agboifoh &Associates.

Aworinwale Muhammadu

Managing Partner.

4. You are the leader of an audit team who has just concluded the field audit exercise on African Kenkad

Nigeria Limited while a final meeting has been slated to take place in your office at a scheduled date. The

scheduled date has been communicated to the tax payer.

In view of your position as the leader, you are expected to preside over the meeting. You are therefore

required to:

i. State the purpose of the meeting. (6 marks)

ii. Itemise the preparations to be made in readiness for the meeting.

(4 marks)

iii. Explain the proceedings at the meeting to ensure its proper conduct.

(10 marks)

(Total: 20 marks)


The question tests candidates‟ knowledge of Tax reconciliation meetings.

Page 37 of 56

The purpose of Tax Audit reconciliation meeting was well attempted, however many candidates failed

to indicate the details of how, what and when the reconciliation was to be achieved and how it is to be

planned before the interview. Hence the tasks were confused in many cases.

Candidates are advised to be more diligent in future.


4(i) The Purposes of the Reconciliation Meeting (Interview):

a. To get the responses of the taxpayer on the audit findings and intended tax adjustments.

b. To discuss and determine whether the Taxpayer agrees with the results of the audit.

c. To further educate the taxpayer on the tax implication of the adjusted items with a view to

encouraging more tax compliance.

ii. Planning to be made in readiness for the meeting proper:

a. Ensure that the audit findings have been properly articulated, calculated and understood by

you and your team for the meeting.

b. Ensure that the working papers are well cross- referenced with the interim report. It must be

clear, accurate and well documented.

c. Ensure that your supervisor (Head of the audit) agrees and approves your findings.

d. Be ready to exchange and share information with the taxpayer regarding your audit findings

and adjustments.

e. Choose a suitable place that respects the taxpayer‟s privacy.

iii. Proper Managing of the Interviewed Process:

a. Ask your officer to make the place of the meeting readily set before the arrival of the

taxpayer‟s team.

b. Ensure that no other meeting or assignment is scheduled for the time already given to the

taxpayers.

c. Ensure that the scheduled officer or others that need to attend the meetings and take minutes

are around.

d. Present your findings and points in a professional and unbiased manner.

e. Use relevant tax laws and accountings procedures to explain your findings in details.

Page 38 of 56

f. Be attentive and respect the opinion of the taxpayer and tax consultants in a courteous

interview manner, even if you disagree with them.

g. You should be calm in a situation where the taxpayer becomes upset or agitated regarding

your audit findings / intending adjustments.

h. Let the taxpayer clearly see the basis of your final adjustments and agree with them.

i. Where they fail to reason along with you and you believe you are in order, let them know

that it is the position of the law and you cannot treat them outside other tax payers‟

treatments.

j. Be polite and if possible, provide light refreshment.

k. Ensure that the decisions taken on each point is well documented.

l. Explain the remaining post meeting processes to the taxpayer.

m. Take summary of the decisions reached and the final audits adjustment that should be

expected except if there are few information to be provided.

5. The concept of Risk Assessment is fundamental to the successful completion of tax audit exercise in a self-

assessment tax system.

a.What is Risk Assessment? (5 marks)

b. State five (5) objectives of the concept in relation to a tax audit exercise. (5

marks)

c.Identify, with reasons, five (5) ratios you will like to include in your risk assessments.

(10 marks)

(Total: 20 marks)


The question is on Risk Assessment. Majority of the candidates attempted the question but the

performance was poor.

Candidates could not explain Risk Assessment. The difference between current ration and liquidity ratio

could not be differentiated as well as the ratio needed for risk assessment.

Candidates should always take time to understand examination requirements.


5a. Risk assessment is the analysis of the taxpayer‟s return with a view to focusing on those items

that have high potential risks affecting the accuracy of taxes that are required to be paid.

b. Objectives of the Concepts of Risk Assessment are as follows:

Page 39 of 56

i. Risk assessment will assist to know which items to put in the tax audit plan.

ii. It will give direction on the types of audit test to perform on the selected items.

iii. It will give indication of the type of audit to perform on the taxpayer e.g. issue audit,

comprehensive audit, e.t.c.

iv. The assessment will assist to know whether the audit addresses the proper risk areas.

v. It will show the performance of the tax payers‟ tax wise when compared with the taxpayers

within the same industry.

vi. It will assist in the efficient utilization of time and human resources.

c. Ratios likely to be included in the Risk Assessment:

There are many ratios in financial analysis but some that are directly applicable to risk

assessment are as stated below:

i. Profit Margin: The emphasis is on Net Profit before tax, the reason is that it is the tax we

are considering. The ratio is a good measure of the taxpayer‟s net trading result in relation

to other period or other taxpayers within the same industry.

Net Profit (Before) Tax X 100%

Sales (Turnover)

ii. Tax Ratio: This ratio gives us the percentage of sales that is assessed to tax. It is useful to

know the tax compliance of a taxpayer when compared it to other taxpayers in the same

group or sector or industry since the same parameters will be applicable to all of them.

Tax Assessed X 100%

Turnover

iii. Ratio of Cost of Sales to Turnover: The ratio gives indication of the taxpayer‟s

accumulation of costs against sales. The lower the better as it will increase profits which

eventually lead to taxable profits. It will also need to be compared with the previous years

and the taxpayers within the same industry.

iv. Current Asset Ratio: The minimum standard is 2:1 or less than or equals to 200 %. This

measure the ability of the taxpayer to meet up with its current liability including taxes. It

is also called working capital ratio.

Current Asset Current Liabilities

Page 40 of 56

v. Liquidity Ratio: It is sometimes referred to as acid test ratio or quick asset ratio. It relates

quick assets to current liabilities. The quick or liquid asset means current assets less

closing stocks. This ratio measures the ability of the business to pay its current debts

(including taxes) when they fall due in the foreseeable future and also immediately.

Current Asset – Stocks

Current Liabilities

vi. Capital Gearing Ratio: This ratio indicates the relationship between the ordinary share

capital of a company and fixed interest capital (i.e. Debentures, Preference Share Capital,

and Bank Loans, Shareholders Loans or Loans from the group / Headquarters or foreign

loan). The company‟s capital structure is said to be highly geared if the proportion of

fixed interests capital to ordinary share capital is high and verse versa, and if both are

equal, it is said to be neutrally geared.

The ratio is a pointer to note the company for thin capitalization and also a direction

towards classification of the interests for the purpose of withholding tax. It also assists to

focus on intercompany relationship which could also assist to know whether some of the

transactions are at arm‟s length or not.

Loan Capital

Equity Capital


APRIL 2012 PROFESSIONAL EXAMINATION 2

TAX PRACTICE AND BUSINESS MANAGEMENT


TIME: 3HOURS

1 a. In accordance with its provision of section 7 of the Federal Inland Revenue Service (Establishment)

Act 2007, list five functions of the board. (5

marks)

b. State the composition of the Federal Inland Revenue Service Board.

(5 marks)

c What are the functions and powers of the Service as stated in Section 8 of the Federal Inland Revenue Service (Establishment) Act, 2007. (10 marks)

(Total: 20 marks)


Page 41 of 56

Candidates performed fairly well in this question except that they could not distinguish between the

functions of Federal Board of Inland Revenue and Federal Inland Revenue Service. Therefore, they are

advised to pay attention to this part of the syllabus.


1a. The following are the powers of the Federal Inland Revenue Service Board:

i. Provide the general policy guidelines relating to the functions of the service.

ii. Manage and superintend the policies of the Service on matters relating to the administration of

the revenue assessment, collection and accounting system.

iii. Review and approve the strategic plans of the Service.

iv. Employ and determine the terms and conditions of service including disciplinary measures of

the employees of the Service.

v. Stipulate remuneration, allowances, benefits and pensions of staff and employees in

consultation with the National Salaries, Income and Wages Commission, and

vi. Do such other things which in its opinion are necessary to ensure the efficient performance of

the functions of the Service.

b. The composition of the FIRS Board is as follows:

i. Executive Chairman being a person experienced in taxation to be appointed by the President

and subject to the confirmation of the Senate.

ii. Six members with relevant qualifications and expertise who shall be appointed by the

President to represent each of the six geo-political zones.

iii. A representative of Attorney-General of the Federation.

iv. The Governor of the Central Bank of Nigeria or his representative.

v. A representative of the Minister of Finance not below the rank of a Director.

vi. The Chairman of the Revenue Mobilization, Allocation and Fiscal Commission or his

representative who shall be any of the Commissioners representing the 36 states of the

Federation.

vii. The Group Managing Director of NNPC or his representatives who shall not be below the

rank of a Group Executive Director of NNPC.

viii. The Comptroller-General of the Nigeria Customs Service or his representative not below the

rank of a Deputy Comptroller-General.

Page 42 of 56

ix. The Registrar-General of the Corporate Affairs Commission or his representat ive not below

the rank of a Director.

x. The Chief Executive Officer of the National Planning Commission or his representative of not

below the rank of a Director.

c. Under the Federal Inland Revenue Service (Establishment) Act 2007, the following are the

functions of the FIRS.

i. Assess persons including companies, enterprises chargeable with tax;

ii. Assess, collect, account and enforce payment of taxes as may be due to the Government or

any of its agencies.

iii. Collect, recover and pay to the designated account any tax under any provision of the Act

or any other enactment or law.

iv. In collaboration with the relevant Ministries and Agencies, review the tax regimes and

promote the application of tax revenues to stimulate economic activities and development.

v. In collaboration with the relevant law enforcement agencies, carry out the examination

and investigation with a view to enforcing compliance with the provision of the FIRS

(Establishment) Act.

vi Make, from time to time, a determination of the extent of the financial loss and such other

losses by Government arising from tax fraud or evasion and such other losses (or revenue

foregone) arising from tax waivers and other related matters.

vii. Adopt measures to identify, trace, freeze, confiscate or seize proceeds derived from tax

fraud or evasion.

viii. Adopt measures which include compliance and regulating actions, introduction and

maintenance of investigative and control techniques on the detection and prevention of

non-compliance.

ix. Collaborate and facilitate rapid exchange of information with relevant national or

international agencies or bodies on tax matters.

x. Undertake exchange of personnel or other experts with complimentary agencies for

purposes of comparative experience and capacity building.

xi. Establish and maintain a system for monitoring international dynamics of taxation in

order to identify suspicious transactions and the perpetrators and others persons involved.

xii. Provide and maintain access to update and adequate data and information on all taxable

persons, individuals, corporate bodies or all agencies of government involved in the

Page 43 of 56

collection of revenue for the purpose of efficient, effective and correct tax administration

and to prevent tax evasion or (fraud).

xiii. Maintain database, statistics, records and reports on persons, organizations, proceeds,

properties, documents or other items or assets relating to tax administration including

matters relating to waivers, fraud or evasion.

xiv. Undertake and support research on similar measures with a view to stimulating economic

development and determine the manifestation, extent, magnitude and effects of tax fraud,

evasion and other matters that affect effective tax administration and make

recommendations to the Government on appropriate intervention and preventive

measures.

xv. Collate and continually review all policies of the Federal Government relating to taxation

and revenue generation and undertake a systematic and progressive implementation of

such polices.

xvi. Liaise with the office of AGF, all government security and law enforcement agencies and

such other financial supervisory institutions in the enforcement and eradication of tax

related offences.

vii. Issue Taxpayer Identification Number (TIN) to every taxable person in Nigeria in

collaboration with States Boards of Internal Revenue and Local Governments.

2. a. What are the composition and powers of the Tax Appeal Tribunal?

(5 marks)

b. State the conditions that a tax consultant should bear in mind before he undertakes to represent a client

before a Tax Appeal Tribunal .

(5 marks)

c. What are the factors that a tax consultant must consider before advising his client to raise an objection

before the Tax Appeal Tribunal?

(3 marks)

d. List the provisions governing procedures before the Tax Appeal Tribunal. (7 marks)

(Total: 20 marks)


Page 44 of 56

Many of the Students did not perform satisfactorily on this question. Majority of them were aware of the

composition and powers of the Tax Appeal Tribunal. However, on the provisions governing procedures

before the Tax Appeal Tribunal, majority of the cand idates did not understand the question and did

woefully. Efforts should be made the Institute to encourage students to study harder also have more

punctual experience.

Solution to question 2

2(a) In accordance with the Fifth Schedule of Federal Inland Revenue Service (Establishment)

Act 2007, the Tribunal shall consist of five members, referred to as Tax Appeal Commissioners

who are to be appointed by the Minister.

(i) A chairman for each zone who shall be a legal practitioner who has been so qualified to

practice for a period of not less than 15 years with cognate experience in tax legislation and tax

matters.

A chairman shall preside at every sitting of the Tribunal and in his absence the members shall

appoint one of them to be the Chairman.

The quorum at any sitting of the Tribunal shall be (3) three members.

Paragraph 20(2) of the Fifth Schedule of the FIRS (Establishment) Act specifies the powers of

the Tribunal as follows:

i. Summon and enforce the attendance of any person and examine him on oath;

ii. Require the discovery and production of documents;

iii. Receive evidence on affidavits;

iv. Call for the examination of witness or documents;

v. Review its decisions;

vi. Dismiss an application for default or deciding matters ex parte;

vii. Set aside any order or dismissal of any application for default or any order passed by it ex

parte; and.

viii. Do anything which in the opinion of the Tribunal is incidental or ancillary to its functions

under the Fifth Schedule.

b. Before a member undertakes to represent a client before an appeal tribunal, such member

should be satisfied that he is familiar with the following:

i. The way in which appeals are conducted.

ii. The way in which hearings are conducted.

iii. The order of proceedings.

iv. The formalities which must be observed.

Page 45 of 56

v. The procedure for expressing dissatisfaction with the tribunal decision.

vi. Other alternatives that may be available including review and the strict limits that

may apply to those alternatives.

vii. A good working knowledge of evidence, and who is competent to give that evidence.

viii. The distinction between an appeal and a review.

ix. The circumstance in which experts application may be made.

c. A tax consultant, in conjunction with his client, must consider the following before filing

an appeal on any disputed assessment to the Tax Appeal Tribunal:

i. The cost to the taxpayer, both in terms of time and money;

ii. The amount of disputed tax liability;

iii. The strength of the client‟s case;

iv. Publicity and the consequences thereof for the client and or his business; and

v. The image created to the officials.

d. i. The procedures for listing appeals and the notification thereof.

ii. The need, where appropriates, to arrange for witness summonses.

iii. Pre – hearing direction mechanism and their uses

iv. The mechanism whereby two or more proceedings before the Tribunal may be

hearings together.

v. The procedures with regard to preliminary hearing.

vi. The power of Tribunal to obtain information and the penalties for failure to comply.

vii. How to obtain adjournment.

viii. The requirements with regard to the submission of expert advice.

ix The composition of the Tribunal at the initial and adjourned hearings.

x. The mechanism of giving evidence.

xi. The competences of parties and witnesses to give evidence.

3 You are the Tax Adviser to RICHARDSON COMPANY PLC. The company‟s income tax returns for the

year ended 31 December, 2009 has been filed with the relevant tax authority. The outcome of the Desk

Examination resulted to the Revenue issuing additional assessment. The Finance Manager kept the

additional notice of assessment for 3 months in his office without referring to you for necessary attention

Page 46 of 56

a. When does an Assessment become final and conclusive? (5 marks)

b. What are the main features of Withholding tax? (5 marks)

c. What is the composition of the Valued Added Tax Technical Committee and what are their functions?

(5 marks)

d. Section 19 of CITA 2004 contains the list of profits or gains of companies or corporate bodies

exempted from Companies Income Tax. List 10 of such profits.

(5 marks)

(Total: 20 marks)


The question was fairly attempted by the candidates. Though many of them performed poorly on (b) and

(c) parts of the question, where features of WHT was likened to operational function of the relevant tax

authority. Also, many candidates went astray on the composition of the Value Added Tax Technical

Committee and their functions.

Due attention must be placed to this part of the syllabus for future guide.


3a. An assessment becomes final and conclusive when all disputes and appeals are resolved and tax become collectible:

i. Where the taxpayer agreed to the tax assessed without objection.

ii. Where no valid objection or appeal has been lodged within 30 days of the receipt of

the assessment notices.

iii. Where there is objection to the Board and the Board‟s decision subsequently shall be

final and conclusive, if no valid objection and appeal is made to the Tax Appeal Tribunal

(TAT) within 30days of receipt of the decision of the Board.

iv. Where there is an appeal to the TAT and the decision/ruling of the Tribunal is agreed

to by the partners based on the rulings, the decision shall be final and conclusive.

v. Where the time for appealing against the decision of the Federal High Court has

elapsed.

b. The following are some of the features of withholding tax concept:

Page 47 of 56

i. WHT is an advance payment of income tax which can be used to offset tax liability of a tax

payer at the end of the period.

ii. It is not a separate form of tax but a collection mechanism adopted by the Tax Authorities to

reduce the incidence of tax evasions / fraud by taxable person.

iii. It helps to bring obscure transactions to the notice of tax authorities.

iv. It makes tax payment less cumbersome to the taxpayer who may not have to bother himself

going to the tax office.

v. It ensures a regular flow of tax revenue to the government.

vi. It reduces incidence of tax evasion.

vii. It enhances voluntary compliance.

viii. It is compulsory payment on any relevant income in which WHT is applicable and must be

paid by the person making a payment to a third person as he becomes an unpaid agent of the

Relevant Tax Authority.

ix. Such a payment must be evidenced by a WHT credit note in the name of the person from whom

deduction has been made.

x. In respect of Franked Investment Income, WHT represents the final tax due.

c. Composition of the VAT Technical Committee

i. A chairman who shall be the Chairman of the Federal Inland Revenue Service.

ii. All the Directors in the FIRS.

iii. The Legal Adviser of the FIRS.

iv. A Director in the Nigeria Customs Service.

v. Three representatives of the State Governments who shall be members of the Joint Tax Board.

Functions of the VAT Technical Committee:

i. To consider all the tax matters that require professional and technical expertise and make

recommendations to the Board.

ii. Advise the Board on its duties

iii. Attend to all such other matters that may from time to time be referred to it.

d. Section 23(1) of CITA states the profits or gains of companies or corporate bodies exempted

from company tax as follows:

i. The profits of any company being a statutory or registered friendly society, in so far as such

profits are not derived from a trade or business carried on by such society.

ii. The profits of any company engaged in ecclesiastical charitable or educational activities of a

public character.

Page 48 of 56

iii. The profits of any company being a trade union registered under this Trade Union Act in so far

as such profits are not derived from a trade or business carried on by such trade union.

iv. The profits of any company or corporation established by the law of a State for the purpose of

fostering economic development of that state.

v. The profits of any company being a cooperative society registered under any enactment or law relating

to cooperative societies.

vi. The profit of any company formed for the purpose of promoting sporting activities where such profits

are wholly expendable for such purpose subject to such conditions as the Board may prescribe.

vii. The profits of any company engaged in petroleum operations within the meaning of Section 2 of PPTA

in so far as those profits are derived from such operations.

viii. Dividend distributed by Unit Trust.

ix. The profits of any company being a body corporate established by or under any Local Government Law

or Edict in force in any State in Nigeria.

x. The profits of anybody corporate being a purchasing authority established by an enactment and

empowered to acquire any commodity for export from Nigeria from the purchase and sale of that

commodity.

xi. The profits from non-Nigerian companies which, but for this paragraph would be chargeable to tax by

reason solely of their being brought into or received in Nigeria.

xii. Dividend, interest, rent, or royalty derived by a company from a country outside Nigeria and brought

into Nigeria through Government approved channels.

xiii. The interest on deposit accounts of a foreign non – resident company, provided that the deposits into

the account are transfers wholly of foreign currencies to Nigeria on or after 1st January 1990 through

Government approved channels.

xiv. The interest on foreign currency domiciliary account in Nigeria accruing on or after 1st January, 1990.

xv. Dividend received from small companies in the manufacturing sector in the first 5 (five) years of their

operation.

xvi. Dividend received from investments in wholly export-oriented business.

xvii. The profits of any Nigerian company in respect of goods exported from Nigeria provided that the

proceeds from such export are repatriated to Nigeria and are used exclusively for the purchase of raw

materials, plants, equipment and spare parts.

Page 49 of 56

xviii. The profits of a company whose supplies are exclusively inputs to the manufacturing of products for

exports provided that the exporter shall give a certificate of purchase of the inputs of the exported goods

to the seller of the supplies.

xiv. The profits of a company established within an export processing zone or free trade zone provided that

100 percent production of such company is for export otherwise tax shall accrue proportionately on the

profits of the company.

4 a Briefly discuss 10 of the general principles of management as stated by Henry Fayol in his universal

theory. (10 marks)

b Explain how the task environment of a business can present business opportunit ies to the organisation. (10 marks)

(Total: 20 marks)


The performance in this question was fair but question 4b was poorly attempted. Candidates could not

explain how the tax environment of a business can present business opportunities to the organization.

Candidates should watch out for such questions in future.


4(a) The 14 General Principles of management from Henny Fayol (1841-1925) are as follows:

i. Division of Labour: This is otherwise known as specification that is performing a task that

can be better performed via specification of labour. Economists consider specification

necessary to efficiency in the use of labour and reduction of waste, it also guarantees

increased output.

ii. Authority and Responsibility: Fayol sees authority and responsibility as complementing each

other. He also recognises the relevance of intelligence and he says authority should be

allocated to those who are responsible.

iii. Discipline: Poor discipline produces poor results. He traces poor discipline to poor

leadership. Discipline must attract sanctions. Employees must obey, but this is two-sided,

employees will only obey orders if management play their part by providing good leadership.

iv. Unity of Command: Employees should receive orders from one superior only. Dual

command is a threat to authority, as it does not facilitate discipline.

Page 50 of 56

v. Unity of Direction: Each group of activities with the same objectives must have one head and

one plan. This relates to the organization of the body corporate rathe r than to personnel.

There should be organization structure and efforts must be coordinated. Unity of command

does not exist without unity of direction but does not necessary flow from it.

vi. Subordination of Individual Interest to General Interest: Individua l interest must be

subordinated to the organizational interest. Personnel goals should not conflict with

organizational goal.

vii. Remuneration of Personnel: The worker is an economic man who is in the employment to

share the profit in terms of wages and salaries. Fayol recognises piece rate and business paid

for the job well done. Remuneration and methods of payment must be fair and afford the

maximum possible satisfaction to employees and the employers.

viii. Centralization: Fayol refers to the extent to which authority is concentrated or dispersed.

Individual circumstances will determine the degree of centralisation that will give the best

overall yield. Small firms should be centralised to optimise their facilities.

ix. Scalar Chain (Line of Authority): This is the decentralised rating of superior to the

subordinates. Fayol views this as “a chain of superiors from the highest to the lowest ranks”.

He recommends that while decentralization needs not to be departed from needlessly, it

should be short-circuited when to follow it scrupulously will be detrimental

x. Principle of Order: This is essentially a principle of organization in the arrangement of things

and people. It deals with task realization with orders in an organization. Fayol believes the

adage of a place for everything (or everyone) and everything in its place.

xi. Equity: Justice and kindness are good solution to the realization of organization goals.

Devotion and loyalty should be elicited from workers by a combination of kindness and

justice on the part of the managers when dealing with subordinates.

xii. Stability of Tenure of Personnel: There musts be tenure provision emphasising permanency

to facilitate continuity. Unnecessary and frequent turnover of personnel is both the cause and

effort of bad management. The costs and dangers of unstable tenure could be devastated to

the goals attainment of an organization.

xiii. Imitative: This principle is conceived of as the thinking out an execution of a plan. Since it is

one of the keenest satisfactions for an intelligent man to experience. Fayol advises, managers

to “sacrifice personal vanity” in order to allow subordinate to exercise initiative. New ideas

must be welcomed.

xiv. Espirit De Corps: In unity, there is strength. It also emphasises the principle of unity of

command, stressing the need for team work and the importance of communication Unity and

oneness within the organization must be built. Fayol emphasised often and often that his

principles of management apply not only to business, but also to political, religious,

philanthropic, military and other undertakings. It is also noted that principles of management

are flexible, not absolute and must be usable regardless of changing and special conditions.

4(b). Task environment is otherwise known as industry environment. It is the most immediate

environment within which an organisation operates. The task environment is that part of the

Page 51 of 56

external environment made up of the specific outside parties which an organisation interact with

in the course of performing its day to day business activities.

The task environment includes:

Competitors, Customers, Suppliers, New Entrants, Substitutes, Regulators, and Stakeholders.

i. Competitors: Business competitors are other business organisations in the same industry

that competes for resources and sell similar products or services to meet the same

customer‟s needs. Business organisations attempt to win market shares at each other‟s

expense. A businessman should be able to identify who the competitors are, how big or

strong they are relative to his own organisation; understand the competitors‟ strengths and

weaknesses and generally keeping close track of what their competitors are doing.

ii. Customers: All organisations and businessmen rely on customers to survive and thrive.

Business customers are those individuals and corporate bodies that purchase its products

and/or services. Customer‟s attitudes, preferences and complaints should be understood

and attended to promptly, therefore monitoring customers‟ changing needs and wa nts is

crucial to business success.

iii. Suppliers: An organisation‟s suppliers are those individuals and organisations that provide

the materials and other resources needed by the organisation to conduct its operations.

Suppliers can affect a business through their ability to raise price or reduce the quality of

goods and services. In general, the greater the powers of suppliers, the lower the business

profits.

iv. New Entrants: The extent to which it is easy or difficult for firms to enter the industry.

New entrants into an industry compete with established companies. The ease with which a

new firm can enter the industry increases competition, reduces prices and usually leads to

lower profit margin because customers have more choices.

v. Substitutes: An important factor in the task environment is the extent to which products in

one industry are closely related to those in other industries. Substitutes reduce market

share and profit and make products and company obsolete.

vi. Regulators: Regulators are other units in the task environment that are capable of

influencing a business operations. As at today in Nigeria, Federal, States and Local

Governments affect organisations by regulating what they can produce and how they may

produce and the costs of operating.

vii. Stakeholders: In many organisations, stakeholders have become a major concern and their

importance cannot be overemphasized. This is especially true of the stakeholders who

hold large block of stocks of any particular organisation. These stakeholders include

Government, unions, local communities, creditors, trade associations, and special interest

groups and stockholders.

Page 52 of 56

5 a. Ankuri Tax Advisory Service has just been appointed by Goody –Goody Nig Plc to replace its former tax consultants. Discuss the provisions of CITN professional rules and practice

guidelines 2010 as they relate to sourcing new clients and acceptance procedures.

(10 marks)

b. Assuming you are the Managing Partner of the new firm, you are to write a letter of engagement to the Directors of Goody-Goody Nigeria Plc, stating the terms of your

acceptance. (10 marks)

(Total: 20 marks)


The question is meant to test the students‟ knowledge of Ethic and writing of letter of Engagement. Most

of them could not write letter of engagement that conform to the standard and have little knowledge

about the Ethic, hence most of them barely got the average pass mark. Some of them who did not know

both requirements failed the question. They should be encouraged to know the required standard.


5(a) Client Acceptance: A member who is invited to undertake professional work by a prospective

client is under no obligations to act. Indeed, he should decline to do so if he believes he would be

unable to assume the duty of care that he would have to that client.

Before accepting instructions to act for a new client, a member should:

i. Comply with the identification requirements set out in the anti-money laundering guidance

ii. Consider whether the client will be an accepted client in terms of the risks which will arise for

the practice from acting for that client and whether the member has the capability to manage

those risk. In assessing the risks relating to the client, the member should consider the potential

client‟s personal circumstances, business situations, financial standing, source of funds, integrity

and attitude to disclosure in regard to compliance with the term.

iii. Consider whether the member and firm will have the skill and competence to service the client‟s

requirements during the course of the engagement.

iv. Consider whether there is any conflict of interest in accepting the client and if so, whether and

how it might be managed.

Page 53 of 56

Having accepted the client, before starting work on any assignment for a client, a member should

understand and agree with the client the scope of the assignment, having first assessed the client

service tasks and be satisfied that the relevant skills and experience to perform the work are

available or acceptable.

Professional Clearance

A member who is invited to undertake professional work in place of another Chartered Tax

Practitioner particularly where any tax compliance services are concerned should before

accepting the appointment, request the prospective client‟s permission to communicate with the

existing Chartered Tax Practitioner. If the permission is refused, the member should decline the

appointment.

When permission has been received from the prospective client for such communication, the

member should ask the previous Chartered Tax Practitioner in wring all information, which in

the opinion of that previous Chartered Tax Practitioner is necessary to decide whether or not to

accept the appointment.

Engagement letter

On accepting instructions, a member is strongly recommended to set out in a letter of

engagement, nature of the assignment and invite the client to agree in writing. The exchange of

letters will serve as contract between the Chartered Tax Practitioner and the Client.

The Managing Director,

Goody- Goody Nigeria Plc, 100 Broad Way Street,

Marina Lagos. 11th February, 2011.

Dear Sir,

RE-TAX CONSULTANCY ENGAGEMENT LETTER TERMS OF ENGAGEMENT

Page 54 of 56

We refer to your letter dated 4th February, 2011 in connection with our appointed as your company‟s

Tax Consultants for 2011 accounting year. This letter sets out the basis on which we are to act for you in

relation to the assignment.

OUR SERVICE TO YOUR COMPANY:

Our responsibility for corporate income tax compliance services would be as follows:

- Review of annual tax returns prepared by the client‟s staff.

- Prepare on your behalf, self-assessment returns and final tax computations for submission with

the statutory accounts to FIRS.

- Advise on instalments tax returns and payments, prompt to remind the company on the due dates

of payments.

- Follow up and respond to queries from FIRS on the tax returns filed.

- Agree on the tax return filed and advise where necessary on contentions matters.

- Deal with other communications relating to the company‟s tax matters.

- General advice in respect of new legislations relating to CIT, PIT, VAT, CGT, etc and other

significant taxes.

- Obtain tax clearance certificate for general purposes and for dividend remittance to non-resident

shareholders.

YOUR RESPONSIBILITIES:

Your staff will be responsible for dealing with other statutory returns such as VAT, PAYE, WHT and

NHF. You agree to give us access to full information about your tax affairs and the matters on which

you have asked us to advise you.

OTHER SERVICES AND GENERAL TAX ADVISE:

We will be pleased to assist the company generally in tax matters if our firm is advised in good time of

any purposed transactions. We will, however, warn you that because tax laws and rules change

frequently, you must ask us to review any advice already given if a transaction is delayed or if an

apparently similar transaction is to be undertaken. It is our policy to confirm in writing advice upon

which the company may wish to rely.

PROFESSIONAL RULES AND PRACTICE GUIDELINES:

We will observe the character, regulations and ethical guidelines of the Chartered Institute of Taxation

of Nigeria and accept instructions to act for you on the basis that we will act in accordance with those

guidelines.

CLIENTS MONIES:

We may, from time to time, hold money on behalf of the company, such money will be held in trust in a

client bank account, which is segregated from the firm‟s funds.

Page 55 of 56

RETENTION OF RECORDS:

Regulatory Requirements:

We reserve the right to disclose our files to Regulating Bodies in the exercise of their powers.

QUALITY OF SERVICE

We aim to provide a high quality service at all times, if you would likely discuss with us how our

service could be improved or if you are dissatisfied with the service that you are receiving please let us

know.

We undertake to look into any complaint carefully and promptly and to do all we can to explain the

position to you.

FEES:

The basis of charging our fees for this assignment will depend on the calibre of staff deployed and the actual time likely to be spent on this assignment multiply by our charge out rate.

It is our practice to collect 75% of fees on commencement and the balance of 25% on completion.

LIMITATION OF LIABILITY:

This letter supersedes any previous engagement letter for the period covered. Once agreed, this letter

will remain effective from the date of the signature until it is replaced. Either party may vary or

terminate our authority to act on your behalf at any time without penalty. Notice of variation or

termination must be given in writing.

We would be grateful if you would confirm your agreement to the terms of the letter by signing and

returning the enclosed copy.

If this letter is not in accordance with your understanding of the scope of our engagement, please do not

hesitate to contact us.

Yours faithfully

Signed

For TAX AUTHORITY SERVICESS

We acknowledge receipt of your above letter dated 11th February, 2011 which fully records the

agreement between you and the company relating to your appointment to carry out the work described in

it.

Signed Date

Page 56 of 56

For and on behalf of Goody-Goody

Documents

THE CHARTERED INSTITUTE OF TAXATION OF NIGERIA … 2.pdfTHE CHARTERED INSTITUTE OF TAXATION OF NIGERIA (Chartered Institute by Act No. 76 of 1992) ... PROFESSIONAL 2: CASE STUDY