Allt

An Introduction to the Nigerian Tax System
and Administration
By
M. Tanko
An Introduction to the Nigerian Tax System and Administration
By
Muhammad Tanko
Department of Accounting,
Ahmadu Bello University Zaria.
2
@ M. Tanko 2003
Ztanko2003@yahoo.com
All rights reserved. No part of this publication may be reproduced, store in a
retrieval system or transmitted, in any form or by any means, mechanical,
photocopying, recorded or otherwise without the express written permission of the
author.
ISBN: 978 – 068 – 741- 6
Published by Alin Kawo Printing Press NB 11 Muri Road, Kaduna
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PREFACE
Taxation as a subject although looks simple to the students, seems to have a lot of
complications, as it is a subject that you either pass all or you fail all. This book therefore,
is intended to help students of accounting, at what ever stage to overcome their fears of
accounting and to have the book as companion to ease their understanding of taxation as
a subject.
Muhammad Tanko
A.B.U. Zaria, 2003.
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AKNOWLEDGEMENT
My most sincere and unalloyed gratitude go to my students of the 2003 academic session
of the Department of Accounting Ahmadu Bello University Zaria. The book was first
envisaged to serve as a course book for the students pursuing degree in accounting. This
scope has now widened to include those writing their professional examinations. To all
and sundry who have contributed to the success of this book, I thank you all.
Muhammad Tanko
A.B.U. Zaria, 2003.
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TABLE OF CONTENTS
Chapter 1: Introduction
Chapter 2: Administration of Taxation in Nigeria

2.1. Federal Board of Inland Revenue
2.2. Joint Tax Board
2.3. State Board of Internal Revenue
2.4. Local Government Revenue Committee
2.5. Joint State Revenue Committee
2.6 Body of Appeal Commissioners.
2.7 Other Matters in the Nigerian Tax Administration
Chapter 3: Basis Periods

Types of Basis Period
3.1 Commencement of a Business
3.2 Change of Accounting Date
3.3 Cessation of a Business
Chapter 4: Capital Allowance

4.1 Introductions
4.2 Initial Allowance
4.3 Annual Allowance
4.4 Investment Allowance
4.5 Balancing Allowance and Balancing Charge
Chapter 5: The Taxation of Companies

5.1 Assessable Profit
5.2 Foreign Company
5.3 Nigerian Insurance Companies
5.4 Companies with other Sources of Income
5.5 Business Losses and Tax Relief
Chapter 6: Partnership Assessment

6.1 Change in Partnership
6.2 Business Combination and Tax Implications
Chapter 7: Petroleum Profit Tax

7.1 Royalty
7.2 Allowable Expenses
7.3 Non-Allowable Expenses
7.4 Non- Taxable Income
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Chapter 8: Pioneer Companies
8.1 Qualification for Application
8.2 Pioneer Certificate and Production Day
8.3 Tax Relief Period
8.4 Accounting Date
8.5 Computation of Profit for Tax Purposes
8.6 Pioneer Status by Location
Chapter 9: Education Tax

9.1 Introduction
9.2 Board of Trustees
9.3 Sharing Ratio
Chapter 10: Personal Income Assessment

10.1 Non- Taxable Incomes
10.2 Benefit in Kind
10.3 Unearned Incomes
10.4 Income from Trade
10.5 Total Income
Chapter 11: The Taxation of Non-Residents

11.1 Definition of Residency
11.2 Resident Company
11.3 Treatment of Expenses
11.4 Agency Operations
11.5 Turnkey Projects
Chapter 11: Capital Gains Tax

12.1 Computation of Capital Gains
12.2 Chargeable Assets
12.4 Disallowable Expenses
12.5 Chargeable Persons
12.6 Rollover Relief
Chapter 13: Withholding Tax

13.1 Taxable Goods
13.2 Taxable Services
13.3 Goods and Services Excepted from Tax
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CHAPTER ONE
INTRODUCTION
1.0 Introduction
Taxation is viewed by many as governments’ way of extorting money from
people. But the term is more than what many sees it. John, (2000) for example, viewed
taxation as the compulsory payments by individuals and companies to the relevant tax
authorities at all levels of governance. The major issue of importance in the definition of
taxation is its uniqueness as a program embarked upon by government to control the
economy. This is because through taxation many aspects of governance could be
achieved.
There are different forms of taxation; they include progressive tax, proportional
tax and regressive tax.
1. Progressive tax: This is a practice by which the rate of tax increases as the
income or the value of the property to be taxed increases.
2. Proportional tax: A tax is proportional where every person pays according to
the proportion of income he has.
3. Regressive tax: A tax is regressive if the more you have, the less you
contribute, that means the rate of the tax or percentage falls as the income
increases.
What ever forms of tax is levied, there are specific features identified as constituting the
characteristics of a good tax system. They include;
i. equality
ii. certainty
iii. convenience
iv. economy
v. flexibility
vi. buoyancy
vii. simplicity
viii. fairness
The rest of the book is structured into eleven chapters starting with the tax administration.
It is my advice that the students follow the book chapter by chapter.
2.0 Tax administration in Nigeria

There are currently six administrative set-ups in the administration of the Nigerian
tax system. Although, there are technical committees set up at both the state and the
federal level to facilitate the administration of the tax system, basically, the organs of
administration in the Nigerian tax system involves the following:
2.1. Federal Board of Inland Revenue

2.2. Joint Tax Board
2.3. State Board of Internal Revenue
2.4. Local Government Revenue Committee
2.5. Joint State Revenue Committee
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2.6. Body of Appeal Commissioners.
2.7. Other matters in the Nigerian tax administration
2.1 Federal Board of Inland Revenue

The federal board of Inland Revenue has an executive arm called the Federal
Inland Revenue Service. Under the Decree, a Federal Inland Revenue Service was
constituted to comprise the following persons, and these persons are said to constitute the
Board of the Federal Inland Revenue Service:
2.1.1 Executive Chairman being a person experienced in taxation to be

appointed by the president and is within the FIRS.
2.1.2 The Directors and Head of Departments within the FIRS
2.1.3 A Director from Federal Ministry of Finance
2.1.4 An Executive Director of the Nigerian National Petroleum Corporation
2.1.5 A Director from the Department of Customs and Excise
2.1.6 A Member from the Corporate Affairs Commission.
2.1.7 A Member of the Board of National Revenue Mobilization, Allocation
and Fiscal Commission.
2.1.8 A Legal Adviser to the Board.
2.1.9 Two other persons appointed by the ministry of finance on their personal
merit
2.1.10 A board secretary appointed by the board as an ex-officio member
The quorum of the board is seven (7) persons and one of whom must be the Chairman or
Director of the Federal Inland Revenue Service (FIRS).
The FIRS is charged with the responsibility of administration of the Decree,

collection of companies’ income tax, petroleum profit tax and value added tax and
accounting for same to the Federal Government. In this regard, the Board may do
anything it deems necessary and expedient for the assessment and collection of the taxes.
Specifically, the following are the functions and powers of this committee.
i. It is responsible for the collection of companies’ income tax,
petroleum profit tax and value added tax. It must therefore, do all
such things necessary for the assessment and collection of these
taxes.
ii. It can sue and be sued in its official name
iii. It may acquire, hold or sell any property taken as security for, or,
in satisfaction of any penalty, tax or judgment debt due from an
organization or a company. The board must account for all such
properties or proceeds to the minister of finance.
iv. It may authorize any person within or outside Nigeria to perform
or exercise any of its powers and duties. The person may also
receive any notice or other documents served upon, delivered or
given to the board.
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v. If the minister consents, the board may appoint the joint tax board
to perform or exercise any of its powers, duties or function.
2.1.1 Technical Committee of the Board

The Finance Decree 1993 established a Technical Committee of the Board whose
membership comprises: —
(1) Executive Chairman of FIRS
(2) All Directors and Heads of Departments of FIRS
(3) Legal Adviser of FIRS
(4) Secretary of the Board
The functions of the committee are:

(1) To consider all the tax matters that require professional and
technical expertise and make recommendations to the Board,
(2) Advise the Board on all its powers and duties.
(3) Attend to such other matters as may from time to time be referred
to the Board.
2.2 The Joint Tax Board

Since each state has its Internal Revenue Board to oversee personal tax
administration and collection, central body is desirable to resolve conflicts, which may
arise between states, as to issues like where an individual is chargeable for tax or even
residences of individuals and therefore income tax claims. This responsibility is on a
body called the Joint Tax Board, which is composed of:
(1) Chairman of FBIR who is the chairman of this Board.

(2) Each member representing each state of the Federation and the Federal
Capital Territory.
(3) A Secretary of the Board appointed by the Federal Public Service
Commission. He is not a member of the Board.
(4) The Legal Adviser of FBIR, who is also not a member but attends as an
Observer, and offers advice when required.
The functions of the Joint Tax Board include but not limited to:
(1) To settle complains and conflicts between the states' tax authorities.
(2) To consider and approve pension schemes and provident funds.
(3) To advise the Federal Government on double taxation arrangements, rates
of capital allowances and other taxation matters relating to individuals
Under the Nigerian tax system.
(4) To promote uniformity in the application of the personal tax system
throughout the country.
(5) To exercise powers and perform duties relating to companies income tax
which might be delegated to it by the Minister of Finance.
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2.3 State Board of Internal Revenue
The Finance Decree 1993, formally established a Board of Internal Revenue for each
State of the Federation, whose operational arm is called State Internal Revenue Service.
Membership of the Board comprises of:

(a) The executive head of the State Internal Revenue Service as the Chairman.
(b) Three other persons nominated by the Commissioner of Finance in the
State and,
(c) A Director from the State Ministry of Finance.
The quorum of this committee is five (5) members of whom one must be the Chairman or
a Director. The Secretary is to be appointed by the Board from within the State internal
Revenue Service, and shall be an ex-officio member.
2.3.1 Functions of the Board

The functions of the State Board of Internal Revenue Service are:
(1) The state board is responsible for the assessment and collection of pay as
you earn and other personal income tax
(2) Ensuring the effectiveness and optimal collection of all taxes and penalties
due to government
(3) To ensure the effectiveness and optimal collection of all taxes and
penalties due to the government under the relevant laws.
(4) To do all such things as may be deemed necessary and expedient for the
assessment and collection of the tax and shall account for all amounts so
collected in a manner to be prescribed by the Commissioner.
(4) Making recommendation where appropriate to the joint tax board on tax
policy, tax reforms, tax legislation, tax treaties and tax exemptions as may
be required from time to time.
(5) Generally controlling the management of the state service on matters of
policy, subject to the provision of the law setting up the state service
(6) Appointing, promoting, transferring, and improving discipline on
employees of the state service.
2.3.2 The Technical Committee of State Board of Inland Revenue
The composition of the committee includes:

i. The executive chairman, as chairman
ii. The directors and heads of departments of the state internal
revenue service
iii. The legal adviser of the board
iv. The board secretary
The functions of the committee

1. Considering all matters that require professional and
technical expertise and make recommendations to the
board
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2. Advice the board on its powers and duties
3. Attend to such other matters that may from time to time
be referred to it.
2.4 Local Government Revenue Committee

This is to be established for each local government area of each state. The
composition of the committee is as given below:
a. The supervisor for finance as chairman
b. Three local government councilors as members
c. Two other persons experienced in revenue matters to be nominated
by the chairman of the local government on their personal merit.
Their main function includes the responsibility for the assessment and collection of all
taxes, fines and rates under its jurisdiction. It shall also account for all monies so
collected in a manner to be prescribed by the chairman of the local government and they
shall be responsible for the day-to-day running of the local government treasury. The
local government treasury shall be its operational arm.
2.5 Joint State Revenue Committee

This was established for each state of the federation by Decree 19 of 1998, with the
main objective of implementing the recommendations of the joint tax board.
The composition of the committee includes
a. The chairman of the state internal revenue service, as chairman
b. The chairmen of the local government revenue committee
c. A representative of the national revenue mobilization allocation and fiscal
commission, as an observer.
d. The state sector commander of the federal road safety commission
e. The legal adviser of the state board of internal revenue
f. The secretary of the committee who shall be a staff of the state internal revenue
service. He shall be an ex-officio member.
The Functions of the committee includes the following: -

i. Implement the decisions of the JTB
ii. Advise the JTB and the state and local governments on revenue matters
iii. Harmonize tax administration in the state
iv. Enlighten members of the public on state and local government revenue
matters
v. Carry out such other functions as may from time to time be assigned to it by
the JTB
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2.6 Body of Appeal Commissioners
2.6.0 Introduction
Every company is required to file a return of its income for tax purposes each year
without notice or demand from the Federal Board of Inland Revenue. The return must be
filed whether or not a company is liable to pay tax.
The contents of a tax return are:

(1) Completed tax form (R3C - 4Coy) which is a declaration of income by the tax
payer. The form is obtainable free from any office of the Board throughout the
country
(2) Audited financial statements of the business for the relevant year of assessment.
Furthermore, items required with the financial statements are: appropriate
schedules, detailed analysis, and further break-down of significant items of
income, expenses, assets and liabilities.
(3) Capital allowance computation and tax liability
(4) A formal self-assessment made by a principal officer of the company if desired.
The tax returns must be filed with the appropriate Area Office of the Board:
(a) Within 3 months of every year of assessment, failing which provisional tax
becomes applicable, especially for tax-payers who are not filing self-assessment
returns.
(b) Not later than 6 months after the close of the company's accounting year for all
corporate tax payers, including those that becomes liable to provisional tax.
(c) Within 18 months from date of commencement of business in the case of newly
incorporated business.
2.6.1 Assessment
The Board may proceed to assess every company chargeable with tax, as soon as
the board deems appropriate, particularly, after the expiration of the time allowed to such
company for the delivery of the audited accounts.
Where a company has delivered audited accounts and return, the Board may:
(a) Accept the audited accounts, returns, and make an assessment accordingly
(b) Refuse to accept the return. This will results to applying the policy of what
we termed as the "best of judgment", determine the amount of the total
profits of the company and make an assessment accordingly
The Board is empowered to make additional assessment if it discovers, at

anytime, that a company has been under-assessed. Additional assessments may be made
within the year of assessment or within six years after the expiration thereof.
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Furthermore, the FBIR is empowered to seek and obtain information from the banks
regarding a company chargeable to tax, including the names and addresses of such tax
payers. The bank is not expected to comply with such a request unless the request is
signed by the Chairman of the FBIR.
Notes:
There are basically, three types of Assessments that can be raised on the tax
payer.
1. The original assessment
2. Revised and or amended assessment
3. Additional assessment.
The original assessment is the first assessment raised on a taxpayer in a particular

year of assessment. An original assessment may be the subject of an objection and appeal
procedure. The revised assessment is raised to replace an original assessment. The
replacement usually arises from either a notice of objection or appeal that is successful.
While on the other hand, additional assessment will usually arise from a back-duty
assessment. The additional assessment is to cover a shortfall in tax that was previously
paid.
Furthermore, there are three forms of assessment that should be noted;

1. The provisional assessment, which is an estimate of the tax
payable based on the tax paid by the taxpayer in the previous year.
A provisional assessment is subject to the objection and appeal
procedures.
2. The best of judgment assessment. This will usually, arise where the
taxpayer has either not filed returns or is not even registered for tax
purposes. Where this occurs, the inspector of taxes will simply use
the best of his judgment to estimate the assessable profit; capital
allowance claimable and the tax payable. A best of judgment
assessment is also subject to the objection and appeal procedure.
3. The third form of assessment is the self-assessment, which was
introduced in 1993, and requires the taxpayer to display some level
of trust. This is because the taxpayer is expected to complete a
standard self-assessment form. To encourage taxpayers to file
their returns by self-assessment, two advantages accrue to the
taxpayer. The first is that, the payment of the tax computed can be
effected by installment, because tax can be paid by six equal
installments, over six months. The second is that where all the
installments are paid on due date, 1 percent bonus is deductible
from the sixth installment.
Typically the penalty for late return is N5, 000. The penalty for incorrect returns
is N200 plus double the amount of tax undercharged in consequence of such incorrect
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return or information (see table 1 for a summary). In cases where no return is filed, the
authorities are authorized to make a best of judgment assessment.
If a company disputes the assessment, it may apply to the Board by notice of

objection in writing, to review and to revise the assessment made upon it. Such
application should state precisely the grounds of objection and should be made within 15
days from the date of the service of the notice of assessment.
Where the Board and the company come to an agreement as to the amount
assessable, the original assessment made will be amended accordingly and notice of tax
payable served upon such company. However; where there is no agreement the Board
may give notice of refusal to amend the assessment as desired by the company and may
revise the assessment to such amount as the Board may; according to the best of its
judgment determine and then give notice of the revised assessment and the tax payable.
It should be noted that Errors or mistakes in assessment, warrant or other

proceedings under the Decree, do not render an assessment or proceedings void or
voidable. In particular an assessment shall not be impeached or affected by: -
(i) Mistake therein as to the name of the company liable, or of a person in

whose name the company is chargeable, description of any profit or the
amount of tax charged;
(ii) By reason of any variance between the assessment and the notice thereof.
2.6.2 Objection and Appeals

Where a taxpayer receives a notice of assessment, he either agrees with it or he is
aggrieved. Where he agrees with the assessment, the position of the law is that, the tax
must be remitted within the statutory time limit or six days from the date of receipts of
the assessment. But where, he is aggrieved by the assessment, he is expected to raise a
notice of objection. This may be made by writing a notice of appeal to the body of appeal
commissioners. The notice of appeal should specify the following;
(1) The official number of the assessment and the year of assessment.
(2) The amount of tax charged by the assessment. ;
(3) The amount of total profits upon which such tax was charged as appearing
in the notice of assessment.
(4) The date upon which the appellant was served with notice of refusal by the
Board to amend the assessment as desired.
(5) The precise grounds of appeal.
(6) An address for service of any notices, precepts or other documents to be
given to the appellant by the secretary to the Appeal Commissioners.
All notices or documents to be given to the Appeal Commissioners should be

addressed to the secretary to the Appeal Commissioners.
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At this point, it should be noted that the law requires the following as conditions for a
valid notice of objection:
i. It must have been made in writing, with the grounds of objection and must
be made within the 30 days of the receipt of the assessment.
ii. Upon the receipt of the valid objection, the relevant tax authority will
examine the grounds of objection to determine their validity. Where the
grounds are found to be valid, the tax computation would be reviewed and
a revised or emended assessment raised. Payment would be based on the
revised amendment.
iii. Where the relevant tax authority believes that there is no merit in the
notice of objection, then a notice of refusal to amend would be sent to the
tax payer.
iv. The tax payer, if aggrieved by the notice of refusal to amend, should file a
notice of appeal to the body of appeal commissioners within 30 days of
the receipt of the notice of refusal to amend.
2.6.3 Who are the Appeal Commissioners?

This is a body that usually adjudicates between the tax payer and the relevant tax
authority in the event of a dispute concerning assessment. This is why the independence
of the body is of paramount importance. The Appeal Commissioners are appointed by the
Minister of Finance for the federal appeal commissioners or commissioner of finance, in
a gazette, for state appeal commissioners. They determine the remuneration of the
commissioners and other allowances. The tenure is for 3 years although an appeal
commissioner may resign his appointment in writing before the expiration of the tenor.
The appointment will be among persons of experience and ability in the profession of
accountancy or law or in the management of substantial trade or business in Nigeria.
Public officers are not qualified for appointment to the Body of Appeal Commissioners.
Where an office of an appeal commissioner is declared vacant, it means he is
removed from office before the end of his tenure. The following are the reason why the
office of an appeal commissioner may be declared vacant:
1. Where he has absent himself from two consecutive meetings without
an approval from the chairman.
2. Where he is confirmed to be of unsound mind.
3. Where he has been convicted for a criminal offence or felony or
offence related to tax matters.
4. Where he has attended a meeting concerning a taxpayer in which he
has interest without informing the other commissioners.
It should be noted here that, where an appeal is to be heard concerning a case in which an
appeal commissioner has an interest either as a shareholder, director, legal adviser,
auditor, tax advisor or in whichever capacity, he should inform the other appeal
commissioners. He will usually be excused from such a meeting.
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The appointment of persons to this body entails the possession of either of the
following:
i Must be a legal practitioner
ii A chartered accountant
iii A tax practitioner
iv A person experience in business
2.6.4 Procedure before Appeal Commissioners

(1) Appeal Commissioners may meet to hear appeals in any town in which is
situated an office of the FIRS.
(2) At the meeting, any three will constitute a quorum and can then hear and
decide on the appeal.
(3) The Chairman of the Body of Appeal Commissioners is to preside over the
meeting. In the absence of the Chairman, the others may elect one of their
members to Chair the meeting.
(4) An appeal commissioner having a direct or indirect financial interest in the
company making the appeal, including being a shareholder or stockholder
or being a relative of such shareholder or stockholder, must when any
appeal of such a company is pending before the Body of Appeal
Commissioners, disclose such interest or relationship and give written
notice to the other commissioners. Such a commissioner is barred from
sitting at any meeting for the hearing of the appeal. This provision applies
to a solicitor or accountant of the company even if the appellant is an ex-
client of the solicitor or accountant.
(5) The secretary of the Appeal Commissioners must give 7 days notice to the
FBIR and to the appellant, of the date and place fixed for the hearing of
each appeal. No notice is required in the case of an adjourned meeting for
which a date was fixed at the previous meeting.
(6) All notices, precepts and documents other than decisions of the Appeal
Commissioners may be signed by the secretary of the body
(7) All appeals shall be held in camera.
(8) The appellant company is entitled to be represented by a lawyer.
(9) The onus for proving that the assessment complained of is excessive is on
the appellant.
(10) The appellant may be required to make a deposit before the hearing of the
appeal.
(11) The Appeal Commissioners may confirm, reduce, increase or annual the
assessment or make such order as they deem fit.
(12) Their Chairman shall record decision of the Appeal Commissioners in
writing and a certified true copy supplied to the appellant and the FBIR
upon a request made within 3 months of such decision.
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2.6.6 Procedures Following Decision of Appeal Commissioner
The decision of the Appeal Commissioners shall be served by the Board upon the
company or upon the person in whose name such company is chargeable.
A taxpayer who is not satisfied by the decision of the Appeal Commissioners may
appeal to the Federal High Court. Where the decision of the Commissioners involve
payment of tax, which does not, exceeds N400, no further appeal by the company shall
lie from that decision except with the consent of the Board.
Notwithstanding that an appeal is pending, tax shall be paid in accordance with

the decision of the Appeal Commissioners within one month of notification of the
amount of tax payable in accordance with the decision of the Commissioners.
2.6.7 Appeal to the Federal High Court

Where a company is not satisfied with the decision of the Appeal Commissioners
it may appeal against that decision to the Federal High court. Notice of such an appeal
must be made in writing and given to the secretary of the Appeal Commissioners within
15 days after the face on which the decision of the Commissioner was given. Such an
appeal must be "on point of law”. Notice to the Appeal Commissioner must state the
ground of the appeal.
The FBIR may also appeal to the Federal High Court if it is dissatisfied with the decision
of the Appeal Commissioners "on point of law".
Appeal against the decision of the Federal High Court lie to the Court of Appeal:
(a) At the instance of the company where the decision of that judge involves
tax payable in excess of N1,000; and
(b) At the instance of or with consent of the Board, in any case.
2.6.8 When Assessment is Final and Conclusive

An assessment shall be considered to be final and conclusive:
(1) Where no appeal is lodged within the time limit
(2) Where the company agrees with the assessment.
(3) Where the total profits assessed has been amended in accordance with the
objection or appeal of the tax payer.
(4) Where the assessment has been determined on appeal
Where an assessment becomes final and conclusive the tax becomes payable within the
appropriate period prescribed for payment of tax. However, any tax overpaid shall be
repaid.
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2.6.9 Deposit on Appeal
The Appeal Commissioners or the court may on the hearing of an appeal at the first
instance, order an amount equal to the lesser of:
(a) The tax charged on the appellant in the preceding year of assessment, or
(b) One-half of the tax charged on the assessment under appeal, to be
deposited by the appellant.
2.6.10 Self Assessment

A company is required to make a provisional or interim tax payment to the Board not
later than 3 months from the commencement of each year of assessment, that is, 31st
March. The provisional tax is an amount equal to the tax paid in the immediately
preceding year of assessment and is to be made in one lump sum or not more than 4
monthly installments as the Board may direct.
This is clearly an advance payment of tax and when the assessment for the year is
finalized the payment is refundable if there is no taxable profit.
A company may file a self-assessment and pay the tax based. The company will pay the
tax on that when delivering its tax return to the tax office. A self-assessment is an
indication that the company has assessed itself on the specified date. The self-assessment
form is signed by a principal officer of the company defined as either, the Managing
Director, an Executive Director or the Company Secretary.
Tax due date for payment is 6 months after the accounting year end. A company has up to
2 months from the due date to settle the assessment.
Self-assessed companies who file their assessments and attach a cheque or draft may on
application be granted concession to pay the remaining tax due in not more than five
monthly installments.
A Self-assessed company is exempted from the payment of provisional tax.
2.6.11 Essential Ingredients of Self-Assessment Tax Returns

To make tax returns qualify as Self-Assessment, the returns must possess the following
components:
i. A duly completed self-assessment form Number IR3C-4 COY which is
obtainable free of charge from any Area Income Tax Office of the Federal Inland
Revenue Service through out the Federation;
ii. Certification of the form by a principal officer of the company who may be the
Chairman, the Chief Executive, an Executive Director or the statutory Secretary
of the company;
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iii. Audited financial statement of the company together with the computation of the
tax liability with accompanying schedules and capital allowances computations;
and
iv. Evidence of direct payment of the whole computed tax due or at least the
equivalent of an installment approved by Federal Inland Revenue Service into the
bank designated for the payment of tax
All companies are required to file their tax returns within six (6) months from the end of
their accounting year.
2.6.12 Self Assessment and Install Mental Payment Concession

Payment of assessed tax by installment is available only to self-assessment filers
for the current year of assessment, and not for back year assessment. Under no condition
will installment concession be granted for the payment of government assessment, back
year assessment or provisional tax. The granting of such benefit to self-assessment filers
is not automatic as the intending beneficiary is to fulfill the following conditions: -
i. The taxpayer must apply for the benefit in writing on or before the due date of
payment;
ii. Evidence of the payment of the first installment must accompany the tax return;
iii. Arrangement for the payment of the remaining installment must be satisfactory to
the Federal Inland Revenue Service.
2.7 Other matters in the Nigerian tax administration
2.7.1 Persons Chargeable With Tax:

A company is chargeable to tax:
(a) In its own name, or
(b) In the name of any principal officer; attorney; factor, agent or
representative of the Company in Nigeria, or
(c) In the name of a receiver or liquidator. The principal officer or manager of
the company in Nigeria is answerable for doing all such acts, matters or things as are
required to be done in the tax laws for the assessment of the company and payment of
tax.
2.7.2 Power to Appoint Agent

The FIRS may, by notice in writing, declare a person the agent of the company,
and the person may be required to pay any tax which is or will be payable by the
company from any moneys which may be held by him for, or due to, or to become due by
him to, the company whose agent he has been declared to be. In default of such payment
the tax is recoverable from the person.
The Board may require any person to give information as to any moneys, funds or
other assets which may be held by him or of any moneys due by him to, any company.
20
Persons affected by these provisions have the rights to object and appeal against the
Board's directives.
Any person answerable under these provisions for the payment of tax on behalf of
a company is indemnified against any person whatsoever for all payments made by him
as tax of the company
2.7.3 Company Wound Up

Where a company is being wound up, the liquidator of the company should not
distribute any of the assets of the company to the shareholders thereof unless he has made
provision for the payment in full of any tax which may be found payable by the company,
including any withheld tax.
2.7.4 Annual Returns

A taxpayer is expected to file an annual return at least once in every year. The content of
the return shall include:
1. The audited financial statement
2. The tax computations
3. The capital allowance computations
4. An undertaking that the information contained in the annual statement is true.
This must be signed by either the company secretary or a director
5. A copy of the duly completed self assessment form
An annual return must be filed within either of the two time limits stated below:
For a new company, within 18 months from the date of commencement or within 6
months after account is prepared whichever is earlier. While for an existing company, it
has to be filed within 6 months from the year end.
The penalty for late submission or not submission at all, involves the following
1. The payment of an amount of N2, 500 every month
2. Where the failure to filed return continues, the payment of N500 every month
2.7.5 Relief in Respect of Error or Mistake

Where a company has paid excessive tax because of error or mistake in the
assessment or in the returns or accounts submitted for assessment, it may not later than
Six years, after the end of the year of assessment concerned, make an application in
writing to the Board for relief, and get repayment of the excess tax.
Various penalties are prescribed by the tax law for non-fulfillment of statutory
duties by persons assessable, whether with intent to defraud or through carelessness. The
following is a summary of the penalty provisions now in force.
21
Table 1: Penalty Provision for tax related offences
S/n Offence Penalty
1 Failure to comply with the provisions of the Decree. Fine N200
2 Failure to furnish statement of account or returns or Fine of N5, 000 imposed by

late returns. the Board without reference
to the court.
3 False returns N1, 000 or 5 years
imprisonment or conviction
or both.
4 Making incorrect returns thereby understating profit Fine of N200 or double of
tax under-charged.
5 Any person employed in connection with tax Fine of N600 or 3 years
assessment - demanding an amount in excess of the imprisonment or both.
tax due & rendering false returns of tax collected.
6 An officer of the company if found guilty as Fine of N2,000 or 6 months
responsible for failure to Submit returns by the imprisonment or both
company
7 Non-payment of tax within stipulated time Fine, 10% p.a. on
outstanding tax.
8 Failure to pay over withholding tax deducted or N5,000 fine plus amount of
failure to deduct tax deducted plus interest
Source: Tax Returns
2.7.6 Back Duty

The term "back duty" is the accepted name given to tax, which has not been charged in
the past years. High rates of tax have tempted many tax-payers to evade their legal
burden, with the consequent serious loss to the Inland Revenue. Other taxpayers have
evaded their liability through ignorance or carelessness.
Evasion must not be confused with legal avoidance. Avoidance of tax is legal
while tax evasion is illegal and criminal. With respect to tax avoidance a judge of the
British Court had said "No man in this Country is under the smallest obligation, oral or
otherwise, so to arrange his legal relations to his business or to his property as to enable
the Inland Revenue put the large possible shovel into his stores. The Inland Revenue is
not slow-and quite rightly to take every advantage, which is open to it under the taxing
statues for the purpose of depleting the taxpayer's pocket. And the taxpayer is in like
manner entitled to be astute to prevent as far as he honestly can, the depletion of his
means by the Revenue" - Lord Dyde.
22
So, tax avoidance embraces honest means taken by the tax-payer to mitigate his
tax liability. Such means may include, for example, not distributing profit in order to
avoid paying withholding. Tax evasion on the other hand, is refusal to pay tax or submit
returns, filing of incorrect or false returns, etc.
The relevant tax authority either under the provisions of the companies income
tax act of 1990 or the personal income tax decree of 1993, may from time to time and as
long as it wishes carry out a back duty audit on a tax payer.
Back duty investigation therefore involves uncovering or discovering undisclosed

profits and incomes. Such practices usually take the form of omission to record certain
transactions, deliberate falsification of expenses, etc. An accountant called upon to carry
out back duty investigation must use his accounting knowledge to prepare accounts that
will show a true and fair view of the taxpayer's incomes or profit.
2.7.7 Dormant Company

A Company, which has been incorporated but is yet to carry on business, is
required to pay a tax of N500 for the first year and N400 every subsequent year of
assessment until it commences business operation. The effective date of this law is 1st
January 1995.
2.7.8 Time for Payment of Tax

Income tax is due within 2 months of receipt of notice of assessment and not latter
than 14th day of December of the year of assessment in which the tax is charged where
there is no valid objection to the assessment. This applies to all assessments whether
final, interim or provisional. Furthermore, the income tax must be paid before a company
pays dividend to its shareholders.
Where a company does not pay its tax within the stipulated period, it shall be
subject to a penalty equal to 10 percent of the tax payable provided the penalty is served
on the company by Demand Note.
With effect from 1st January 1991, Unpaid tax attracts interest at the base lending
rate from the date the tax becomes payable until it is paid. Base lending rate is the
weighted average of the cost of funds to any bank.
2.7.9 Suspension of Payment

Where a company objects to or appeals against an assessment, the tax assessed will be in
abeyance until the objection or appeal is determined.
23
Where the objection or appeal is determined the Board is required to serve upon the
company notice of the tax payable as finalized or agreed and the tax then becomes
payable within one month of the notice.
2.7.13 Power to Assess on Turnover

The Decree gives the Board power to assess tax on the basis of a company's turnover at
such a fair and reasonable rate as the Board may determine. This power would in practice
be exercisable by the Board where it is satisfied that the company's account does not
disclose reasonable profit of its operation.
In the case of a company other than a Nigerian company:
(a) If that company has a fixed base of business in Nigeria, the Board may
assess and charge on such fair and reasonable percentage of that part of
the turnover attributable to that fixed base.
(b) If that company operates a trade or business through a person in Nigeria

authorized to conclude contracts on its behalf or on behalf of some other
companies controlled by it or which have controlling interest in it; or
habitually maintains a stock of goods or merchandise in Nigeria from
where deliveries are regularly made by a person on behalf of the company
assessed to the extent that the profit is attributable to the business or trade
carried on through that person.
(c) If that company executes one single contract involving survey deliveries,
installation or construction, assess and charge the tax for that year of
assessment on such a fair and reasonable percentage of that turnover of the
contract.
(d) If the trade or business is between the company and another person
controlled by it or which has controlling interest in it and conditions are
imposed or made between the company and such person in their
commercial or financial relations which in the opinion of the Board is
deemed to be artificial and fictitious, assess and charge on a fair and
reasonable percentage of that part of the turnover as may be determined by
the Board.
Note that the "Board" as used here refers to the Federal Board of Inland Revenue.
2.7.14 Power to Distrain For Non-Payment of Tax

Where a company neglects, refuses or is unable to pay the assessed tax, the board
may seize its goods, chattels, land or premises owned by the taxpayer.
24
Assets so seized shall initially be held for 14 days after which if settlement of the
tax is not made, such assets can be disposed off except in the case of immovable
property, where disposal can be done only on the order of the High Court.
The general practices in the process of exercising the power of distrain can be
briefly summarized as follows:
a. Where the relevant tax authority wishes to exercise the power of restrain,
an application made to a high court to obtain a warrant. The warrant is a sufficient
authority to levy by distressing the amount of tax being owed.
b. Upon the warrant being obtained the authority is exercised by any officer
authorized in writing by the board.
c. The function is carried out by breaking open any building or place, if he so
wish he calls to his assistance any police officer. It shall be the duty of the police officer
to aid and assist in the execution of the warrant of distress and in levying such distress,
when so required.
d. The items detrained may be kept for a period of fourteen days at the cost
of the taxpayer after which they may be sold in the event that the tax due is not paid. No
immovable property may be sold without an order of a high court.
e. The sales proceed is applied in meeting of the incidental cost of keeping
and selling the items detrained and the payment of the tax, penalty and interest owed. If
there is any balance it shall be paid to the tax payer upon a demand from him, but
provided the request is made within one year of the date of sale.
2.7.15 Appeal to Joint Tax Board

Appeals procedure in respect of individuals and body of individuals regarding
determination of residence are made to the Joint Tax Board.
Where an individual disputes the determination of his residence by a tax authority, he or

she should set out the grounds upon which he relies to refute that determination, and
these grounds together with the observations' thereon by the tax authority, shall be
referred (by the tax authority) to the Joint Tax Board.
In the event of a dispute between two state tax authorities as to the territory of residence
of an individual, or between an individual and a state tax authority, the facts may be
referred to the Joint Tax Board by the tax authority, which is a party to the dispute.
The Secretary of the Board is obliged to give at least 30 days notice to the parties of the
hearing of the appeal. The Board may require further information from any of the parties,
and at the expiration of the notice period, proceed to determine the appeal. Written
notice of the decision of the Board must be given to the parties and the decision of the
Board is binding on the parties and on any appeal tribunal.
Appeals lie from the decision of the Board to the High Court of the State and from there
to the Supreme Court. At this point, we observe that the Appeal Court has been omitted.
25
For now we could not say the reason why the omission, but it might be because the
Appeal Court did not exist when the ITMA 1961 was passed, and this part of the law has
not been amended. Following the normal legal procedures, an appeal should go to the
Appeal Court before the Supreme Court.
Where a tax authority discovers that an assessment has been made on an individual
resident in another state, the assessment shall be discharged and the tax already paid shall
be:
(1) Set-off against tax owing for any other year by the individual to the said
tax authority, or
(2) Paid to the state of the other territory, or
(3) Repaid to the individual.
2.7.16 Tax Clearance Certificate

Where a relevant tax authority is of the opinion that tax assessed has been fully paid or
that no tax is due, it shall issue a tax clearance certificate to the person within two weeks
of the demand. TCC is therefore, issued by the Inland Revenue on application and with
proof of tax payment or exemption, for the last three years.
It should be noted that where a taxpayer has fully charged his tax liability but has failed
to remit any tax deducted to the appropriate tax authority, no tax clearance certificate
would be issued. Furthermore, where a non-resident earns dividend and interest from
which withholding tax has been deducted at source, he is not required to have a tax
clearance certificate for the tax. It will be assumed that tax deducted by the payer has
been remitted to the appropriate tax authorities for the purposes of remitting his earnings
to his country of residence.
The Tax clearance certificate shall disclosed the following information in respect of the
last three years of assessment.
a. Total profits or chargeable income.
b. Tax payable
c. Tax paid
d. Tax outstanding or statement that no tax is due.
TCC for the last 3 years is required of every company and individuals before the
following transactions could be processed.
(1) Application for government loan for industry or business
(2) Registration of Motor Vehicles
(3) Application for Firearms Licence
(4) Application for foreign exchange (foreign money) or for permission to remit
funds outside Nigeria.
(5) Application for Certificate of occupancy
(6) Application for award of Contracts by government and its agencies and registered
Companies.
26
(7) Application for trade licence
(8) Application for approved building plans
(9) Application for transfer of real property
(10) Application for import or export license
(11) Application for plot of Land
(12) Application for buying agent license
(13) Application for pools or gaming license
(14) Application for registration as a Contractor
(15) Application for distributorship
(16) Stamping of guarantor's form for Nigerian Passport
(17) Application for registration of a Limited liability Company or of a business
name and.
(18) Application for allocation of market stalls.
2.7.17 Approved Taxes

The Joint Tax Board (JTB) has met and after full discussions, the following taxes and
levies have been submitted to the Head of State and Commander-in-Chief of the Armed
Forces, who has approved their publication. For now there is no amendment it is still
applicable.
(a) Taxes by Federal Government

1. Companies Income Tax
2. Withholding Tax on Companies
3. Petroleum Profit Tax
4. Valued Added Tax
5. Education Tax
6. Capital Gains Tax - Abuja residents and Corporate Bodies
7. Stamp Duties of Corporate Entities
8. Personal Income Tax in respect of:
i. Armed Forces;
ii. Police;
iii. Residence of Abuja FCT; and
iv. External affairs.
(b) State Government Taxes

1. Personal Income Tax
2. Pay-AS-You-Earn (PAYE)
3. Direct (Self Assessment)
4. Withholding Tax (individuals only)
5. Capital Gains Tax (individual only)
6. Stamp Duties (Instruments executed by individuals)
7. Pools betting and lotteries, Gaming and Casino Taxes
27
8. Roads Taxes.
9. Business premises and registration levy
i. Urban areas as defined by each state - maximum of N10, 000 for registration
and N50, 000 renewals per annum.
ii. Rural areas

-Registration N2, 000
-Renewal N1, 000 per annum
10. Development Levy (individuals only) not more than N100,
000 per annum
11. Taxable individuals
12. Naming of Street Registration fees in the state capital.
13. Right of Occupancy Fees in state capitals
14. Markets where state finances are involved.
(c) Local Government Taxes

1. Shops and Kiosks rates
2. Tenement rates
3. On and Off liquor license
4. Slaughter slab fees
5. Marriage, birth and death registration fees
6. Naming of streets registration fee (excluding state capitals)
7. Right of Occupancy fees (excluding state capitals)
8. Market/Motor park fees (excluding markets where state finance is
involved)
9. Domestic animal license
10. Bicycle, trucks, canoe, and wheelbarrow
11. Propelled trucks.
12. Cattle tax
13. Merriment and road closure fees
14. Radio/Television (other than radio/TV transmitter) radio licence
(to-be imposed by the local government of the state in which the
car is registered.
15. Wiping parking charges.
16. Public convenience, sewage and refuse disposal fees.
17. Customary burial ground and religious places permits
18. Signboard/Advertisement permit.
28
CHAPTER THREE
BASIS PERIODS
3.0 Basis period

This defines the basis upon which tax liability would be computed. Generally,
every business has its permanent year. This permanent tax year is not fixed by law except
for some selected companies. As a result of the fact that permanent year ends, vary from
business to business, there must be a way of capturing the income of all businesses to
taxation on a common basis, hence the whole idea of the basis period.
3.1 Types of Basis Period:

There are different types of basis period; the preceding year basis, the actual year
basis, normal basis and the abnormal basis.
3.1.1 The Preceding Year Basis Period

For a correct year basis period, the basis period must have ended before the beginning of
the government fiscal or tax year. The government fiscal and or tax year is from the
January of the year to the December of the same year. For example, for two companies
with permanent year ends of June 30 and year ends October 31. The following are the
correct preceding year basis.
Tax year company A company B

1995 1/7/93 -30/6/94 1/11/93-31/10/94
1996 1/7/94 -30/6/95 1/11/94-31/10/95
1997 1/7/95 -30/6/96 1/11/95-31/10/96
It should be observed from the above that, all the terminal dates for the basis periods are
before January 1 of the years under review. For example, the basis periods ended before
January 1, 1995 in respect of 1995 tax year. Examples of tax liabilities that will arise on
the proceeding year basis period include the taxation of companies, taxation of sole
traders, partnership assessment e.t.c.
3.1.2 Actual Year Basis

This type of basis period should coincide with the basis period of the government running
from January 1 to December 31 of every year. Example, of tax liabilities that will arise on
actual year basis are the taxation of employees, capital gains tax and petroleum profit tax.
3.1.3 Normal basis

For a normal basis period, the following features must be in place;
(a) The number of months in the basis period should neither be more than nor less
than twelve
29
(b) The basis period must have commenced the day after the end of the previous
one i.e. there must be continuity
(c) There must be only one permanent year-end i.e. there must be consistency
It is important to stress here that a normal basis period is obtained for businesses in
continuous operation i.e. an old company that has not changed its accounting date, and
which is not ceasing operation. For example, if we consider a business whose permanent
year-end is December 31 every year, the basis period for assessable profit for 1995 to
1997 shall be as follows:
Tax Year Basis Period

1995 1/1/94-31/12/94
1996 1/1/95-31/12/95
1997 1/1/96-31/12/96
The following observation is made;

1. for all the tax years, the basis period is made up of exactly twelve months
2. the basis period for 1996 tax year commenced a day after the end of 1995 tax
year while 1997 tax year also commenced a day after the end of 1996
3. every basis period shown terminated on December 31st every year
3.1.4 Abnormal basis

In any situation where any of the three conditions listed above is not obtained,
then abnormal basis period results.
An abnormal basis period is obtained under any of the following situations
1. on the commencement of a new business
2. where there is a change in accounting date
3. on the cessation of a business
3.2 The Commencement of a business

Where a new business commences operation, the basis period for assessable profit
is the year end. i.e. December 31 of the same year
Year 1 from the date of commencement up to the end of the government tax year-
December 31 of the same year.
Year 2 from the date of commencement up to the end of the first twelve months i.e. the
accounts for the first one year.
Year 3 the basis period is on the proceeding year basis
The basis period for assessable profit of the second tax year would be repeated in the
third tax year under the following conditions:
30
(a) Where the month of commencement of business arises on the calendar after
the month chosen as the year-end, it would be impracticable to have a correct
preceding year basis period. For example, if the date of commencement of
business is October 1 1994, and the permanent year end of the business is
march 31 every year, then the correct basis period for assessable profit for the
relevant years of assessment would be as follows:

1994 1/10/94 - 31/12/94
1995 1/10/94 - 30/9/95
1996 1/10/94 - 30/9/95 and not
1/4/94-31/3/95
Observe that the basis period commencing from April 1 994 and terminating on March 31
1995 is correct preceding year basis period, but the business had not started by April 1
1994 hence the need to repeat the basis period of the second tax year in the third tax year.
(b) Where the first accounts prepared by the new business is for a period that is in
excess of twelve months. On this particular instance, it may in fact be possible
to obtain a correct preceding year basis period but it would be wrong in
principle to do so. For example, if the date of commencement is June 1, 1995
and the first account is up to December 31, 1996 there will need to be a
repetition of the basis period of the second tax year in the third tax year as
follows:

1995 1/6/95 - 31/12/95
1996 1/6/95 - 31/5/96
1997 1/6/95 - 31/5/96 and not
1/1/96 - 31/12/96
3.2.1 Tax Payers Right of Election

Under the commencement rule, the tax payer may exercise its right of election
requesting that it be assessed to taxation in the second and third tax years on the actual
year basis. Naturally, the tax payer will exercise this right only where it may result in a
lower tax liability.
For the application to be valid a taxpayer must exercise this right not later than
two years after the end of the second tax year. It is also possible that after excising the
right, the tax payer may revoke it on his own volition. For the revocation to be valid, it
must be made not later than one year after the end of the third year.
31
Illustration
Adanda Ltd commenced business on 1st April 2002, show the basis period for capital
allowances.
Solution
Adanda ltd
Normal basis
Year Basis period
2002 1/4/02 - 31/12/02 - 9 months
2003 1/4/02 - 31/3/03 - 12 months
2004 1/4/02 - 31/3/03 - preceding year.
The period 1/4/02, 31/12/02 is common to 2002 and 2003 years of assessment (that is
Over lapped), hence assets bought during this period will claim initial allowance only in
2002. Further since the basis period for 2002 is 9 months, the annual allowance for that
year will be 9 x annual allowance rate.
12
The basis periods for 2003 and 2004 coincide, hence assets purchased during this period
would claim initial allowance in 2003 only However, since assets purchased during
1/4/02 to 31/12/02 have already claimed initial allowance in 2002 year of assessment
only assets bought in the remaining period 1/1/03 to 31/3/03 will claim initial allowance
in 2003 year of assessment. Full annual allowance will be granted in 2003 and 2004 years
of assessment.
Illustration
Amanga Ltd. used to make up its accounts to 31st March. In 2000 the accounting year
end was changed to 31st December. Show how the fixed assets purchased during the
period
1998 and 1999 should be treated for capital allowance purposes.
Solution
Amanga ltd.
The affected years of assessment are 2000, 2001 and 2002. If the Board bases the
assessment of these years on the new accounting period, the basis periods would be:
Year Basis period

2000 1/1/99 - 31/12/99
2001 1/1/00 - 31/12/00
2002 1/1/01 - 31/12/01
32
But the basis period of 1999 is 1/4/97 - 31/3/98. Thus we find there is a gap of 9 months
from the end of basis period of 1999 and beginning of basis period for 2000. Therefore
assets purchased during this period 1/4/98 - 31/12/98 will claim initial allowance in 2000.
Thus assets purchased between 1/4/98 - 31/12/99 (21 months) will claim capital
allowances in 2000.
Now if the Board takes the alternative basis of adopting the old accounting date for those
three years of assessment, the basis periods would be:-
Year Basis period

2000 1/4/99 - 31/3/99
2001 1/4/99 - 31/3/00
2002 1/4/00 - 31/3/01
But the basis period of 2003 is 1/1/02 - 31/12/02. Thus we still see that there is a gap
between the end of 2002 basis period and the beginning of the basis period for 2003 (1st
April 2001 - 31st December 2001), a period of 9 months. Assets purchased during this
period will be deemed to have been purchased in 2003 basis period for the purpose of
initial allowance. In other words, that gap is regarded as being part of 2003 basis period.
3.3 Change of Accounting Date

A period of twelve months is generally accepted to be equal to a year, whether the
calendar year or the financial year or accounting year. We have seen that the government
year corresponds with the calendar year which is also the income tax year. A company
may make up its accounts to any date provided the period is twelve months in a financial
year; the normal preceding year basis of assessment applies. However, some companies
do in practice change their accounting year - end to a new date for one reason or the
other. In the year of the change, therefore, the accounts are likely to be made up for a
period either less or more than 12 months. Where this is the case, the Decree permits the
Board to compute the assessable profit of the year of change and the following two years
of assessment on such basis as the Board may determine.
Where a taxpayer has changed its accounting year end, it is the responsibility of the tax
authority to determine the basis upon which tax liability will be computed. The general
practice of the tax authority is to take the following steps
Step 1: Identify the year when the business changes its accounting date first, this
means the date when the company failed to prepare accounts to the old
year end. This represents the first tax year under the commencement rule.
Step 2: Determine the two subsequent tax years
Step 3: Determine the basis period for assessable profit and the corresponding
assessable profit on the proceeding year basis using the old year end for
33
the three years identified in step one and two above. Sum up the assessable
profit for the three tax years
Step 4: Repeat step three above using the New Year end.
The basis upon which the revenue board will assess the tax payer shall be on the higher
of the assessable profits obtained in steps three and four
The significance of this is that a tax payer has no say in determining the basis of
assessment where there is a change in date.
In solving a problem involving the change in accounting date, the key issue is the proper
identification of the year of change. Indeed if all the other basic principles are well
understood but the year of change is wrongly identified, the solution proposed will still
be wrong.
Consequently, in properly identifying the year of change one should be guided by the
principle of continuity under the conditions for a correct preceding year basis period.
In practice the procedure adopted is given below:
(a) Compute assessment for the 3 years referred to, based on 12 months
ending on the original accounting date and total up. The apportionment
should be done on a pro-rata basis.
(b) Compute the assessments alternatively based on 12 months ending on the
new accounting date also on pro-rata basis and total up.
The higher of A and B will be adopted by the Board.
Illustration
Assume that Anga limited, Manga limited and Banga limited have presented the
following information from which you are required to identify the correct year of change.
Anga limited
Year ended 30/6/90

Year ended 30/6/91
Period ended 31/12/91
Year ended 31/12/92
Year ended 31/12/93
Manga limited
Year ended 31/10/90
Year ended 31/10/91
Year ended 31/10/92
34
Year ended 31/3/94
Banga limited
Year ended 31/12/90
Year ended 31/12/91
Year ended 30/4/94
Year ended 31/4/95
Solution
Anga limited
Using the consistency rule, it is expected that after 30/6/91, the next account should be
prepared to 31/6/92 but the next account was for the period ended 31/12/91.
Consequently, the company has failed to prepare its account to 31/6/92 so that the year of
change is taken to be 1992 tax year. The two subsequent tax years shall be 1993 and 1994
years of assessment.
Manga limited
Following the principle discussed earlier, the above named company can be seen to have
failed to prepare accounts to 31/10/93. consequently the year of change is 1993 tax year
while the two subsequent tax years shall be 1994 and 1995 years of assessment.
Banga limited
The year of change is 1992 tax year because the account was not made up to year ended
31/12/92.
If we take anga limited as an example, the basis periods for assessable profit
under the change in accounting date rule can be summarize as follows
Year Basis Period (Old Date) Basis Period (New Date)

1992 1/7/90-30/6/91 1/1/91-31/12/91
1993 1/7/91-30/6/92 1/1/92-31/12/92
1994 1/7/92-30/6/93 1/1/93-31/12/93
Illustration
Madaka Ltd has been making up its account to 31st March of every year. The directors
on 1st April 1999 decided to change the accounting year-end to 31st December to
conform to the Government fiscal year. The adjusted profits of the company for some
years are given below:
N
Year ended 31st March 1998 8,000
35
9 months ended 31st December 1999 10,000
Year ended 31st December 2000 15,000
Required: Compute the assessable profits for the relevant years.
Solution
Madaka ltd
The affected years of assessment are 1999, 2000 and 2001. We start we the computation
of the tax liability base on the old accounting date. This is simple, we just continue as if
no change of date has occurred. For example, in 1999 the profit of 1998 will be taxed.
Likewise in 2000, but there after you notice that the company produce the account up to
December of the same year, therefore when we are taxing the company for 2001 we take
the profit from the last date of 1999 to the December, which is 9 months and add 3
months profit from the subsequent profit. This is give below;
Based On Old Accounting Dates
Assessable Profit
Year N
1999 12 months to 31/3/98 8,000
2000 12 months to 31/3/99 12,000
2001 12 months to 31/3/2000 10,000+ 3 x 15,000 13,750
12 33,750
Now, we compute the tax liability based on the new accounting date. Simple knowledge
of arithmetic may be needed here. In 1999, we only have 3 months for 1998 and the 9
months balance will come from the 1999 profit. We compute thus;
Based on new accounting dates

1999 12 months to 31/12/98 3 x 8,000 + 9 x 12,000
12 12 = 11,000
2000 12 months to 31/12/99 3 x 12,000+10,000

12 13,000
2001 12 months to 31/12/2000 15,000

39,000
The assessable profits would be based on the taxable income that is higher among the two
as it is the tax authority that has the option to take the income that will produce a higher
tax.
36
Year Profit
N
1999 11,000
2000 13,000
2001 15,000
39,000
3.4 Cessation of Trading or Business

When a company permanently ceases business operation the assessment for the
last year and the year preceding cessation are assessed as follows:
(i) Year of Cessation - the actual profit of the year, that is, from 1st January
to date of cessation.
(ii) In the year preceding cessation (penultimate year), the higher of the profit
as assessed on the normal basis and the actual profit of the year.
This means revising the assessment of the penultimate year as it would have been
assessed on the normal preceding year basis.
Penultimate tax year: The basis period for assessable profit for the penultimate tax year is
on the preceding year basis.
Ultimate tax year: this is the year of cassation. The basis period for assessable profit is
from the beginning of government tax year usually 1st January up to the date of cessation.
Illustration
Adams limited decided to fold up its operations with effect from 31st march 1999 as a
result of difficulty in getting enough contracts.
Using the information below, you are required to determine the basis of assessing the
company;
Year ended 31st October 1997 N324, 000

Period ended 31st march 1999 N150, 000
37
Solution
Adams limited
Basis period for assessable profit under the cassation rule
Tax year original assessment revised assessment

Basis Period Assessable Profit Basis Period Assessable Profit
1998 1/11/96-30/10/97 N324, 000 1/1/98-31/12/98 N210, 000
1999 1/1/99-31/3/99 N90, 000
Workings
1998 1/1/98-31/10/98 10/12 X 180,000 = 150,000
1/11/98-31/12/98 2/5 X 150,000 = 60,000
210,000
1999 1/1/99-31/3/99 3/5 X 150,000 = 90,000
Conclusively, we see that the company would be assessed on the basis of the original
assessment in the penultimate tax year. This is because this assessment results in a higher
tax liability.
Illustration
Nasir Ltd which has been trading for many years ceased trading on 30th October, 2001.
The accounts for the three years preceding cessation showed the following profits:
N
January - December 1999 18,000
January - December 2000 25,000
January - October 2001 (10 months) 30,000
The original assessment would have been:
Year Profit
N
2000 18,000
2001 25,000
2002 profit of 2001 if business had not ceased.
The revised assessment would be:
Assessable
Year Profit
N
2001 Actual (10 months) 30,000
2000 Higher of N18, 000 (1999)
or Actual N25,000 (2000) 25,000
38
Illustration
Saidu Ltd ceased trading on 31st March 2002. Its accounts showed the following profits:
N
1st April 1993 - 31st March 2000 12,000
1st April 1994 - 31st March 2001 25,000
1st April 1995 - 31st March 2002 30,000
The normal assessment would be:

Assessable
Year Profit
N
2001 12,000
2002 25,000
2003 30,000 (if business had not ceased).
Since the business has ceased the assessment would be:
Assessable
Year Profit
2002 Actual: January - March 2002 3_ x 30,000 = N7,500
12
2001 Higher of N12.000 as above or

Actual: Jan. - Dec. 2001
3 x 25,000 + 9_ x 30,000 = N28,750
12 12
Under the cessation rule, the tax authority may exercise its right of election by
determining whether it should assess the tax payer in the penultimate tax year on actual
year basis. The general rule is that the tax authority will exercise this right only if it will
increase the tax exposure of the tax payer
Whenever revision of assessment either at commencement or cessation of business as

discussed above involves an overpayment of tax, the Board is obliged to refund the
excess. Similarly where underpayment is the result, the Board will raise an additional
assessment.
3.4.1 Post Cessation Income and Expense

Subsequent to the cessation of business, it is not unusual for the demised company to
recover some debts or be able to sell off either stocks of merchandise or its fixed assets,
In the course of earning this income. It may also incur some expenses. These are deemed
to be post cessation income and or expenditure
Where after the date of permanent cessation, the company or its liquidators receive or pay
any sum which would have been included or deducted in computing adjusted profit if it
39
had been received prior to that date, such shall be deemed for the purpose of tax to have
been received or paid on the last day before such cessation occurred.
The treatment of such income or expenditures would be as follows

1. Where the income is one that would ordinarily be considered as a taxable
income even where the business has not folded up. It would be deemed to
have arisen on the last day of the business and hence subjected to tax. For
example, where some stocks items are sold off or some scrapped stocks are
sold off and where a debt previously written off is recovered.
2. Where such an income would have been treated as a non-taxable income then
such an income would not be considered for tax purposes. For example, where
the fixed assets of the business are sold off due to cessation.
3. where the expenditure would have ordinarily been considered as incurred on
the last day of business and used to reduce the income chargeable to tax
4. where the expenditure is non allowable it would be inadmissible for tax
purposes
Illustration
Nabamu limited closed its business with effect from 31st may, 1999. The company had
made a profit of:
N48, 000 for the year ended December 1997,

N54, 000 for the year ended December 1998
N10, 000 for the period ended May 1999
The liquidator of the company received the sum of 4,000 from the disposal of some
obsolete stocks written off during the year ended 31st December 1996 sometimes in
October 1999 and N3, 000 was collected in December 1999 from a debtor previously
considered bad.
Solution
Determination of assessable profit for the relevant tax year
Tax year basis period assessable profit basis period assessable profit
1998 1/1/97-31/12/97 N48,000 1/1/98-31/12/98 N54,000
1999 1/1/99-31/5/99 N17,000
Notes
1999 assessable profit
1/1/99-31/5/99 10,000
Receipts on disposal of stock 4,000
Bad debt recovered 3,000
17,000
The income from the disposal of stock and bad debts are deemed to have arisen after the
date of cassation.
40
3.5 Standard Income Tax Rate
With effect from 1993 year of assessment the standard income tax rate to be
applied on the taxable profit of a company is 35 kobo per Naira or 35 percent. Although,
this will be discussed further in our discussion of company income tax.
A company which is yet to commence business after 6 months of incorporation but

before submitting accounts for the first 12 or 18 months of operation is to pay a levy of
N500 for the first year and N400 each subsequent year of assessment and part thereof for
which the company remains without carrying on any business.
For a Nigerian Company which has newly commenced business and is engaged in
manufacturing or agricultural production or mining of solid minerals, and turnover for the
first 3 years does not exceed N500,000 p.a. the tax rate is 20% of the total profits. This
concessionary tax applies to such a company which commenced business before 1st
January 1988 for assessment years 1988, 1989 and 1990. The sectors of business referred
to are called "preferred Sectors" and such a company may have the concession extended
for another 2 years if it shows evidence of good records and management.
Exercises
1. Bamko Ltd has been making up its account to 31st March of every year. The
directors on 1st April 1999 decided to change the accounting year-end to 31st December
to conform to the Government fiscal year. The adjusted profits of the company for some
years are given below:
N
9 months ended 31st December 1999 12,000
Required: Compute the assessable profits for the relevant years.
2. Akanda limited decided to fold up its operations with effect from 31 st march 1999
as a result of difficulty in getting enough contracts.
Using the information below,

Period ended 31st march 1999 N230, 000
You are required to determine the basis of assessing the company
3. Nadabo limited closed its business with effect from 31st may, 1999. The company
had made a profit of:
41
N26, 000 for the year ended December 1997,
N45, 000 for the year ended December 1998
N22, 000 for the period ended May 1999
The liquidator of the company received the sum of 6,000 from the disposal of some
obsolete stocks written off during the year ended 31st December 1996 sometimes in
October 1999 and N5, 000 was collected in December 1999 from a debtor previously
considered bad.
You are required to determine the assessable profit for the relevant years of assessment.
42
CHAPTER FOUR
CAPITAL ALLOWANCES
4.1 Introductions
Capital allowances would be claimed on qualifying capital expenditures incurred

in acquiring or constructing an asset used in the trade or business whose profit is
assessable to tax. Capital allowances are claimed only on the following conditions:
(1) The qualifying capital expenditure must be owned by the taxpayer making
the claim as at the end of the basis period.
(2) The expenditure incurred must be wholly exclusively necessarily and
reasonably for the purpose of the trade or business.
(3) The asset must be used for the purpose of the trade or business whose
profit is assessable to tax.
(4) The company must be the owner of the asset.
(5) Where the value of the qualifying capital expenditures is not less than
N500, 000 an acceptance certificate must be obtained from the
inspectorate division of the federal ministry of industry
The term "qualifying expenditure" means expenditure incurred in a basis period

on: -
(1) Plant and Machinery
(2) Buildings, structures, or works of a permanent nature and building not
classified as industrial buildings, plants or included in housing estate.
(3) Industrial buildings or structures in regular use:
(a) As a mill, factory, mechanical workshop or other similar building
or structure used in connection with any such buildings.
(b) As a dock, port, wharf, pier, jetty or other similar building
structures.
(c) For the operation of a railway for public use or of a water or
electricity undertaking for the supply of water or electricity for
public consumption; and
(d) For the running of a plantation or for the working of a mine or
Other source of mineral deposits of a wasting nature.
(4) Mining expenditures incurred in connection with or in preparation for, the
working of a mine, oil well, or other source of mineral deposits of a
wasting nature, on the acquisition of, or of rights in or over, the deposit or
on the purchase of information relating to the existence and extent of the
deposits and expenditures incurred in searching for or on discovering and
testing deposits or winning access there to
(5) Plantation expenditures incurred on

(a) The clearing of land for planting;
(b) Planting (other than replanting).
43
(c) on the construction of any works or buildings which are likely to
be of little or no value when the source is no longer worked, or
where the source is worked under a concession,, which arc likely
to become valueless when the concession comes to an end to the
company working the source immediately before the concession
comes to an end.
(6) Furniture and fittings (excluding soft furnishings e.g. curtains).
(7) Motor vehicles
(8) Ranching (i.e. animal husbandry) e.g. poultry, cattle rearing, and fish.
(9) Housing estate.
(10) Research and Development expenditures.
(11) Qualifying public transportation (inter-city) new mass transit coach
expenditure incurred on new mass transit coach of 25 seats and above,
operated by a recognized corporate private establishment.
Where the asset is acquired second hand, the qualifying capital expenditures will depend
on the class of the assets.
In respect of buildings acquired second-hand
a. No initial allowance can be claimed
b. The annual allowance to be claimed must be based on the
lower of the original cost of acquisition and the new
purchase price.
Take for instance, if Ikomo Limited purchased a building from Nabamu Limited for the
cost of N1, 050,000.00 second hand, and it can be shown that original cost to Nabamu
Limited was N620, 000.00 then the annual allowance to be claimed by Ikomo Limited
shall be based on the N620, 000.00 instead of the N1, 050,000.00 paid as consideration.
No initial allowance can be claimed.
It may be stressed that this condition will hold true only where the building acquired
second-hand was being previously used for business. Where the building was being
previously put into private use or where it has not been previously put into use at all, it
should be possible to claim both initial and annual allowances.
There is no clear cut provisions in the tax laws as to the treatment of other assets acquired
second-hand as the only provision in the law is in respect of buildings. Consequently,
where other assets are acquired on second-hand, both initial and annual allowances can
be claimed provided they are transactions at arms-length. But where transactions are
between two related parties, then
a. No initial allowance can be claimed

b. The annual allowance to be claimed must be based only on the
un-expired tax life of the asset.
For example, if Ikomo Limited, the holding company to Nabamu Limited purchased a
motor vehicle from its subsidiary second-hand for the cost of N1, 000,000.00. If we
44
assume that the assets which has a four year tax life has been in use for the two years
before the transaction, then the annual allowance to be claimed shall be N500,000
because the annual allowance shall be based on the un-expired two year life of the motor
vehicle.
CAPITAL ALLOWANCE RATES

EFFECTIVE 1ST JANUARY 1996
Initial Annual
Allowance Allowance
% %
Buildings (industrial and non-industrial) 15 10
Mining 95 Nil
Plant:
Agric production 95 Nil
Others 50 25
Furniture & Fittings 25 20
Motor Vehicles:
Public transportation 95 Nil
Others 50 25
Plantation Equipment 95 Nil
Housing Estate 50 25
Ranching and Plantation 30 50
Research and Development 95 Nil
NOTE: Research and Development expenditures are expenditures on equipment and

facilities, patent, licenses, secret formula or process or for information concerning
industrial, commercial or scientific process, technical feasibility or products or process
and purchase, searching for and discovering and testing products or processes for future
market or use, and such other similar costs which has not brought into existence any
asset.
Acquisition of assets is matched with the basis period. An asset attracts capital
allowance when incurred in the basis period; assets not acquired within the basis period
of a year of assessment will be excluded from capital allowance computation of that year.
For example, if the basis period for 1997 year of assessment is 1st January - 31st
December 1996, then only assets bought within this period will be granted capital
allowances in 1997 year of assessment. This applies basically for the first year
allowances because thereafter, so long as the asset remains in use at the end of
subsequent basis period, it will be attracting the annual allowance.
4.2 Types of Capital Allowances

4.2.1 Initial Allowance
4.2.2 Annual Allowance
4.2.3 Balancing Adjustment
4.2.4 Investment Allowance
45
4.2.1 INITIAL ALLOWANCE
Initial allowance is granted when the asset is first used for the purpose of the trade
or business and no more. In other words, it is granted once only and on an asset. The
applicable percentage is applied on the cost of the asset to arrive at the initial allowance.
It can be called "first-year-allowance" since it is given only in the first year of asset
ownership. The only condition under which initial allowance may not be fully claimed is
where there has been an element of private use.
4.2.2 ANNUAL ALLOWANCE

The Annual Allowance as the name implies, is granted every year that the asset is
in use in the trade or business. With effect from 1st January 1985 the Annual allowance is
Calculated thus:
(1) In the first year by applying the relevant percentage on the cost of the
asset less the initial allowance,
(2) In the second and subsequent years, the allowance is on a straight-line

basis. This means that the same allowance given in the first year is given
in subsequent years.
This straight-line method means that the tax laws have implicitly fixed the life span of the
asset. Therefore, the capital allowance computation would be for:
(A) Newly acquired qualifying capital expenditure

Where the number of months in the basis period for assessable profit is twelve
months
Where a new asset is to be used in the computation of annual allowance. The normal
formula to be used shall be:
Annual allowance = cost - initial allowance
N
Where N = estimated tax life of the qualifying capital expenditure
100%
annual allowance rate
the quantity N representing the estimated tax life of the asset is obtained by dividing
100% by the annual allowance rate. For example, if the annual allowance rate of an
asset is 25% then the estimated tax life would be 4 years.
Where the number of months in the basis period for assessable profit is less than
twelve months. The annual allowance to be claimed must be appropriated in
accordance with the number of months in the basis period for assessable profit as
follows:
Annual allowance = cost - initial allowance X Y
N 12
46
Where Y = number of months in the basis period for assessable profit.
The above formula would be used in the first year under the commencement rule and
the ultimate tax year under the cessation rule because it is only under this condition
that the number of months in the basis period for assessable profit can be less than
twelve months.
In the second tax year, under the commencement rule, there would be the need to re-
compute the annual allowance claimable. This is because there is the need to ensure
that the tax written down value as at the beginning of the second tax year must be
written off equally over the remaining life of the asset as follows:
Annual allowance = tax written down value

N - 1
This means that if the estimated tax life is 5 years in the second year, the tax written
down value should be written down over the remaining 4 years.
(B) Existing qualifying capital expenditure

The tax written down value of such an existing old asset would be provided together
with the date of acquisition of such an asset. The number of assets in the class
acquired on the particular date should be provided. The date of acquisition of the
asset is to enable one determine the number of years for which capital allowance has
been previously claimed on the asset while the number of asset will help one in
establishing the residual value to be retained after the asset has been disposed.
Annual allowance is computed using the formula below:
Annual allowance = tax written down value

N - X
Where X is the number of years for which capital allowance was previously claimed.
It is important to note that in practice, it is possible to have a situation where the N is less
than or equal to X. this will result in the following situation.
i. Where N<X then N-X = negative
ii. where N= X then N-X = 0
These are impossible propositions in practice as it means that the estimated tax life of the
qualifying capital expenditure has either been reached or that it has been exceeded. Under
any of these situation, the general practice is to assume that the quantity N – X = 1. this
will require that the tax written down value brought forward is claimed fully in that year
as the annual allowance only retaining the mandatory residual value of N10 per asset or
an amount equivalent to 5% of the cost of the asset.
The major condition under which the scenario painted above is obtained is where there is
a change in the rate as we observed between 1995 and 1996 year of assessment. For
example, the rate for plant, which used to be 20% initial allowance and 10% annual
allowance rate, signifying an estimated tax life of 10 years was suddenly reviewed to
50% initial allowance and 25% annual allowance rates, signifying an estimated tax life of
47
4 years. The position is clearer if we imagine a situation where the plant has been in use
for 6 years before 1996 year of assessment.
As an illustration let's assume that a qualifying expenditure was incurred on 1st January
1985 on Motor Vehicles for N200, 000. The capital allowance computation would be:
N
Year Cost, 1st January 1985 200,000
1986 Initial Allowance 25% 40,000
160,000
Annual Allowance 20% 32,000
Residue or written-down value 128,000
1987 Annual Allowance 32,000
W.D.V 96,000
W.D.V 64,000
W.D.V 32,000
W.D.V 0
So we see that the asset has been written off in 5 years because the straight-line
depreciation rate is 20% (100/20), therefore when the annual allowance is 10% the asset
will be written off in 10 years and when it is 12.5% the asset will be written off in 8
years.
The implication of the above is that an asset could be written off for tax purposes whereas
the company could still be using the asset to earn profit. To avoid this situation,, the tax
law has provided that the annual allowance is to be granted to ensure that at least N10
(ten naira) residue must remain for each asset until it is sold or otherwise disposed of by
the company. For this to be done in the above illustration the annual allowance for year 5
must be less N10, that is, N31, 990 to enable the written-down value of the asset to be
N10 if the asset has not been disposed of. This apparently means that if the company
continues to use the asset after the fifth year, no more annual allowance would be granted
because the asset has been written off for tax purposes.
4.2.3 Balancing Allowance and Balancing Charge

This will arise when a qualifying capital expenditure is disposed off or is deemed to have
been disposed off. It is obtained by comparing the sales proceeds on disposal to the tax
written down value of an asset as at time of disposal. There are basically two types of
adjustments
When an asset is sold and its tax written-down-value is less than the proceeds of sale the
difference is given as "Balancing allowance". The intention of the tax law is to ensure
that the total capital allowances claimed equals the cost of the assets over its life as
determined by the annual allowance rate and no more. The tax-payer will not be allowed
to claim capital allowances in excess of the cost of the asset over its life, therefore, where
48
the proceeds of sale exceeds the tax written-down value of the asset a "Balancing charge"
arises (literally representing "profit" on disposal) and is added to the adjusted profit or
deducted from the sum of the capital allowances. The Balancing charge however, cannot
be made to exceed the total amount of capital allowances granted.
Illustration
Consider the following information for magama traders in respect of some assets
disposed.
a. land and building purchased for N750,000 in 1990 and with tax written down
value of N348,750 was disposed off for 1, 250,000
b. motor vehicle with a tax written down value of N259,650 was disposed off for
N500,000 the original cost was N650,000
c. a set of office furniture and equipment was sold for N150,000. it originally
cost the company N300,000 and the tax written down value at the time of
disposal was N179,500.
Solution
The balancing adjustment would be obtained by deducting the tax written down value
from the sales proceeds on disposals
land building motor vehicle furniture
Sale proceeds 1,250,000 500,000 150,000
Less
Tax written down value 348,750 259,650 179,500
Balancing charge 901,250 240,350
Balancing allowance 29,500
the balancing charge for the land and building would be limited to 401, 250 (750,000 –
348,750) which represents the maximum capital allowance already claimed on the
qualifying capital expenditure as at the time of disposal.
There will be no limit on the amount taxable for the motor vehicle because the amount
N240,350 does not exceed the capital allowance already claimed on the asset of 390,350
(650,000-259,650)
4.2.4 Investment Allowance

With effect from 1993 year of assessment, an additional capital allowance on
expenditures on Plant and Equipment is introduced. It is called Investment Allowance
and the rate is ten percent.
Prior to that date the allowance was available only to plant and equipment used in
agricultural production which was defined to exclude marketing and processing.
It is given once like the initial allowance on the first year and is in addition to the initial
allowance. However, investment allowance is not to be taken into account in determining
49
the written down value of the asset, and may for this reason not be "Capital Allowance"
in the strict sense. Investment allowance in Nigeria has the following key features:
a. It is usually granted once in the life of a qualifying capital expenditure and in

the first year when the qualifying capital expenditure is first put into use.
b. It is an additional allowance and hence cannot be considered in the process of
computing the tax written down value of the qualifying capital expenditure
c. Where the investment allowance in any particular tax year but there is either
no profit or the profit available is not enough to cover the investment
allowance then the investment allowance unutilized cannot be carried forward
unlike both initial allowance and annual allowance.
The investment allowances that are currently available under the Nigerian tax system are:
i. 10% investments allowance is available on production machine in use by
manufacturing concerns
ii. 10% investments allowance is available on plant and machinery of business in
the agricultural sector of the economy.
iii. 15% investments allowance is available on plant and machinery acquired in
replacement for obsolete ones.
iv. 25% investments tax credit on the assets of companies engaged in the local
fabrication of small tools and machinery.
v. 15% investments allowance can also be claimed by a tax payer who uses the
locally fabricated small tools and machines.
vi. Rural investments allowance from 1992.
4.3 Rural Investment Allowance

A new Capital Allowance, called Rural Investment Allowance has been introduced with
effect from 1993 year of assessment for companies that incur expenditures on the
provision of facilities such as electricity water, tarred road or telephone where such
facilities are not provided by the government in the area.
The facilities provided by the company must be for the purpose of its trade or business
which is located at least 20 kilometers away from such facilities provided by the
government.
The Rural Investment Allowance cannot be claimed in addition to the Investment

Allowance on the same asset, it is either of the two. It is also given once in the first year
of the qualifying expenditure like the investment allowance and the initial allowance.
The Rural Investment Allowance is not allowed to be carried forward if un-recouped in

the year of assessment that it is granted. It is granted against profit of the year in which
the date of completion of the said investment fails. Thus it is advisable to set-off the rural
investment allowance before setting off other capital allowances which can be carried
50
forward if assessable profit is not enough to cover them. As an investment allowance,
RIA is not reckoned in finding the written down value of the asset.
The rates of Rural Investment Allowance are:
(1) No facilities at all by government 100% of the expenditure.
(2) No electricity by government 50% of the expenditure
(3) No water by government 30% of the expenditure
(4) No tarred road by government 15% of the expenditure
(5) No telephone by government 5% of the expenditure.
4.4 Limitation of Capital Allowances - Non Manufacturing Companies

The idea of restricting capital allowances claimed in any particular year of assessment
was first introduced in 1985 year of assessment. The general rules are as follows:
1. There would be no restriction for any business in the agricultural and
manufacturing sectors of the economy. The exemption of
manufacturing businesses only became effective from the 1990 year of
assessment.
2. For other businesses, the total amount of capital allowance which can
be claimed in any year of assessment is limited to a percentage of the
assessable profit. Any unrelieved capital allowance is carried forward
to future years. The percentage is 662/ 3% for those companies.
Illustration
Consider kaduna business enterprise that has reported an adjusted profit of N5, 700,000
but has capital allowances claimable of N6, 000,000. You are required to compute the tax
payable at 30% assuming
a. kaduna business enterprise is an agricultural company
b. kaduna business enterprise is a trading company
Solution
kaduna business enterprise
(a) Assessable profit 5,700,000

Capital allowance 6,000,000
Relieved 5,700,000 5,700,000
Unutilized capital allowance c/f 300,000
Taxable profit 0
(b) Assessable profit 5,700,000

Capital allowance 6,000,000
Relieved (2/3 X5, 700,000) 3,800,000 3,800,000
Unutilized capital allowance c/f 2,200,000
Taxable profit 1,900,000
Tax payable at 30% 570,000
51
It is important to observe that the restriction is based on the assessable profit. Also note
that where there has been a relief of losses, the restriction will then have to be limited to
the remainder of the assessable profit after giving effect to the losses being relieved.
It should also be noted that at the point of cessation of business, there may be some
unutilized capital allowance which can no longer be carried forward the position of the
law is that where this occurs, such unutilized capital allowances may be carried backward
for a maximum period of 5 tax year before the year of cessation.
Where this occurs, the unutilized capital allowance is to be used in reducing the taxable
profits of those years, if any. Where the taxable profits have been reduced, then any taxes
that must have been paid during the year should be refunded, if already paid. where they
are yet to be paid, then the liabilities are extinguished. If after the five years there are still
unutilized capital allowances, then such are said to be terminal and will permanently
become lost.
Illustration
Mamser Ltd has been in trading business for a number of years. The profits as adjusted
for tax purposes for the last 5 years are:
Accounting period N
1st Jan - 31st Dec 1998 200,000
1st Jan-31st Dec 1999 500,000
1st Jan - 31st Dec 2000 800,000
1st Jan-31st Dec 2001 100,000
Expenditures on assets were as follows:

N
Plant and machinery 30th Sept 1998 100,000
Plant and Machinery 31st Dec. 1998 100,000
Motor Vehicles 1st April 1999 200,000
Buildings 6th June 1999 50,000
Industrial Buildings 1st Oct. 1999 75,000
Plant and Machinery 1st April 2000 10,000
Motor Vehicles 3rd June 20001 56,000
Industrial Buildings Extension 30th Nov 2000 20,000
Show the taxable profit for all years of assessment.
Solution
COMPUTATION OF CAPITAL ALLOWANCES

Fiscal Year Plant and Total
Machinery Allowances
N N N
52
1999
(Basis period) Cost. 30/9/98 100,000
(1/1/98-31/12/98) Cast, 30/12/98 100,000
200,000
Investment Allowance 10% 20,000

Initial Allowance 50% 100.000 100,000
100,000
Annual Allowance 25% 25,000 25,000
WD.V 75,000 145,000
2000 Annual Allowance 25,000 25,000

(1/1/99-31/12/99) WD.V 50,000
2001 Addition, 1/4/2000 10,000
60,000
(Basis period)
(1/1/2000-31/12/2000 Investment Allowance 10% 1,000 1,000
Initial Allowance
50% of N10,000 5,000
Annual Allowance -
Old asset 25,000
New asset
(25% x 10,000-5,000) 1,000 31,000 31,000
WD.V 29,000 32,000
2002
(Basis period) Annual Allowance
(1/1/2001- 31/12/2001) lst asset 24,990
2nd asset 1,000 25,990 25,990
W.D.V 3,010
fiscal Year Buildings Industrial Buildings Total Allowances
2000 Cost, 6/6/99 50,000

Cost, 1/10/99 N75,000
Initial Allowance 7,500 11.250 N18.750
(15%)
42,500 63,750
Annual Allowance 4,250 6,375 10,625

(10%)
53
WD.V 38,250 57,375 29,375
2001
Addition 30/11/2000 20,000
77,375
Initial Allowance 15% 3,000
Annual Allowance:
Old Asset 4,250 6,375
New Asset 1,700
(10% x 20,000-3,000) 11,075 15,325
WD.V 34,000 66,300

Annual Allowance 4,250 8,075 12,325
WD.V 29,750 58,225
Motor Vehicles
2000
Cost, 1/4/99 N 200,000
Initial Allowance, 50% 100,000 100,000
100.000
Annual Allowance, 25% 25,000 25,000
WD.V 75,000 125,000
2001 Addition, 3/6/2000

Initial Allowance 50% of N156,000 78,000
Annual Allowance
Old Asset 25,000
New Asset
(25% x 156,000-78,000) 19,500 122,500 122,500
WD.V 108,500
Annual Allowance 44,500
WD.V 64000
54
Income Tax Assessment 1999
N
N
Adjusted Profit, 1998 200,000
Less Capital Allowances

Lower of 66%% of N200,000 133,333
or Total allowances 145,000 133,333
Taxable Profit 66,667

Less Capital Allowances:
Lower of 66%% of N500,000 333,333
or Total Allowances 191,042 191,042

Lower of 66%% of N800,000 5333,33
or Total Allowances 170,325 170,325

Lower of 66%% of N l 00,000 66,666
or Total Allowances 82,815
Unrelieved Capital Allowance c/f 16,149 66,666
Example
Basis & Co. Ltd is an old established company and makes up its accounts to 31st
December. The capital allowance computation for 2001 fiscal year showed the following
written-down values:
N
Factory Building 300,000
Leasehold properties 50,000
Plant and Machinery 200,000
55
Additions to fixed assets at 31st December, 2001 were:
N
Factory Building 100,000
One of the plant and machineries purchased in March 2000 for N10,000 was sold for
N15,000 in December 2001 You are also informed that capital allowances had been
claimed for the assets up to 2001 fiscal year as follows: -,
Factory Building 5 years
Leasehold Properties 4 years
Plant and Machinery 2 years
You are required to show the capital allowance computations for 2002 year of assessment
Notes
(i) Since the tax life of the assets as computed from inverting the annual allowance
rates are 10 years for each of the three classes of assets, the remaining period to
write off the brought forward residue are:
Factory Building 10 - 5 = 5 years

Leasehold Property 10-4 = 6 years
Plant & Machinery 4-2=2 years
In the case of plant and machinery the asset sold in December 2001 is not included since
it was bought in 2000 and therefore claimed capital allowance for only a year.
(ii) In respect of the plant and machinery sold, the computation of capital allowance
should commence from the beginning, since the year of purchase has been given,
so as to know the written down value at 2001 fiscal year. This value is included in
the WD.V of N200,000 and should therefore be excluded. In other words, the
capital allowances for the asset sold should be computed separately from the rest.
Plant and Machinery Sold In 2002 Assessment Year

Fiscal Capital
Year Allowance
2001 Claimed
N N
Cost, March 2000 10,000
Capital Allowances:
Investment Allowance N1000
Initial 50% 5,000 5,000
5,000
Annual 25% 1,250 1,250
W.D.V 3,750
2002 Sale proceeds 15,000
Balancing Charge 11,250 6,250
Balancing Charge restricted to N6,250
Since the capital allowances claimed is less than the amount of Balancing charge, the
56
Balancing charge is restricted to the amount of Capital allowance claimed, that is N6,250,
excluding investment allowance.
Fiscal Factory Leasehold Plant/

Year Building Property Machinery
2001 N N N
WD.V 31/12/2000 300,000 50,000 200,000
Less Asset sold
W.D.V --- --- 3,750
300,000 50,000 196,250
2002 Addition. Dec. 2001 100,000 ---- 120,000
400,000 50,000 316,250
Capital Allowances
Initial (15%, 50%) (15,000) (60,000)
Annual:
Old (60,000) (8,333) (98,125)
New (8,500) --- (15,000)
W.D.V 31/12/2001 316,500 41,667 143,125
Capital Allowance claimed in 2002

N
Initial Allowance 75,000
188,125
Less Balancing charge 11,250
176,875
Investment Allowance 12,000
188,875
Workings:
Annual Allowance - old asset
Factory Building 300,000 = N60,000
5
Leasehold Property 50,000 = N8,333
6
Plant/Machinery 196,250 = N98,125
2
4.5 Assets under Hire-Purchase

Where an asset is acquired under the hire-purchase system the qualifying expenditure for
capital allowance is the installment or installments paid during the basis period excluding
the interest elements in such payments.
57
In other words, when a qualifying capital expenditure is acquired through payment by
installment, only the principal portion of the payment is to be utilized in the computation
of capital allowances and the hire purchase interest is to be treated as an allowable
expense for tax purposes. Consequently, upon the above, it is important as an allowable
expense for tax purpose element in every installment and excludes it prior to the
computation of capital allowance. The peculiar characteristics of a hire purchase
transaction is the fact that every deposit and installment is to be considered for capital
allowance computation purpose, as an addition to qualifying capital expenditure with the
effect that both initial and annual allowances have to be computed on each. There are
several issues that have to be taken note of
1. Where there are several installments paid during the course of a particular
year of assessment, it is often advisable that all installment falling into a
particular basis period for capital allowance should be aggregated and
considered as payment for that particular year of assessment represented by
the basis period.
2. The change of the basis of annual allowance computation from the reducing
balance basis to the straight line basis from 1987 year of assessment meant
that for each qualifying capital expenditure, a maximum tax life has been
defined. If this is true, it will mean that for a specific asset acquired in a
particular tax year, there is a defined number of years for which the asset
should be represented in the tax records after which it is only the residual
value of N10 per asset that should be obtained. If the principle highlighted
above were to be strictly applied, then there is the likelihood of extending the
estimated tax life of the qualifying capital expenditure. This possible problem
would be solved by ensuring that the denominator used for computing annual
allowance after the first tax year of use is progressively reduced by one every
time there is a new installment.
3. As a follow-up to the point made above is the possibility of deducting N10 per
item from more items than are actually in existence. This problem is solved by
ensuring that the N10 per item is deducted only from the last installment.
Illustration
Amaka limited normally acquire its machinery on hire purchase. On 1st September, 1993
it entered into a hire purchase agreement with ankaka limited. Ten of the machines are to
be acquired with N2,000,000 paid as initial deposit on that date. This is to be followed by
twenty four equal installments of N200,000 commencing from 30th November 1993. it
was reported that if cash were to be paid immediately, only N5,600,000 would have been
required. Amaka limited normally prepare its accounts to 30th June every year and it is
not expected to have a change in date in the next four years.
You are required to compute the capital allowances up to end of 1998 year of assessment.
58
Solution
Computation of capital allowances for 1995 to 1998 tax years
Tax year item i Ii iii Capital allowance

1995 Cost 3,200,000
IA 640,000 640,000
AA 256,000 256,000
896,000
1996 TWDV 2,304,000
Cost 1,800,000
I.A. 900,000 900,000
A.A. 300,000 1,068,000
1,968,000
1997 TWDV 1,536,000 600,000
Cost 600,000
I.A. 300,000 300,000
A.A. 768,000 300,000 150,000 1,218,000
1,518,000
1998 TWDV 768,000 300,000 150,000
A.A. 768,000 300,000 149,000 1,217,000
0 - 0 100
Workings
1. principal for capital allowance
Deposit 2,000,000
Installments 24X200,000 4,800,000
Hire purchase price 6,800,000
Cash price 5,600,000
Hire purchase interest 1,200,000
Number of installments 24
Interest per installment 50,000
Principal 150,000
2. Scheduled of payment
Tax year basis period no of installments amount
1995 1/7/93-30/6/94 8 1,200,000
Deposit 2,000,000
3,200,000
1996 1/7/94-30/6/95 12 1,800,000
1997 1/7/95-30/6/96 4 600,000
3. 1995 annual allowance

AA = 3,200,000-640,000
10
59
= N256,000

AA = 1,800,000-900,000
4-1
= N300, 000
AA = 2,304,000
4-1
= N768, 000
annual allowance
AA = 600,000-300,000
4-2
6. In 1998, it is apparent that this is the last tax year of the asset. Consequently there
is the need to retain the mandatory N10 per asset. Since there are ten of the assets. The
sum of N100 must be retained hence the claim of N149,900 instead of the expected
N150,000 from the last installment. Observe that for the installments of 1995 through
1997, they were fully claimed in the last year.
4.6 Second-Hand Assets except Buildings

Assets bought second-hand are regarded as new in the hands of the purchaser and
therefore attracts all allowances.. The only exception is building.
4.7 Assets Acquired From Connected Person

Where an asset is acquired from a connected person the Board may determine the rate of
initial allowance as it deems just and reasonable having regard to all the circumstances,
provided that the amount granted shall not exceed the amount of initial allowance which
would have been allowable if the asset were acquired otherwise. It should be noted that
the word "person" used throughout in this book applies to a "legal person", that is,
includes humans and corporate bodies.
4.8 Assets Used Partly For the Trade or Business

Where an asset which qualifies for capital allowances, is used partly for the business and
partly for other purposes (e.g. personal used), capital allowances are calculated for the
whole asset and then apportioned between the trade or business and the other purpose as
the Board may deem just. Only the portion attributable to the trade or business would
then be relieved against assessable profit.
60
Example
Dongoyaro Nigeria Ltd which makes up accounts to 30th June each year purchased a
tractor on hire-purchase for N260,000 payable over 5 years in quarterly installments of
N13,000 inclusive of interest of N500 per quarter. The installments so far paid are:
N
30th June 2000 13,000
30th Sept. 2000 13,000
31st Dec. 2000 13,000
31st Mar. 2001 13,000
30th June 2001 13,000
65,000
Show the capital allowances to be claimed.
Solution
Assessment Basis period Total
Year Allowance
N N
N
2001 (1/7/99-30/6/2000)
Installment paid less interest 12,500
Initial Allowance 50% 6,250 7,500
6,250
W.D.V at 30/6/2000 4,688 9,062
2002 Installments paid less interest 50,000
(between 1/7/2000-30/6/2001)
Investment Allowance 5,000 54,688 5,000
Initial Allowance: 25,000
Annual Allowance:
25% of N12,500-6,250 1,562
25%ofN50,000-25,000 6,250 32,812 32,812
W.D.V at 30/6/2001 21,876 37,812
Example
Unongo Ltd purchased a motor car for N156,000 in September, 1997. The car is used by
the Managing Director and it has been agreed with the tax authorities that one-third of its
use is for private purposes. Accounts are made upon to 31st December each year.
Show the capital allowances for all years of assessment.
61
Solution
Assessment Motor Capital allowance
Car Business Private
2 1
Year N /3 /3
1998 Cost, September 1997 156,000
Initial Allowance, 50% 78,000 52,000 26,000
78,000
Annual Allowance, 25% 19,500 13,000 6,500
W.D.V 58,500
1999 Annual Allowance 19,500 13,000 6,500
W.D.V 39,000 6,500
W.D.V 19,500
W.D.V 10
Notes:
(1) Since the asset has not been disposed of, the annual allowance of 2001 has
to be reduced by N10 to enable the written-down value to be N10 until the
asset is sold.
(2) If it is assumed that the car was sold in June 2002 for N-500, the capital
allowance for 2003 would be
N
W.D.V 10
Sales proceeds 500
Balancing charge 490
Business 2/3 327
Private 1/3 163
490
4.9 Assets on Lease Other Than Leasehold Premises

Where an asset is on lease, capital allowances are granted to the lessor (the owner) and
not the lessee (the user), in the case of an operating lease and to the lessee in the case of a
finance lease. The conditions for giving the capital allowance to the lessee are:
(a) The expenditure is incurred for the purposes of leasing, that asset for use
wholly, exclusively, necessarily and reasonably for the purposes of a trade
or business carried on by the lessee; and
(b) The asset is actually leased to the lessee; and
(c) During the whole or part of the lease period the asset is used wholly and
exclusively by the lessee in such trade or business.
(d) As in hire-purchase, interest element is excluded.
62
Under a finance lease, ownership passes to the lessee at end of the lease, whereas it does
not under operating lease.
The basis period of the lessor for the purposes of calculating Capital allowances on leased
asset is the year immediately preceding the year of assessment.
4.10 Temporary Disuse of an Asset

When an asset has been temporarily suspended from use in the trade or business of the
tax-payer, capital allowances would also be suspended until the assets are put back into
use. This gap in the period of use does not qualify the asset to be treated as new when
reused, for the purposes of initial allowance. The date of re-use is the date on which its
temporary disuse ends.
4.11 Exclusion of Certain Expenditures

An expenditure on an asset which has been allowed as a deduction in computing profit
for tax purposes cannot also be regarded as a qualifying expenditure for the purposes of
Capital allowance. On the other hand, expenditures relating to assets, disallowed for the
purpose of computing profit should be added to the cost of the asset for the purpose of
calculating capital allowances.
4.12 Meaning of Disposal

For the purposes of computing Balancing allowance or Balancing charge, “disposed of”
has the meaning given below:
A Building is disposed of if
(a) The relevant interest in the building is sold
(b) The interest in the building depends on a concession and that concession
comes to an end;
(c) The leasehold comes to an end otherwise than at the end of the lease;
(d) The building is demolished, destroyed or ceased to be in use for the
purposes of the trade or business carried on by the owner.
Plant, machinery or fixtures are disposed of if they are sold, discarded or scrapped.
Mining assets are disposed of if they are sold, ceases to be used for the purpose of the
trade or business either on the company ceasing to carry on such trade or business or on
receipt of insurance or compensation money thereof.
4.13 Disposal without Change of Ownership

Where an asset is disposed of and ownership still remains with the owner e.g. an asset
formerly used for business, withdrawn for private use and later returned for business use,
the following is the treatment :-
(a) On the disposal the sales proceeds is regarded as being equal to the residue
(hence there would be no Balancing allowance or Balancing charge).
63
(b) On re-use, the owner will be deemed to have bought the asset at a price
equivalent to the written-down value (residue) of the asset at the date of such disposal,
increased by the amount of Balancing charge or decreased by the amount of any
Balancing allowance. This is equivalent to saying that the owner would be deemed to
have bought the asset at a price equal to the initial disposal (value) but there cannot be
any Balancing allowance or Balancing charge as explained in (a) above.
4.14 Second-Hand Buildings

When a building, structure or works is sold, the company that buys the building will not
be granted initial allowance, but will receive the yearly annual allowance. For this
purpose the value of the building is the lower of the price paid or the original cost of
construction.
Where, however, the building is sold before it has been used, all allowances will be
granted to the buyer and the original cost of construction will be taken to be the purchase
price for the purpose of capital allowances.
4.15 Special Provisions Relating to Mining Expenditure

We have seen from the previous sections that one of the conditions for claiming capital
allowances is usage in the business of the company, and that temporary disuse would
suspend capital allowance until reuse. However, in the case of mining expenditure, so
long as a mining expenditure has been incurred for the purpose of the trade or business of
the company, it would be deemed to have brought into existence an asset or assets owned
and in use and hence would attract capital allowances.
Further, so long as such asset has not been disposed of, it shall be deemed to be in use
(that is, temporary or permanent disuse not recognized).
4.16 Claim for Capital Allowances

A company must formally claim the allowances otherwise they would (or any one not
claimed) not be given. As noted earlier, computation of claims for capital allowances is
one of the particulars to be filed with tax returns.
4.17 Basis period for capital allowances

In the computation of capital allowances, it is important that qualifying capital
expenditures are utilized for the correct tax year. It is therefore not enough to check the
date of acquisition of an asset and on that basis determine off-hand the correct tax year
that such an asset would be deemed to have been acquired. For example, where
information is to the effect that an asset was purchased on 17th June, 1996 does not mean
that the relevant tax year must always be 1997 tax year on the preceding year basis.
This brings us to the key issue of the relevance of the permanent year end of a tax payer
before the correct basis period for capital allowance can be determined. Going back to the
64
date of 17th June 1996, the tax year may be 1997 year of assessment if the permanent year
end is a date after June. Examples include accounts for year ended 30th June 1996 up to
December 31 1996.
The relevant tax year when the asset is deemed to have been acquired would change to
1998 if the permanent year end of say 31st may is considered, the year would have ended
before June and hence 17th June, 1966 must fall into the basis period commencing 1st June
1996 and ending 1 march 1997 which automatically falls into 1998 year of assessment on
the proceeding year basis.
The determination of the basis period for capital allowance attains greater significance
because it will become important to identify when the initial allowance on such an asset
can be claimed. And given the fact that initial allowance can be claimed only once on the
qualifying capital expenditure, the year when such claim would be made needs be
established.
1. Under the normal basis period situation, it would always be observed that the
basis period for assessable profit is equal to the basis period for capital
allowance.
2. Under the abnormal basis period regime, the basis period for assessable profit
may never be equal to the basis period for capital allowance for two major
reasons.
(a) coincidence overlaps of basis periods

(b) gaps in between basis periods
4.18 Overlapping Basis Period

Basis period will overlap or coincide mostly in the application of the commencement rule
or occasionally under the change in accounting date rule.
Where there is an overlapping basis period, a qualifying capital expenditure is acquired

on a date that falls into more than one basis period. There is therefore the problem of
identifying the year when the asset can be deemed to have been acquired. It is very clear
that an asset on a particular date can hardly be said to have been acquired in more than
one year.
The general practice is that where an asset can be allocated into more than one tax year,
the allocation would be made to the earlier tax year hence initial allowance can be
claimed in that earlier tax year.
Illustration
Alabama limited commenced business on 1st April, 1995 and has chosen 31st December
every year as its permanent tax year. You are to determine when initial allowance can be
claimed on the following qualifying capital expenditure.
Building 7/1/95
Furniture 28/4/96
65
Motor vehicle 19/2/96
Generator 21/7/96
Solution
Allocation of qualifying capital expenditure
Tax year Basis period for Basis period for Qualifying capital
assessable profit capital allowance allowance
1995 1/04/95-31/12/95 1/04/95-31/12/95 Building, Furniture
1996 1/04/95-31/03/96 1/01/96-31/03/96 Motor vehicle
1997 1/01/96-31/12/96 1/04/96-31/12/96 Generator
The important point to note here is in respect of assets acquired before the date of
commencement of business. The general rule is that where an asset is purchased before
the date of commencement, and there is proof that the first use to which the asset would
be put, will be for the purpose of the business, they are deemed to have been acquired on
the first day of business.
Meanwhile the coincidence of date occurs between 1995 and 1996 years of assessment in
the period 1/04/95 to 31/12/95 and the period 1/01/96 and 31/03/96 between 1996 and
1997 years of assessment. Observe that the asset have been allocated to the earlier tax
years.
Illustration
Anana limited changed its accounting date from 31st December to 31st march, every year
in 1995. You are required to determine when initial allowance should be claimed for the
following asset acquired.
Building 8/9/95
Solution
1996 1/04/95-31/12/95 1/01/95-31/12/95 Building, Furniture
1997 1/04/95-31/03/96 1/01/96-31/03/96
1998 1/04/96-31/03/97 1/04/96-31/03/97
The coincidence of date arose during the transition from the old date to new date in the
period 1/04/95-31/12/95 which is obtained in 1996 and 1997 years of assessment. The
building purchased on that date is allocated to 1996 tax year because it is the earlier of
the two.
66
4.19 Gaps in between basis period
This arises where a qualifying capital expenditure is acquired on a date that does not fall
into any basis period. The significance of this is the possibility of not being able to
allocate a qualifying capital expenditure. This will translate to a situation where capital
allowance cannot be claimed on an asset.
The general observation is that a gap will occur in between two basis periods mostly
under the cassation rule and sometimes where there is a change in accounting date. The
practice is that where a qualifying capital expenditure is acquired on a date that does not
fall into any basis period. Such an asset is allocated to the latter tax year. But then the
allocation to the latter tax year is only where the latter tax year is not a year of cessation.
Where the latter tax year is a year of cessation then the allocation must be to the earlier
tax year.
The general practice can then be summarized as follows:

Gap arising as a result of cessation Allocate asset to the earlier tax year
Gap arising as a result of change of date Allocate asset to the latter tax year
Illustration
Anana limited with a permanent year end of 31st August every year. The company wound
up with effect from 31st march 1996. You are required to determine when a generator
acquired on 17th September 1995.
Solution
1995 1/09/93-31/08/94 1/09/93-31/12/95 Generator
1996 1/01/96-31/03/96 1/01/96-31/03/96
It is to be observed that in a situation of cessation of business, the way to close the gap in
between the basis period for 1995 and 1996 is to use the earlier tax year, 1995 since the
latter tax year is a year of cessation.
Illustration
Amana limited changed its accounting date from 31st may every year to 31st December
every year in 1994. You are required to determine when initial allowance would be
claimed on the motor vehicle purchased on 28th November. 1993.
67
Solution
1994 1/06/92-31/05/93 1/06/92-31/05/93
1995 1/01/94-31/12/94 1/06/93-31/12/94 Motor vehicle
1996 1/01/95-31/12/95 1/01/95-31/12/95
In the above illustration, the gap has been covered by the 1995 basis period which is the
later tax year between 1994 and 1995 tax years.
4.20 Restriction on Capital Allowances

The idea of restricting capital allowances claimed in any particular year of
assessment was first introduced in 1985 year of assessment. The general rules are as
follows:
1. There would be no restriction for any business in the agricultural and
manufacturing sectors of the Nigerian economy. The exemption of
manufacturing businesses only became effective from 1990 year of
assessment.
2. For other businesses, there is a restriction on the maximum capital allowances
that can be claimed to only two-third of the assessable profit.
This invariably implies that, for all businesses other than the agriculture and
manufacturing sectors, tax would have to be paid for any year of assessment to the extent
of one third of the assessable profit of that year of assessment.
Illustration
Dangano limited reported an adjusted profit of N6, 200,000. But has capital allowance
claimable of N6, 500,000.
You are required to compute the tax payable at 30 % if:
1. Dangano limited is an agricultural company
2. Dangano limited is a trading company
Solution
Dangano limited as an agricultural company
Assessable profit 6,200,000
Capital allowances 6,500,000
Relieved 6,200,000 6,200,000
Unutilized capital allowances c/f 300,000
Taxable profit 0
Dangano limited as a trading company

Assessable profit 6,200,000
Capital allowances 6,500,000
68
Relieved (2/3 X N6,200,000) 4,133,333 4,133,333
Unutilized capital allowances c/f 2,366,667
Taxable profit 20,666,667
Tax payable at 30% = N620, 000.

It should be observed that the restriction is on the assessable profit. Thus where there
is a loss to be relieved, you have to deduct the loss relieved from the assessable profit
before the capital allowances.
It should also be noted that at the point of cessation of business, there may be
unutilized capital allowance which can no longer be carried forward. The position of
the law is that where this occurs, such unutilized capital allowances may be carried
backward for a maximum period of 5 tax years before the year of cessation. Where
this occurs, the unutilized capital allowance is to be used in reducing the taxable
profits of those years.
Exercises
1. Consider the following information for maigana traders in respect of some assets
disposed.
d. Land and building purchased for N1,000,000 in 1990 and with tax written
down value of N598,750 was disposed off for 1, 500,000
e. Motor vehicle with a tax written down value of N450,000 was disposed off for
N700,000 the original cost was N850,000
f. A set of office furniture and equipment was sold for N450,000. It originally
cost the company N600, 000 and the tax written down value at the time of
disposal was N479, 500.
2. Nasir Ltd has been in trading business for a number of years. The profits as
adjusted for tax purposes for the last 5 years are:
Accounting period N
1st Jan - 31st Dec 1998 100,000
1st Jan-31st Dec 1999 200,000
1st Jan - 31st Dec 2000 400,000
1st Jan-31st Dec 2001 300,000
Expenditures on assets were as follows:

N
Plant and machinery 30th Sept 1998 50,000
Plant and Machinery 31st Dec. 1998 50,000
Motor Vehicles 1st April 1999 150,000
Buildings 6th June 1999 25,000
Industrial Buildings 1st Oct. 1999 40,000
Plant and Machinery 1st April 2000 20,000
69
Motor Vehicles 3rd June 20001 30,000
Industrial Buildings Extension 30th Nov 2000 10,000
Show the taxable profit for all years of assessment.
3. Dangoya Nigeria Ltd which makes up accounts to 30th June each year purchased
a tractor on hire-purchase for N520, 000 payable over 5 years in quarterly installments of
N26,000 inclusive of interest of N1000 per quarter. The installments so far paid are:
N
30th June 2000 26,000
30th Sept. 2000 26,000
31st Dec. 2000 26,000
31st Mar. 2001 26,000
30th June 2001 26,000
130,000
Show the capital allowances to be claimed.
70
CHAPTER FIVE
THE TAXATION OF COMPANIES
5.1 Assessable Profit

The adjusted profit of a company is assessable to tax in the year following the accounting
year. In other words, the basis period of assessment for each fiscal year is the adjusted
profit of the accounts ending in the preceding fiscal year. It should be noted that the
Government's fiscal year is the calendar year, which is from 1st January to 31st
December. It is the assessment year for income tax purposes.
The taxable profit is arrived at as follows:

Net profit xx
Add:
Non-allowable expenses xx
Taxable income not reported xx xx
Deduct:
Non taxable income xx
Allowable expenses not reported xx xx
Adjusted / assessable profit

Loss b/f xx
Relieved xx
Loss c/f xx xx
Add balancing charge xx

Capital allowance b/f xx
Relieved (xx) xx
Unutilized capital allowance c/f xx
Taxable profit xx
Illustration
Assume that a company makes up it accounts to 31st December of each year, then its
adjusted profit is assessable to tax as follows:
Accounting year
(Basis period) Assessment Year
1/1/96 - 31/12/96 1997

1/1/97 - 31/12/97 1998
1/1/98 - 31/12/98 1999
1/1/99 - 31/12/99 2000
and so on.
71
Solution
If the accounting year ends on 31st March of every year, then the profit are assessable to
tax as follows:
Basis period Assessment Year

1/4/95 - 31/3/96 1997
1/4/96 - 31/3/97 1998
1/4/97- 31/3/98 1999
and so on. We thus find, for example, that no matter what date the accounting year ends
in 1996, the profit of such accounts as adjusted for tax purposes is assessable to tax in
1997 fiscal year.
The above assumes that the accounting year is for a period of twelve months. Where
accounts are made up for a period more than 12 months, then adjustment is required,
since it is 12 months accounts that form the basis period.

Under the provision of CITA, the following expenses are considered as admissible for tax
purposes:
(a) contribution to a pension fund approved by the joint tax board
(b) any interest on a loan obtained for the purpose of the trade or business
(c) rent of accommodation for the staff provided this does not exceed the annual
basic salary of the staff
(d) bad debt written off
(e) provision for doubtful debt of a specific nature
(f) rent and premium in respect of land and building occupied for the purpose of
the business
(g) any expenses that is wholly, reasonably, exclusively and necessarily incurred
for the purpose of the business
(h) for an investment company, directors fee not exceeding N10,000 per annum
each for a maximum of 3 directors
(i) donations; provided the following are satisfied
i it must have been made out of a profit
ii it must not exceed 10% of the assessable profit
iii it must not be capital in nature
iv it must have been made out of the bodies listed in schedule 5 of CITA
(j) legal expenses that includes:
i. general legal advisory services

ii. retainers fees
iii. renewal of a short lease
iv. any cost of protecting or defending the business
72
5.3 Non-Allowable Expenses
The following expenses are not allowed for tax purpose:
(a) Depreciation
(b) Expenditure of a capital nature
(c) Any contribution to a fund not approved by the joint tax board
(d) Any provision for doubtful debt of a general nature
(e) Legal expenses including:

i cost of acquiring a new lease, whether long or short
ii cost of renewing a long lease
iii cost of defending a tax proposal
iv stamp duties on increase in share capital
(f) Fines and penalties

(g) Income tax provision
(h) Any sum recoverable under an insurance or contract of indemnity
(i) Any withdrawal of capital
(j) Any sum reserved out of profit
5.4 Non Taxable Incomes

The following incomes are to be treated as non-taxable
1. Any profit on the disposal of a fixed asset. In a similar manner, any loss on the
disposal of a fixed asset is treated as inadmissible for tax purpose.
2. Any profit on the disposal of an investment. The loss arising from the sale of
an investment is also to be treated as inadmissible for tax purposes.
3. Any reversal into income of a previously disallowed expense. Examples of
such include depreciation and general provision for doubtful debt.
5.5 Dividends Exempted From Taxation

The following dividends are exempted from taxation
(a) dividend received by way of a bonus issue of shares
(b) dividends received from a pioneer company
(c) dividends received from a company subjected to tax under the provisions of
the petroleum profit tax act
(d) dividends received net of withholding tax by a Nigerian company from
another Nigerian company
(e) dividends received net of withholding tax by a Nigerian company from
another Nigerian company
(f) dividends received from small companies in the manufacturing sector in the
first five years
(g) dividends received from investment in wholly export oriented business
(h) dividend from a unit trust scheme
73
(i) dividend received by a company from another one provided that the equity
participation in which the dividend is paid :
i either wholly paid for in foreign currency or by assets brought into

Nigeria
ii. brought into Nigeria between 1st January 1987 and December 31
1992
iii not less than 10% of the equity share capital of the company
paying the dividend
5.6 Interest Exempted From Tax

The following interests are exempted from tax, hence the company paying such interest
should not deduct withholding tax:
(1) Interest on foreign loans of not less than N50, 000 with repayment period of not
less than 2 years.
(2) Interest on loan for agricultural trade or business granted by a bank where
repayment period is not below 2 years, the moratorium period is not less than 18
months and the interest rate is not more than the lending rate.
(3) Interest on a loan granted by a bank for the purpose of manufacturing goods for
export if the repayment period is not below 2 years. There must be proof that the
goods exported are not less than 50% of the goods produced and that they were
not re-exported back to the country
The rate at which the interest from taxation shall be based on table 1 of schedule 3
of CITA as follows:
Period moratorium rate of exemption

> 7 years not less than 24 months 100%
5-7years not less than 18 months 70%
2-4 years not less than 12 months 40%
< 2 years - -
5.7 Profits exempted from taxation

The following profits or gains are exempted from taxation in accordance with the
provisions of section 19 of the companies income tax act.
1. Profits exempted provided it is not derived being a statutory or registered

friendly society.
2. the profits of any company engaged in ecclesiastical, charitable or educational
activities of a public character
3. the profits of any company being a trade union registered under the trade
union act of 1973
4. the profits of any company or corporation established by the law of a state for
the purpose of fostering the economic development of that state
74
The implication of the above provision is that where any income is derived from a trade
or business by any of the above named bodies, tax liability will arise.
5.8 Profits Exempted Even if Derived From a Trade or Business
1. The profits of any company being a cooperative society registered under any
law relating to corporative societies
2. The profits 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
3. 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
4. The profits of non-Nigerian companies which would be chargeable to tax by
reason sorely of being brought into or received in Nigeria
5. The profits of any Nigerian company in respect of goods exported from
Nigeria provided that the proceeds from such exports are repatriated to
Nigeria and are used exclusively for the purpose of raw materials, plants,
equipment and spare parts
6. The profits of a company whose suppliers are exclusive inputs to the
manufacturing of exports provided the exporter shall give a certificate of
purchase of inputs of the exportable goods to the seller of the suppliers
5.9 Where companies are in a partnership
Where two or more companies enter into a joint venture agreement or partnership, then
1. The joint venture or partnership is not chargeable to tax itself.
2. The profit chargeable to tax in the hand of each of the partners is the share of
profit from the partnership
3. Capital allowance on the same assets of the partnership shall be shared in the
agreed profit and loss sharing ratio
4. Where any of the companies involved in the partnership has another line of
business, the loss generated from the business will not be available for relief
against the profit generated from the partnership
5.10 Where a company is sold or transferred
Where a company is sold or transferred to another company either for the purpose of
better organization or transfer of management and provided that the revenue is of the
opinion that both companies belonging to the same holding company:
1. There will be no application of either the commencement of cessation rules
75
2. All the qualifying capital expenditure transferred are deemed to have been
made at their tax written down value. The balancing adjustment may be
computed
3. In the computation of capital allowance, no initial allowance may be
computed while the annual allowance would be based on the unexpired tax
life of the qualifying capital expenditure
4. Any unutilized capital allowances transferred are deemed to have been
transferred prior to the sale
5. Any unrelieved losses transferred are also deemed to have been relieved prior
to the transfer of sale
Where a company is reconstituted
A reconstituted company is one registered in Nigeria to take over the assets of a foreign
company in Nigeria.
For a reconstituted company

1. There will be no application of either the commencement or cessation rules
2. All the qualifying capital expenditure transferred are deemed to have been
made at their tax written down value. The balancing adjustment may be
computed
3. In the computation of capital allowance no initial allowance may be computed
while the annual allowance would be based on the unexpired tax life of the
qualifying capital expenditure
4. Any unutilized capital allowances transferred are deemed to have been
transferred prior to the sale
5. Any unrelieved loses transferred are deemed to have been transferred prior to
the sale
6. Any unrelieved loses transferred are deemed to have been incurred on the first
day of the reconstitution. Such a loss is then available for relief against the
taxable profit of the year of the reconstitution and the three subsequent tax
years.
Where a company merged with another company
Where a company merges or amalgamates with another company to form a new company
1. The commencement rule is applicable to the newly formed company as it is
deemed to have commenced a new business
2. The cessation rule is applied on the companies that are merging as they are
deemed to have folded up
3. The qualifying capital expenditures transferred are deemed to have been made
at their agreed values. This will result in the computation of balancing
adjustment
76
4. No initial allowance may be claimed on the transferred assets. Annual
allowance to be claimed must be based on the unexpired tax life of the
qualifying capital expenditure
5.13 Dormant Companies Levies

Where a company has not commenced business after six months of incorporation in any
year of assessment a pre-operational levy is payable for the purpose of obtaining tax
clearance certificate as follows:
1. N500 for the first year
2. N400 per annum for every subsequent years
5.14 Taxation on Dividend

Where a company either:
1. Does not have a taxable profit
2. The dividend declared and distributed to the shareholders exceeds the tax payable
The dividend declared shall be treated as the taxable profit of the company and subjected
to tax in the hand of the company accordingly.
This is the position where a company has generated enough capital allowance to match
the assessable profit. It could also vary well be that the company has recorded a loss. This
will result in no tax payable because there will be no taxable profit. As a consequence,
the company may declare dividend to the shareholders.
Any such dividend paid automatically becomes the taxable profit chargeable to tax at the
ruling corporate income tax rate.
5.2 Foreign Company

A foreign company is a company incorporated in a foreign country, while a Nigerian
company is a company incorporated in Nigeria. The profit of a foreign company is
chargeable to tax only to the extent that such profits are attributable to operations carried
out in Nigeria. On the other hand, the profit of a Nigerian company assessable to tax is its
global profit, (derived in Nigeria and abroad), irrespective of the fact that such profits
earned in a foreign land has not been remitted to Nigeria.
Profits of a foreign company is deemed to be derived from Nigeria.

(1) If that Company has a fixed base of business in Nigeria, to the extent that
the profit is attributable to the fixed base;
(2) If it does not have such a fixed base in Nigeria but habitually operates a trade or
business through a person in Nigeria authorized to conclude contracts on its
behalf or on behalf of some other companies controlled by it or which have
controlling interest in it, or habitually maintains a stock of goods or merchandise
77
in Nigeria from which deliveries are regularly made by a person on behalf of the
company to the extent that the profits is attributable to the business or trade or
activities carried on through that person.
(3) If that trade or business or activities involves a single contract for surveys,
deliveries, installation or construction, the profit from that contract; and
(4) Where the trade or business or activities is between the company and another
person controlled by it or which has controlling interest in it and conditions are
made or imposed between the company and such person in their commercial or
financial relations which in the opinion of the Board is deemed to be artificial or
fictitious, so much of the profits adjusted by the Board to reflect arm's length
transaction.
A "Fixed base" in Nigeria does not include:
(a) Facilities used, solely for storage or display of goods or merchandise;
(b) Facilities used solely for the collection of information.
5.2.1 Foreign Shipping or Air Transport Companies

Foreign airlines and shipping companies that land in Nigeria and carry passengers,
cargoes or mails are assessable to tax on the part of their full profit or loss arising from
the carriage of passengers or cargoes in Nigeria. The income from passengers or cargoes
brought into Nigeria for transshipments or for transfer from one aircraft to another is not
chargeable to tax.
The basis of taxation is either:

(i) Profit on the transportation business as reflected by the annual account; or
(ii) Withholding tax of 2% on Nigerian Sales on monthly remittance basis.
It is however, provided that where the Board is satisfied that the taxation authority of a
foreign country computes and assesses to tax on the basis similar to the Nigerian system,
then the profit from the Nigerian operation is ascertained by taking the ratio that the
airline's profit for the period before depreciation bears to the total revenue of the airline,
of the revenue from the Nigerian operation, that is,
Profit before depreciation X Revenue from passengers and cargoes

Total revenue from carried in Nigeria.
passengers/or cargoes.
In addition a depreciation relief is given thus:

Depreciation x Revenue from passenger and cargoes
Total revenue from carried in Nigeria
Passenger and / or cargoes
78
Illustration
Pan African Airlines Ltd is a foreign airline which operates flights to and from Nigeria.
Its Profit and Loss Account for the year ended 31st December, 2001 is given below:
N000 N000
Transportation Income
Income from passenger, cargo and mails:
Outside Nigerian sales 3,100,000
Nigerian sales 100,000 3,200,000
Less: Transportation Expenses

Salaries & other expenses 2,300,000
Depreciation 320.000
Other disallowed expenses 180,000 2,800,000
Net Transportation Profit 300,000
Other Income
Income from Properties (net) 25,000
Income from Maintenance (net) 50,000
Income from duty-free shop (net) 50,000
Income from catering (net) 75,000 200,000
Net Profit 500,000
Solution N000
Net transportation Profit as per account 300,000
Add Depreciation 320,000
Other disallowed expenses 180,000
Total Adjusted Profit 800,000
(ii) Compute the statutory ratios

(a) Adjusted Profit ratio:
800,000 x 100% = 25%
3,200.000
(b) Depreciation ratio:
320,000 x 100% = 10%
3,200,000
(iii) Calculate the Tax payable:

Nigerian Sales as above 100,000
Total Assessable Profit 25% of N1100.000 (Nigerian Sales) = 25,000
Less: Depreciation allowance 10% of N100,000 (Nig. Sales) 10,000
Chargeable Profit 15,000
Tax at 35% 5,250
The effect of charging a portion of the revenue from Nigeria is to allow for the operating
expenses before depreciation on a pro-rata basis as it would be unfair to tax the entire
79
revenue without allowing for the expenses incurred in earning the revenue. Even then,
when section 12(1) of the Decree refers to "full profit or loss arising from the carriage of
passengers ... in Nigeria", one would have expected that this allows for expenses incurred
in earning the profit since "profit" is not the same thing as "revenue". But the Decree
seems to confuse "revenue" with "profit".
The "depreciation relief given is in place of capital allowances. Section 12(3) of the
Decree provides that where the above ratios cannot be satisfactorily applied, the Board
may use a "fair percentage" to compute the profit deemed to be derived from Nigeria.
The company affected however, is given the right of appeal within 6 years of the
assessment being made on the basis of "fair percentage" to be assessed under the above
provisions on the production of a certificate to the satisfaction of the board that his
country tax practice is similar to that of Nigeria.
5.2.2 Foreign Companies Engaged in Transmission of Messages by any Form of

Wireless or Cable
These companies are assessable to tax on the same basis as foreign shipping companies
or foreign airline as though the transmission of messages to places outside Nigeria were
equivalent to the shipping or loading of passengers or cargoes in Nigeria.
5.2.3 Foreign Non-Life Insurance Companies

The profit of a foreign non-life insurance company which carries on business through a
permanent establishment in Nigeria and whose profits accrue in part outside Nigeria is
computed thus: -
Provisions for Unexpired risks at beginning X

Gross premiums received in Nigeria X
Less re-insurance and returned premium X X

Interest income received in Nigeria X
X
Less Actual Losses in Nigeria X
Less recovered from reinsurance X X
Agency expenses in Nigeria X
Fair proportion of Head Office expenses X
Provision for unexpired risk at close of the period X
Profit chargeable to Tax X
The provision for unexpired risk must be at the percentage adopted by the company in
relation to its operations as a whole for such risk, thus different percentages may be
applied for different risks.
Knowledge of insurance accounting is necessary to understand this computation of profit.
80
5.2.4 Foreign Life Assurance Companies
A foreign life assurance company which carries on business through a permanent
establishment in Nigeria is liable to tax on its profit computed by deducting a
management expenses and commissions from its investment income.
Where, however, profits of such a company accrue in part outside Nigeria, the profit shall
be the proportion of the total investment income of the company as the premiums
receivable in Nigeria bear to the total premiums receivable, less the agency expenses in
Nigeria, and a fair proportion of the head office expenses of the company The Board is
given power to substitute another basis for ascertaining the required proportion of the
total investment income where the head office of the life insurance company is outside
Nigeria.
It is also provided that where the company declares dividend to its shareholders from the
increase arising from actuarial revaluation of its life policy liabilities, the company shall
pay tax on the dividend as if such dividend is the total profit of the company
Illustration
British Assurance Co. Ltd. is a life assurance company incorporated in England but
which carries on business in Nigeria through a permanent establishment. The company's
Profit and Loss Account for the year ended 31st December, 2001 is as follows: -
N N
Life Fund, 1st January, 2001 4,375,000
Premiums 6,625,000
Investment income (Gross) 900,000
11,900.000
Less: Claims paid 362,500
Provision for outstanding claims 1,050,000
Expenses • 180,000
Commissions 2,190,000
Surrenders 55,000
Bonuses 87,500
Life Fund, 31st December 2001 6,250,000
10,175,000
Profit
1,725,000
The following additional information is given:

(1) Premiums received outside Nigeria is N1,250,000
(2) Commissions and expenses attributable to operations outside Nigeria are
N440,000 and N37,500 respectively
81
(3) Depreciation of assets in Nigeria included in expenses amounted to
N15,000.
Required: Compute the company's profit for tax purposes.
Solution:
BRITISH ASSURANCE CO. LTD.

COMPUTATION OF PROFIT FOR TAX PURPOSES
N
Investment Income 5375 X 900,000 = 730,188
6625
Deduct expenses attributable to Nigeria:
Commissions 1,750,000
Expenses (less depreciation) 127,500 1,877,500
Adjusted Loss for the year (1,147,312')
Illustration
Arab Insurance Co. Ltd. is a foreign insurance company carrying on marine insurance
business in Nigeria through a permanent establishment. Its Revenue account for the year
ended 31st December 2001 is given below:
N000 N000
Gross Premiums receivable 1,048,500
less Reinsurance premium 975,000 73,500
Commissions receivable 12,750
Gross Interests and dividends 2,475
Reserve for unexpired risks,
1st Jan. 2001 1,800
90,000
Deduct
Claims 10,000
less recoverable from
re-insurer 6,250 3,750
Commissions payable 49,500
Office expenses 9,750
Provision for outstanding claims 750
Head Office expenses 6,750
Depreciation 3,000
Reserve for unexpired risk, 31st Dec., 2001 3,000 76,000
Profit 14,025
Required: compute adjusted profit for tax purposes.
82
Solution:
ARAB INSURANCE CO. LTD..

N
Profit per accounts 14,025
Add back Disallowable charges: -
Depreciation 3,000
Adjusted Profit 17,025
Tutorial note: The foreign insurance company is a non-life insurance company
"Permanent establishment" in Nigeria does not include an agency unless the agent has,
and habitually exercises, a general authority to negotiate and conclude contracts on behalf
of the insurance company
5.3 Nigerian Insurance Companies

The profits of Nigerian insurance companies for tax purposes are computed in accordance
with the principles but on the assumption that all premiums and investment incomes were
receivable in Nigeria and all expenses and other outgoings of the company were incurred
in Nigeria.
5.4 Companies with Many Sources of Income

Where a company has many sources of income, the profit for tax purposes must be
computed for each source separately. The expenses for each source matched against the
revenues from the source. Thus where one source shows a profit and another source a
loss, the profit of that source will be taxed while the loss from the other source will be
carried forward. It is not permissible to net off the loss of one source from the profit of
another source. Expenses common to all the sources may be apportioned over them on a
basis acceptable to the tax authority Thus a trading company which also owns properties
from which rents are earned, has two sources of income - from the trade and from the
property.
Example
XYZ Insurance Co. Ltd presents the following figures from its Trial Balance for the year
ended 31stMarch, 2001:
Business other than Life N

Gross premiums receivable 200,000
Gross interest 50,000
Other incomes 50,000
Premium payable on re-insurance 25,000
Claims paid 100,000
83
Claims recoverable from re-insurer 10,000
Agency fees and other expenses 20,000
Reserve for unexpired risks:
at 1st April 2000 50,000
at 31st March 2001 75,000
Life Department
Gross interest receivable 50,000
Other investment income (gross) 100,000
Claims paid 50,000
Fund Management fees 10,000
Life Department running expenses 25,000
Life Fund at 1st April 2000 1,500,000
Required: compute the company's profit for tax purposes.
Solution
XYZ INSURANCE CO. LTD.

N N
Non Life Business

Reserved for unexpired risks, 1st April 2000 50,000
less Re-insurance premium 25,000 175,000
Interest income (gross) 50,000
325,000
Deduct claims paid 100,000
less Recoverable from re-insurer 10,000
90,000
Reserve for unexpired risks, at
31 st March, 2001 75,000 185,000
Adjusted Profit from non-life Business 140,000
Life Business
Interest income (gross) 50,000
150,000
N
Deduct claims paid 50,000
commission
84
payable 50,000
Running exp. 25,000 125,000
Adjusted Profit from Life Business 25,000
Note: Management fee is not an allowable charge unless the agreement giving rise to
the fee was approved by the Minister of finance and the approved fee specified. Hence, in
the absence of further information, the management fee is disallowed.
Total Profits for Tax: N

Non-life business 140,000
Life Business 25,000
165,000
5.6 Artificial Transactions

Where the Board is of the opinion that any transaction which reduces or would reduce the
amount of tax payable is artificial or fictitious, it may disregard any such transaction and
make adjustments to counteract the effect of such transactions on tax liability
Transactions between relations or between persons one of whom has control over the
other or both of whom are controlled by some other person shall be deemed to be
artificial or fictitious if in the opinion of the Board those transactions were not made at
arm's length.
Disposition is treated in similar manner if considered artificial and "disposition" includes

any trust, grant, covenant, agreement or arrangement.
5.7 Property Holding Companies

A property holding company is one that acquires lands and buildings not for resale but
investment - for the purpose of earning income. The basic principle for computing profit
for tax purposes applies but in addition, the remuneration of directors of the company is
restricted to N3, 000 per annum and for a maximum number of two directors. Thus
directors' remuneration allowable is N6, 000 in total, unless there is only one director.
The following expenses are also allowable:
(1) Interest on investment to provide the property

(2) All state and local government taxes or levies ground rent, water rate,
general rate, tenement rate, environmental charges, where paid by the
landlord.
(3) Normal repairs and maintenance
(4) Insurance premium on property
85
(5) Agency fees for collection, maintenance or generally taking care of the
property
(6) Money spent in providing services to tenants where it is part of the
condition of tenancy
(7) For those who own estates, the construction and upkeep of roads and
Other motorways, drainage, etc. within.
All expenses of capital nature (except (7) above) are of course disallowable. So is
Depreciation.
5.8 Business Losses and Tax Relief

It may happen that the computation of "adjusted profit" turns out to be a "loss" or it may
be that a loss shown in the accounts becomes an "adjusted loss" after applying the income
tax principles. Where losses exist there is no income tax liability in that year of
assessment and the loss may be carried forward to be relieved against the profits of future
periods.
Example
Nkere Nigeria Ltd. which has been in business for many years presents the following
adjusted profits for tax assessment:
Accounting Year Adjusted Profit (Loss)
Jan. - Dec. 2000 N20,000
Jan. - Dec. 2001 (N40,000)
Compute his assessable profits for the relevant years.
Solution
Tax Year Basis Assessable Loss
Profit c/f
N N
2001 Preceding year (2000) 20,000
2002 Preceding year (2001) Nil 40,000
5.8.1 Limitation of the Period for Relieving a Loss

A loss can be carried forward for 4 years only after which it lapses if it could not be
totally relieved then. Losses should therefore be relieved on the basis of "first incurred
first relieved" basis since the earlier one will lapse before the later.
Example
The adjusted profits and losses of Adio Ltd., which has been trading for many years are:
Accounting Year Profit (Loss)
86
N
1996 (200,000)
1997 40,000
1998 (20,000)
1999 50,000
2000 10,000
2001 30,000
You are required to compute the assessable profit for the relevant years.
Solution
ADIO LIMITED
Income Tax Assessment
Assessment Assessable profit

Year N N
1997 Loss carried forward (200,000) Nil
1998 Profit 40,000

Less loss brought forward (200,000)
Loss carried forward (160,000) Nil
1999 Lossb//f (160,000)
Loss for the year (20,000)
Lossc/f (180,000)
2000 Profit 50,000
Less loss b/f (180,000)
1996 N110,000
1998 N20,000
2001 Profit 10,000

Less Loss b/f (130,000)
Loss unrelieved (120,000)
Loss lapsed 1996 100,000 Nil
Loss (1998) Carried forward (20,000) Nil
2002 Profit 30,000
Less loss b/f (20,000) 10,000
5.8.2 Loss Relief Restricted to Source of Income

Where a Company derives its incomes from many sources and incurs a loss on any of
them, the loss has to be carried forward to be relieved by future profits from that source
only. Income tax has to be paid on the incomes from other sources.
87
Example
Nene Ltd. makes up its accounts 31st March. The tax information about the company is
given below:
Adjusted Profit N
Trading 200,000
Rent (gross) 50,000
Investment income (gross) 10,000
Capital allowances 20,000
Balancing allowance 1,000
Loss from trading brought forward (250,000)
Required: Compute the Company's assessable profit.
Solution
Income Tax Assessment
N N
Profit from trade 200,000
200,200
Less Capital allowance 20,000
Balancing allowance 1,000 21,000
Total Profits 179,200
Less Loss from trade b/f 250,000
Restricted to profit from trade 179,200 179,200
Loss (trade) c/f 70,800
Total Taxable Profit 0
Loss from trade c/f (70,800)
WITHHOLDING TAX ASSESSMENT

Rent 50,000
Investment income 10,000
60,000
5.8.3 Losses Incurred By New Business

You will recall that because of the special rules for assessing new business, the profit of
one year may be assessed for two or more years of assessment and that apportionment of
the profits is usually made on time basis. Where a loss is incurred in the early years of
business and it has been apportioned and as a result partly set-off against apportioned
profit, that part of the loss has been effectively relieved and has to be eliminated in
computing loss carried forward. In all cases, the loss relieved must not be higher than the
loss actually incurred
88
Example
lyeye Nigeria Limited commenced business on 1st April 1996 and makes up its accounts
to 31st March in each year. The adjusted profits for tax purposes as agreed with the tax
authorities are:-
N
31st March 1997 9,600
March 1998 (24,000) loss
March 1999 8,000
March 2000 8,000
March 2001 13,200
Shows the assessments for all the years.
Solution
Assessment Assessable
Year Profit
N
1996 1/4/96-31/12/96=9/12x9600 == 7,200
1997 12 months from commencement 1/4/96-31/3/97 == 9,600
1998 Preceding year = 9,600
1999 Preceding year Loss (N24,000) c/f Nil
2000 Preceding year N8,000
Loss c/f (16,000) Nil
2001 Preceding Year N8,000

Loss c/f (8,000) Nil
2002 Preceding Year N13,200
Less loss b/f ( 8,000) N5,200
Now if the tax payer exercises its option to be assessed on the actual profits of the
second and third years of assessment the assessment would be:
Assessment Profit
N
1996 1/4/96 - 31/12/96 = 9/12 x 9600 7,200
1997 1/1/97-31/12/97
3/12x9600 = N2,400
9/12x24.000 = (N18,000)
Loss unrelieved c/f (N15,000) Nil
1998 Actual basis
1/1/98-31/12/98
3/12x24,000 loss = (N6,000)
9/12 x N8,000 profit = 6,000
0
Nil
89
1999 Preceding basis loss (N24,000) Nil
Loss relieved:
1997 N2,400
1998 6,000 8,400
2000 Preceding profit N8,000

Less loss b/f (N15,000)
Loss c/f 7,600
2001 Preceding profit N13,200

Less loss b/f (7,600) 5.000
Thus it will not pay the tax-payer to exercise the option because of two reasons:
(a) It will pay tax earlier, in 2001 instead of 2002.
(b) The assessable amount would be higher; hence a higher tax will be paid.
Notes
The second working has brought out features not disclosed in the first. Notice that the
unrelieved loss in 1997 (N15,600 is not carried forward and added to 1999 loss because it
is the same loss; it was merely apportioned in 1997 and not apportioned in 1999. To do
otherwise will be to duplicate the loss and claim relief for more than the actual loss and
this is not allowed as already said. Similarly, it would not be proper to carry forward the
whole of the loss which is the assessment figure for 1999 because part has been relieved
"effectively" in the earlier years owing to apportionment.
Example
Okesuna Ltd., which makes up its accounts to 31st December permanently ceased to
carry on business on 31st May 2002. The following adjusted profit/loss was agreed with
the Inland Revenue.
12 months to 31st December 2000 N24, 000

5 months to 31st May 2002 (N19, 000) loss
You are required to prepare the original assessment and the revised assessment if the
Inland Revenue exercises its option regarding the penultimate year.
Solution
Assessment
Profit
2001 Actual 1/1/01 - 31//5/01 Nil
Loss N19,000 Unrelieved
90
2000 Penultimate year:
Original assessment
Preceding profit N24,000
or
Revised assessment:
Actual 1/1/00 - 31/12/00 21,600 N24,000

whichever is higher
Thus the loss lapses since losses can only be carried forward and never backward.
5.8.4 Losses and Capital Allowances

Capital allowances were ignored in the previous examples for sake of simplicity. In the
year of a loss capital allowances would obviously not be relieved and have to be carried
forward. In carrying forward losses and capital allowances they should not be merged as
not to lose their identities because of their varying treatments. It will be remembered that:
(1) Capital allowances may be carried forward without a time limit whereas losses can
only be carried forward for 4 years.
(2) Capital allowances may be carried backward in the year of cessation, losses cannot.
For the reason in (1) where losses and capital allowances are carried forward, losses
should be relieved first.
Example
Okesuna Ltd., which makes up its accounts to 31st December each year permanently
ceased to carry on business on 31st May 2002. The following adjusted profits/loss were
agreed with the Inland Revenue.

5 months to 31st May 2002 (N19.000) loss
The following are information relating to fixed assets of the business :

Plant
Buildings
N N
WDV at l999
(accounting year ended 31/12/99) 3,750 19,040
91
Additions:
2000 March 2,000
September 3,000
December 3,000
2001 February 1,300

August 3,600
November 4,800
Sale proceeds:
2002 15,000 48,000
You are informed that the assets brought forward from the end of 1999 accounting year
were bought in 1997 at:
Plant N30, 000
Buildings N32, 000
You are required to compute the assessments.
Solution
Tutorial Note: In order to ascertain the annual allowance for the assets a working back
from date of acquisition is desirable. Such an exercise would also help regarding other
decisions which might be made regarding balancing charge restriction since the assets
were later sold.
Plant Buildings Allowances
Investment Allowance 10%

Initial Allowance 50% 15%
Annual Allowance 25% 10%
N N N
Cost, 1997 30,000 32,000
Investment Allowance 3000 3,000
1997 Initial Allowance 50% 15,000 4,800 19,800
15,000 27,200
Annual Allowance 25% 3,750 2,720 6,470
W.D.V 11,250 24,480
WDV 7,500 21,720
92
1999 Annual Allowance 3, 570 2,720 6,470
WDV per question 3,750 19,040 42,210
COMPUTATION OF CAPITAL ALLOWANCE FOR

2001 AND 2002
Total
Plant Building
Allowance
N N N
W.D.V.b/f 3,750 19,040 42,210
10 16,320
Addition, 8000
2001 Investment Allowance N800
Old assert NIL
New assert 1,000 5,000
W.D.V 3,000 13,600
2002 (Basis period actual)
1/1/02-31/5/02
Addition, 2001 9,700
12,720
Investment Allowance N970
Annual Allowance:
1st assert 2,720
2ndAssert 5/12 X 1000 = 416
3rdAssert 5/12 X 1212 = 505 5,771 9,461
W.D.V. 6,929 10,880
2003 Sales proceeds 15,000 48,000
Balancing Allowance 8,071 8,071
Balancing Charge 37,120
Total charge restricted to 21,120
Total Allowance granted on the assert
(excluding investment allowance) 74,731
NOTES:
(1) Since the basis period for the year of cessation is less than 12 months, the annual
93
allowance is given pro rata.
(2) Total capital allowances granted on building from inception totaled N21,120,
hence balancing charge cannot exceed this amount.
(3) Since the business ceased in 2002 the Balancing allowance and balancing charge
will be carried back to 2001 in computing assessable profit.
(4) It will be recalled that the penultimate year assessment may be revised by the
Inland Revenue and assessed on the actual basis if that will provide a higher
assessable profit. When that is done, capital allowance computation would have to
revised too since the basis period has changed.
(5) The basis period (normal for 2001) is the accounting year to 31st December
2000. In 2002 the basis period is 1st January 2002 - 31st May 2002. There is thus
a gap of 12 months - the whole of 2001 hence assets purchased in 2001 rank for
capital allowances in 2002.
INCOME TAX ASSESSMENT
2002 Loss N19,000

Unrelieved
Capital Allowances carried back:

2002 Capital allowances N9,461
2003 Balancing allowances 8,071
17,532
Less Balancing charge 21,120
Balancing charge c/b 3,588
2001 Higher of:

Preceding basis N24,000
Actual Basis 21,600 N24,000
Balancing allowance b/f 3,588
27,588
Less Capital Allowances (normal) 8,520
Assessable Profit 19,068
Since the assessment for 2001 would have been concluded on the normal basis (N24,000
- N8,520) at N15,480 before it became known that the business permanently ceased in
2002 thus requiring the re-opening of that assessment, the company would pay additional
tax on N3,588.
NOTES:
94
(1) It is important to observe carefully which of the capital allowance computations
have been used in the assessment.
(2) It would appear that the revised capital allowance computation is redundant. Yes,
so it is and is because the normal basis of assessment for the penultimate year is higher
than the actual basis. If the actual basis were higher we would have used the figures from
the revised computation.
5.8.5 Terminal Loss

It refers to the loss in the year of cessation plus other year's losses brought forward,
which are unrelieved in the year of cessation. Capital allowances must not be included as
they can be carried backward up to the fifth year preceding cessation of business.
The limit of 4 years for carrying forward loss does not apply to a company engaged in
agricultural trade or business. Such companies may carry forward their losses indefinitely
until relieved but they cannot carry the losses backward. Agricultural business comprises
activities involved in farming, deep sea fish trawling, animal husbandry and agro-allied
activities. Retailers and distributors of agric produce are excluded.
5.9 Total Profit Defined

"Total Profits" of a company for tax purposes is denned by the Decree as "the amount of
its total assessable profits from all sources for that year plus balancing charge (if any) less
Capital allowance (including balancing allowance) and losses". In other words the "total
Profit" is computed thus:
Profit from trade X

Profits from other sources:
Rental income X
Investment income X X
Profits from all sources X
Balancing charge X
X
Initial X
Annual X
Balancing X X
Loss b/f X X
Total Profit X
95
It will be recalled that "donations" are in total limited to 10% of the "Total Profits", the
excess is not allowable as deduction in computing the adjusted profit.
5.10 Minimum Tax

Where in any year of assessment the ascertainment of total profits of a company from all
sources results in a loss or where a company's ascertained total profits results in no tax
payable or tax payable which is less than the minimum tax, the FIRS is to levy a
minimum tax, on the company (section 23, Finance Decree 1991).
The minimum tax is to be computed as follows:

(a) For a company with turnover not wore than N500, 000 and it has been in
business at least a calendar year: .
(1) 0.5% of gross profit or
(2) 0.5% of net assets or
(3) 0.25% of paid-up capital or
(4) 0.25% of turnover
whichever is higher.
(b) For a company with turnover above N500,000 tax as computed under (a)
above plus 0.125% of the excess turnover.
Example
ISIAKU NIGERIA Ltd is a trading company owned by Nigerians and has been carrying
on business since 1987. During the year ended 31st December, 2001, the results of the
company's activities were as follows:
ISIAKU NIGERIA LIMITED

BALANCE SHEET AS AT 31ST DECEMBER, 2001
N
N
Assets Employed
Fixed Assets 200,000,000
Current Assets 560,000,000
Less: Current Liabilities 370,000,000
Net Current Assets 190,000,000
390,000,000
Financed by
Share Capital 160,000,000

Statutory Reserves 60,000,000
General Reserves 100,000,000
96
Long Term Loans 70,000,000
390,000,000
Notes:
(i) The turnover of the company during the year ended on 31st December, 2001 was
N200,000, 000.
(ii) Gross Profit was N35, 000,000.
(iii) Assessable Profit for 2002 year of assessment was N2, 100,000.
(iv) Unrelieved Capital Allowances brought forward from 2001 year of assessment
was N600,000.
(v) Capital allowance for the 2002 year of assessment was N950, 000.
You are required to compute the company's tax liability for 2002 year of
assessment taking cognizance of the Minimum Tax Provisions,
Solution
ISIAKU NIGERIA LIMITED
2002 INCOME TAX COMPUTATIONS
BASIS PERIOD: 1/I/01-31/12/OI
N N
Assessable Profit 2,100,000
Deduct:
Unrelieved Capital allowances b/f 600,000 600,000
Current Year Capital Allowances 950,000 950,000
1, 550,000 550,000
Restricted to 66 2/3 % of Assessable Profits 366,666 366,666

Unrelieved Capital allowance carried forward 1,183,334
Total Profit 183, 334
Tax at 35% 64,167
MINIMUM TAX COMPUTATION

N
N
A. (i) 0.05% of 35,000,000 Gross Profit = 1,750,000 or
(ii) 0.05% of 190,000,000 Net Assets = 9,500,000 or
(iii) 0.025% of 160,000,000 Paid up Capital = 4,000,000 or
(iv) 0.025% of 500,000 Turnover = 12, 500
The highest in the above is (A) 9, 500,000
97
B. Plus Tax on Excess Turnover over N500,000 at 0.125%
That is N (200,000,000-500,000) .0125% = 2, 493,750
Minimum Tax Payable is A + B 11, 993, 750
TAX LIABILITY = N11, 993, 750
5.11 Exemption from Minimum Tax

The minimum tax provisions do not apply to the following companies -
(1) A company in agricultural trade or business
(2) A company with at least 25% imported equity.
(3) During the first 4 years of commencement of business of any company.
5.11.1 Investment Allowance for Banks

Nigerian Banks are entitled to "Rural banking Investment allowance" of 20% of the total
expenditure incurred in opening a branch under the “rural banking scheme” policy of the
Central Bank of Nigeria. Like the Investment Allowance for other undertakings, it is
granted once and is not considered in determining the residue of the asset.
Export Trade Loan Interest Income

Interest earned by a bank and other financial institution on loans granted for the purpose
of manufacturing goods for export is exempted from tax according to the scale below:
Repayment Period Grace Period Tax

exemption
including Moratorium (moratorium) Allowed
Above 7 years Not less than 2 years 100%

5 - 7 years Not less than 18 months 70%
2-4 years Not less than 12 months 40%
below 2 years NIL None
The exemption is subject to a certificate issued by the Nigerian Export Promotion

Council (NEPC) The NEPC will not issue the Certificate except documents are presented
to show that:
(1) The level of export specified has been achieved;
(2) Not less than one-half the manufactured goods of the year is sold outside
Nigeria and is not re-imported into Nigeria.
(3) Not less than 75% of the export proceeds are repatriated to Nigeria
through government approved channels.
This condition attached to it clearly imposes a duty on the bank to ensure

that the money Lent to this customer was used for manufacturing goods for
exports, and the bank in fact should ensure repatriation of the export proceeds
through it.
98
Example
First Credit Bank Ltd lent N300,000 to ABC Ltd a company engaged in manufacturing
and export business. The loan bears interest at the rate of 15% p.a. and is repayable in 5
years installments. The moratorium period is two years.
Show the interest to be brought into the banks income tax computation for each of the
years concerned.
Solution
Tutorial Note: Since the moratorium period is 2 years and repayment period 5 years, it
means that the duration of the loan is 7 years.
Repayment will start in the 3rd year. Interest shown below is calculated on the amount of
loan outstanding at the beginning of each year.
BANK'S INCOME
Accounting Gross Tax exempt Taxable
Year Interest 70% 30%
N N- N
N
1 45,000 31.500 13,500
2 45,000 31.500 13,500
3 45,000 31,500 13,500
4 36,000 25.200
10,800
5 27,000 18,900 8,100
6. 18,000 12,600 5,400
7 9,000 6,300 2,700
Notes
We seize this opportunity to point out that the interest which the bank charges it
customers for loans is not subject to withholding tax because it is impracticable for the
customer to "withhold tax" which would later be remitted to the tax authorities. This is
because although the customer "pays" the interest, it is a mere book entry that reduces the
customers balance (or increases in case of overdraft) with the bank. Therefore in the
income tax computation of the bank no tax has been suffered at source on such interest.
99
Interest Earning of Banks Exempted from Tax
Effective, 1st Jan. 1997 interest earned by banks from loans granted for the following
purposes are exempted from tax provided the moratorium is not less than 18 months.
1. Loans for agricultural trade and business
2. Loans for companies or persons engaged m fabrication of local plant and machinery
3. Loan for working capital for cottage industries established under the family
Economic Development Programme.
Before 1st January 1997, the exemption applied to interest earned on loan granted for
agricultural trade or business only.
Agricultural trade or business means any trade or business connected with:

(a) The establishment or management of plantation for the production of rubber, oil
palm, cocoa, coffee, tea and similar crops;
(b) The cultivation or production of cereal crops, tubers fruits of all kinds, cotton,
beans, groundnuts, sheanuts, banished, vegetables, pineapples, bananas and
plantains;
(c) Animal husbandry, that is to say, poultry, piggery, cattle rearing and the like and
fish, and deep sea fish trawling..
The following information is to be disclosed by the bank to the firs

(a) Amount of loan
(b) Moratorium period
(c) Repayment commencement date
(d) Repayment sum, showing capital sum and interest separately
(e) Full particulars of loan recipient
Interest on Foreign Loan

Interest earned on a foreign loan granted to a Nigerian business on or after 1st April 1978
is relieved from tax in accordance with the scale given earlier on "export trade loan
interest".
Foreign loan means any loan granted by a foreign company with moneys brought into
Nigeria from any territory or country outside Nigeria or any loan granted in a currency
other than the Naira.
In making payment for the three types of loan interest referred to in the preceding
paragraphs the paying company must not deduct withholding tax.
Foreign Loan Not Less than N5 Million

When a foreign loan of not less than N5m is granted on or after 1st January 2001 to any
person carrying on any trade, business, profession or vocation in Nigeria for the purpose
of such trade, business, profession or vocation, the interest earned on such loan is subject
to tax relief as below:
100
Repayment
period for Tax relief
the Loan
Over 10 years The whole interest is exempted from tax.

5-10 years Interest taxable at half the standard income tax rate.
Interests on such loan are therefore not subject to withholding tax. However, it is not
clear, in the case of the second class of loan how the tax would be collected if, for
example, the lender is not resident in Nigeria and does not submit accounts to the tax
authority By implication therefore the company making such payment should deduct the
tax and remit to the Inland Revenue. If the Standard income tax rate is 35% the interest
for loan duration of 5 - years will be taxed at 17.5%, which is higher than the withholding
tax rate. Something is wrong with this law, as this is not the intention.
The relief may be withdrawn where the first class of loan is repayable within a period less
than 8 years and the second class within a period less than 4 years.
Foreign Company Which Does Not Submit Accounts

Where a foreign company which docs not submit accounts to the Inland Revenue, derives
any income from the use in Nigeria of its asset, the Nigerian beneficiary of the contract,
i.e. the person making the payment to the foreign company is obliged to tax fifty five
percent of such income at the standard income tax rate that is, withhold the tax and remit
to the Inland Revenue. 'Fifty-five percent of the income is taxable because forty-five per
cent is given as relief in lieu of Capital Allowances and expenses.
WITHHOLDING TAX
Certain incomes are liable to a tax known as "Withholding tax" and not income tax. This
tax is deducted at source by the paying company. A company making such payments is
obliged to deduct withholding tax and pay over the tax so deducted to the relevant tax
authority. The relevant tax authority is the Federal Inland Revenue Service where the
beneficiary is a company and the State Inland Revenue Board where the income recipient
is an individual or firms (unincorporated business organizations). The incomes liable to
withholding tax at source and the applicable withholding tax rates are:
Income/Earnings Withholding
Tax Rate
1. Rent 5%
2. Interest 5%
3. Interest on bank deposit 15%
In the case of savings passbook account deduction is made only if the
amount on deposit is N50, 000 or more
101
4. Fee for use or hire of any equipment 15%
5. Dividend 5%
6. Directors fees 15%
7. Royalties 15%
8. Management fees 15%
9. Building construction and related activities 2 1/2 %
10. All types of contracts and agency arrangements
other than sales in the ordinary course of business 2 1/2 %
11. Consultancy services 10%
12. Management services 10%
13. Technical services 10%
14. Commissions 10%
Remittance to the relevant tax authority should accompany the following information:
1. Name and address of beneficiary on whose behalf the payment is made.

2. Nature of activities or services in respect of which payments have been made.
3. Gross amount payable.
4. Amount of tax deducted.
5. Amount of tax remitted
6. Date of remittance
7. In the case of dividend, the accounting period in which the dividends is paid.
As an administrative convenience remittance of withholding tax is required to be made to
the FIRS from where the relevant state tax authority can claim the tax remitted for
persons subject to its tax.
There is a fine of N5, 000 for failure to deduct and account for withholding tax. The tax
withheld is to be remitted within 30 days of the payment.
CERTIFICATE TO BE ISSUED TO EACH BENEFICIARY

In respect of incomes subject to tax at source, the company making such payments is
obliged to issue a certificate to each recipient setting out:
(1) The gross amount due,
(2) The withholding tax deducted and the rate thereof; and
(3) The net amount paid to the recipient.
DIVIDEND RECEIVED FROM ABROAD

Where the company paying the dividend is in a Commonwealth country, the net dividend
received by a Nigerian company shall be increased by the amount of tax imposed on that
company on the dividend. The treatment of net dividend from other foreign countries will
be dealt with in the lesson on "Double Taxation" relief.
102
DIVIDENDS EXEMPTED FROM WITHHOLDING TAX
The following dividends are not subject to withholding tax and should therefore be paid
gross to the beneficiary:
(1) Bonus shares
(2) Dividend paid by a Pioneer company
(3) Dividend distributed out of taxed petroleum profit
(4) Capital distributions made by the liquidator of a company in the process of
winding up.
(5) Dividend as stated in the section on "profit exempted"
(6) Dividends of small companies
(7) Dividends from manufacturing companies in petrochemical and liquefied
natural gas industries.
CLOSELY CONTROLLED COMPANIES

Where a company controlled by not more than five persons has not distributed profits as
dividend and the Board if of the opinion that such distribution would have been made
without detriment to the company's business, it may treat such profits or portion of it as
distributed.
Where profits are treated as distributed then such shall be regarded as the incomes of the
persons who are shareholders in the company in proportion to their shareholdings. The
company is then under obligation to pay over withholding tax on such deemed dividend.
PROFITS FROM DIVIDEND

When a company's profit is made up of dividends received from other companies, in
paying dividends to its shareholders out of such profit, it is not required to deduct
withholding tax, but is required to issue a certificate to its shareholders setting out the
amount which the shareholder is entitled and describing the profit out of which the
dividend is payable. This provision clearly refers to an investment company such
dividends are referred to as "franked investment income."
Exercise
1. Alex Airlines Ltd is a foreign airline which operates flights to and from Nigeria.
Its Profit and Loss Account for the year ended 31st December, 2001 is given below:
N000 N000
Transportation Income
Income from passenger, cargo and mails:
Outside Nigerian sales 2,200,000
Nigerian sales 200,000 2,400,000
Less: Transportation Expenses

Salaries & other expenses 1,300,000
103
Depreciation 480,000
Other disallowed expenses 220,000 2,000,000
Net Transportation Profit 400,000
Other Income
Income from Properties (net) 35,000
Income from Maintenance (net) 70,000
Income from duty-free shop (net) 20,000
Income from catering (net) 75,000 200,000
Net Profit 600,000
You are required to compute the amount of tax payable by Alex Airlines Ltd.
2. Namu Insurance Co. Ltd presents the following figures from its Trial Balance for
the year ended 31stMarch, 2001:
Business other than Life N

Gross interest 30,000
Premium payable on re-insurance 35,000
Claims paid 150,000
Claims recoverable from re-insurer 30,000
Reserve for unexpired risks:
At 1st April 2000 25,000
At 31st March 2001 45,000
Life Department
Gross interest receivable 40,000
Claims paid 60,000
Fund Management fees 20,000
Life Department running expenses 25,000
Life Fund at 1st April 2000 1,300,000
Required: compute the company's profit for tax purposes.
3. Amiko Ltd is a trading company owned by Nigerians and has been carrying on
business since 1987. During the year ended 31st December, 2001, the results of the
company's activities were as follows:
BALANCE SHEET AS AT 31ST DECEMBER, 2001

N
N
104
Assets Employed
Fixed Assets 100,000,000
Current Assets 280,000,000
Less: Current Liabilities 185,000,000
Net Current Assets 95,000,000
195,000,000
Financed by
Share Capital 110,000,000

Statutory Reserves 20,000,000
General Reserves 25,000,000
Long Term Loans 40,000,000
195,000,000
Notes:
(i) The turnover of the company during the year ended on 31st December, 2001 was
N200, 000. 000.
(ii) Gross Profit was N30, 000,000.
(iii) Assessable Profit for 2002 year of assessment was N2, 000,000.
(iv) Unrelieved Capital Allowances brought forward from 2001 year of assessment
was N46,000,000.
(v) Capital allowance for the 2002 year of assessment was N980, 000.
You are required to compute the company's tax liability for 2002 year of
assessment taking cognizance of the Minimum Tax Provisions,
105
CHAPTER SIX
PARTNERSHIP ASSESSMENT
6.0 PARTNERSHIP ASSESSMENT

The adjusted profile of a partnership is computed in usual manner and all
allowable expenses will be allowed even though they are earnings of a partner. But like in
all cases, private and domestic expenses of the partner are not allowable. The adjusted
profit is then shared among the partners in their profit and lost sharing ratios, after
deducting their salaries and interest on capitals.
The assessable income of a partner would therefore comprise the following:

(a) His share of the adjusted business profit or loss.
(b) His salary from the firm
(c) Interest earned on his capital
(d) Interest earned on loan to the firm
(e) Rent, if any, earned for use of his property by the firm
(f) Leave or recreational passages.
(g) Other income from the firm and outside sources.
Capital allowance or balancing charge is also shared in the profit/loss sharing ratios.
Illustration
Kongi, Abu and Etim have been in partnership for many years sharing profit and
losses in the ration of 2:2:1. Kongi, Abu and Etim respectively contributed N 10,00, N
10,000 and N 5,000 as capital at 10% interest p.a. Abu granted a loan of N ^,000 at 120%
interest p.a. After taking into account the following items, the adjusted profit of the firm
was N 35,000 for the accounting period ended October 31, 20001.
Kogi Abu Etim
Interest on Capital N N N
Interest on loan 1,000 1,000 1,000
Salaries and Allowances - 720 -
Leave passage 6,000 5,000 4,000
Consulting fee 1,500 1,200 1,200
Rent received 2,000 - 3,000
Use of private vehicle for partnership - 2,400
Business 600 - -
There was a capital allowance of N 5,000 during the accounting period. The following
information is also available:
Kongi Abu Etim

Marital status Married Married Married
Number of children 8 5 2
Dependent Relatives 2 1 3
Adopted Children - - 2
106
Life Assurance Policy:
Capital assured N 8,000 N 6,000 N 7,000
Annual premium 1,000 5,000 9,000
You are required to compute:

(a) The partners’ incomes assessable to tax
(b) The partners’ tax relief, and
(c) The partners’ incomes chargeable to tax.
Solution
COMPUTATION OF ASSESSABLE INCOMES
Kongi Abu Etim Total
Share of profit N N N N
Interest on Capital 1,928 1,928 964 4,820
Interest on loan 1,000 1,000 500 2,500
Salaries and Allowances - 720 - 720
Leave passages 6,000 5,000 4,000 15,000
Consulting fee 1,500 1,200 1,200 3900
Rent received 2,000 - 3,000 5,000
Private Vehicle used - 2,400 - 2,400
Assessable Income 660 - - 660
Less Capital Allowance 13,088 12,248 9,664 35,000
Total Income (earned) 2,000 2,000 1,000 5,000
11,088 10,248 8,664 30,000
(b) Tax Relief’s:

N N N
Personal 5,000 + 20% of earned
Income) 7,218 7,050 7,176
Children 10,000 10,000 5,000
Dependent Relative 4,000 2,000 4,000
Life Assurance 1,000 500 900
22,218 19,550 17,076
(d) Chargeable Incomes is total income at minimum tax rate
All incomes derived from the firm is regarded as trading or business income even
though some of them in other cases are unearned incomes. By adding them back to the
partners shares of “profit” they are indirectly being treated as “disallowed”.
6.01 Change In Partnership

When a new partner joins a firm, clearly he has just commenced business and the
commencing provisions apply, when a partner retires or leaves the partnership by death
107
or resignation, he is determined to have permanently ceased business or profession and
therefore the cessation provision apply, but without affecting the other partners who
continue in the business or profession after his withdrawal from the firm. Thus we see
that the commencement and cessation provisions apply to the partners individually.
Profit/losses have to be apportioned on time basis.
Illustration
Messrs. Uche, Jubril and Tune have being in partnership for several years as
surveyors and operate under the name of “UJT Surveyors”.
Accounts are made up to December 31st of each year and adjusted profits for 4
years were as follows.
N
Year ended December 31st 1998 144,000
Other relevant information on the partnership is as follows.

Profit sharing Salary p.a. Capital Interest on
Ratio N Capital
Jubril 2 24,000 30,000 6%
Tunde 1 18,000 21,000 6%
Uche 1 36,000 15,000 6%
On 31st May 2000 Uche retired and Kola was admitted into the partnership the
following day no a salary of N 18,000 p.a. He brought in a capital of N 21,000. It was
agreed that Kola was to share profits on the basis of the enjoyed by Uche.
You are required to compute the partners' assessable profits for 2000 year of assessment.
Solution
WORKINGS
The adjusted profits before deducing partners’ salaries and interest on capital between the
two partnership are:
“Old” Partnership
N
st
Year ended 31 December 1998 144,000
5 months ended May 2000 5/12x 240,000 = 100,000
“New partnership”
7 months ended 31st December 2000 – 7/12x 24,000 = 140,000
Year ended 31st December 2001 = 220,000
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Year Profit Jubril Tunde Kola Uche Total
1998 Profit 31,020 15,510 15,510 62,040
Salary 24,000 18,000 36,000 78,000
Interest on capital 1,800 1,260 900 3,960
Total profits 56,820 34,770 52,410 144,000
1999 Profit 41,520 20,760 20,760 83,040
Salary 24,000 36,000 36,000 78,000
Interest on capital 1,800 1,260 900 3,960
Total profits 67,320 40,020 57,660 165,000
2000 Profit 84,165 42,033 16,462 25,620 168,330
Salary 24,000 18,000 15,000 10,500 67,500
Interest on capital 1,800 1,260 375 735 4,170
Total profits 109,965 61,343 31,837 36,855 240,000
2001 Profit 77,840 38,920 - 38,920 155,680
Salary 24,000 18,000 - 18,000 60,000
Interest on capital 1,800 1,260 - 1,260 4,320
Total profits 103,640 58,180 - 58,180 220,000
Assessable Profit 2000 Assessment

Jubril Tunde Uche Kola
N N N N
Preceding year (1999) 67,320 40,020 - -
Actual (Cessation) - - 31,837 -
Actual (Commencement) - - - 36,855
6.0.2 Partnership Charges and Capital Allowance

When a partner is admitted, retires, dies or resigns, for the purpose of capital
allowance computation only, the business is deemed to have ceased on the date of the
change and recommence on the following day. Therefore the new partnership will be
deemed to have bought the assets of the firm at a price equal to their resides (to be
increased by balancing charge or decreased by balancing allowance as a result of each
disposal). The “new” Firm will not be granted initial allowance on the assets taken over.
6.0.3 Income of a Sleeping Partner

The income of a sleeping partner from the firm is unearned income because he
does not take active part in producing those incomes.
Illustration
Ulaeto who has been trading for a number of years decided to from a partnership
with Lkpong with effect from 1st January; 31st December. Qualifying expenditures on
plant and machinery were:
109
Purchased by cost Date of
N purchase
Ulaeto 20,000 1/4/1998
Ulaeto 40,000 20/12/1999
Ulaeto 60,000 1/1/2000
Ulaeto and lkpong 40,000 10/1/2001
Ulaeto and lkpong 20,000 1/6/2001
Compute the Capital Allowance of the individuals for all the years affected.
CAPITAL ALLOWANCE COMPUTATION

Allowance
N Ulaeto lkpong
1999 Cost 60,000
Initial Allowance 20% 12,000 12,000
48,000
WDV 43,200
2000 Addition 60,000

103,000
Investment 6,000
Initial 12,000
Annual:
Old asset 4,800
New asset 4,800
WDV
21,600 21,600
81,600
New Business
2001 (Basis period actual) 81,600
WDV b/f 60,000
Addition 141,600
Investment 6,000
Initial 12,000
Annual:
Old assets 9,600
New asset 4,800 26,400 16,200 16,200
WDV 115,200 66,600 16,200
New to Working
110
2000 is the “year of cessation” of the business of Mr. Ulaeto hence the Basis
period is actual i.e 1/1/00 – 31/12/00. But the normal basis period for 1999 is
1/1/98 – 31/12/ 98 meaning that there is a gap of 12 months { the whole of 1999}
hence assets purchased during that period claimed allowance in 1999 year of
assessment.
(2) 2001 is the year of change in business ownership and a new business is deemed to
have commenced on 1st January 2001, hence the basis period is actual.
6.0.4 Relevant Tax Authority

The relevant tax authority for partnership is the state in which the principal office
or place of business of the partnership is situated on 1 st January of the year of assessment
involved or on the day the partnership is first established during the year. Thus we see
that if the principal place of business of profession of Ulaeto and Lkpong for 1996 year
of assessment is Lagos the relevant tax authority is Lagos state Internal Revenue Board
even through these men may live Ogun state in that year. The same is the situation if they
had established their place of business in Lagos on 1st July, 1996 instead of 1st January
1996.
It is important to note that the Federal Capital Territory of Abuja is regarded as a state in
law.
6.0.5 Payee Tax Collection System

Income derived form employment is collected under the system known as “pay
As You Earn”. This means that as the employee earns his or her remuneration on monthly
or weekly basis, income tax is deducted to the. The tax so deducted by the employer who
is under obligation to do so, is remitted to the relevant tax authority of the employee
concerned. How this system works is described in the following few pages
6.0.6 Notice of Coding

When an employee has made his return of incomes and claim for reliefs for the
year, the state Internal Revenue Authority will issue him or her a “notice of coding”. A
notice of coding showings the following particulars:
(1) Reliefs (or “allowance”) granted the taxpayer
(2) Allowances to be set against “other income”. These are unearned incomes
such as rent interest and dividends, and other earned income such as
pension and benefits in kind. They are not “allowance” although called as
such in the notice of coding, but incomes which are used to reduce the
relief’s granted, instead of being added to salaries and other allowances
from employment.
(3) Free-pay allowance, which is obtained by deducting (2) from (1) above.
6.0.7 Tax Deduction Card
111
A tax deduction card accompanies notice of coding. The card spreads the “free-
pay allowance” over the twelve months of the year and contains a historical record of tax
deducted or refunded on monthly basis. A specimen of the card is given below.
6.1 Business Combinations and Tax Implications
Business combinations can be viewed as consisting of two different aspects,

namely, acquisition and merger.
4.1.1 Acquisition
The aspect of one acquisition involves a situation whereby a business purchases
another business. The later business or the business purchased either goes into
liquidation or remains as a subsidiary of the purchaser.
4.1.2 Merger or amalgamation
This is a situation where two or more companies or businesses comes together
thereby losing their separate identities to a new company formed for that purpose.
Generally, the tax implication of the above situations can be seen thus; when one
company sells its undertakings to another and permanently cease to carry on business,
this means there is acquisition of one business by another business, it will then mean that
the business will be assessed to tax according to the cessation principles while the
purchaser company will be assessed according to the commencement principle in respect
of that part taken-over. When the purchaser is a new company, it could be seen as a new
company just stating, this means you treat the company as a new company stating a
business. In case the business is an existing business there may be some complications.
This may arise as to whether commencement principles should apply to that aspect of the
business that has just commence while the existing business will be assessed as usual or
whether the business newly acquired is regarded as an expansion of the existing business
and therefore assessed as a single continuing business. The determining factor here is to
determine whether the business of the former or old company is essentially the same
business as that of the purchaser or not. If the company is the same as the purchaser then
no new business has commence by acquiring another company, but if it not the same
business, then a new business has commenced which is a quit different from the old
company and therefore should be assessed differently.
Illustration
The adjusted profits of two businesses that operate similar trade are as follows.
Mama Baba
N N
Year ended 31st March 1992 91,200 169,600
112
It has been agreed that one company is taking over the other business with effect from
31st March 1995. The profits of the company after the taking over as at 31st March 1996
are estimated to be as follows:
N N
Year ended 31st March 1995:

From Mama’s business 100,000
From Baba’s business 300,000 400,000

From Mama’s business 144,000
From Baba’s business 432,000 576,000
Assuming the company taken-over to go into liquidation, you are required to advise
which company should take over the other to secure maximum tax advantage assuming:
(i) The two companies are in similar trade, and

(ii) Are not in similar trades.
Ignore Capital Allowances.
Solution
Mana business takes over Baba business.

Under this condition it is assumed that the business taken over in this case Baba
will ceased business.
Year Basis Assessable Profit

N
1994 Actual January- March 1994, 3/12 x 387,200 96,800
1993 penultimate year, higher of
Preceding year basis N169,600
or Actual
3/12 x 220,000 + 9/12 x387,200 345,400 345,400
Continuing basis for Mama

1993 preceding year basis 91,200
1,727,000
113
Baba business takes over Mama business.
Cessation rules for A Ltd.

1994 Actual basis 3/12 x 147,200 = 36,800
1993 penultimate year, higher of
preceding year basis 91,200
or Actual
3/12 x 70,400+ 9/12 x 147,200 128,000 128,000
Continuing Basis for B Ltd.
1994 “ “ “ 220,000
1995 “ “ “ 387,200
1996 “ “ “ 400,000
1997 “ “ “ 576,000
1,917,600
Conclusion: if the two companies are in a similar trade it is suggested that Mama
should take over Baba business as this will reduce that total tax liability and hence the
total tax payable.
Next we consider the situation where the two companies do not operate the same type of
business.
Solution
Mana business takes over Baba business.
Cessation rules for B Ltd. N
1994 96,800
1993 3/12 x 220,000 + 9/12 x387,200
(345,400) 345,400
442,200
Commencing rules for Mama’s new source of income

1995 First year Actual Jan – March 1995 75,000
3/12 x 300,000
1996 first 12 months 1/4/94 – 31/3/95 300,000
807,000
1995 As option to be exercised if advantageous: 75,000

Unaffected
1996 actual January – December 1997
9/12 x 432,000 + 3/12 x 432,000 333,000
114
1997 Actual January – December 1997
9/12 x 432,000 + 3/12 x ?? Date
Incomplete
So Mama’s option is ignored because information is not provided to complete

computation of 1997 on actual basis.
Continuing preceding year for Mama’s old source of Income

N
1994 “ “ “ 70,400
1995 “ “ “ 147,200
1996 “ “ “ 100,000
1997 “ “ “ 144,000
552,800
Total assessable profits 422,200 + 807,000 +552,800 N1,802,00
Baba business takes over Mama business.
Cessation rules for Mama N

1994 36,200
1993 3/12 x 70,400+ 9/12 x 147,200 128,000
[
Commencing rules for Baba’s new sources of Income
N
1995 first year, Actual 3/12 x 100,000 25,000
1996 first 12 months 100,000
1997 preceding year 144,000
Continuing preceding year basis for Baba’s old source of income

N
1995 387,200
1996 300,000
1997 432,000
1,942,600
Conclusion: it is still advantageous for Mama to take over Baba.
6.2 Sale or Transfer of Business under Same Ownership

In some business combinations the sale or merger may be between companies
under the same ownership or control, the acquisition or merger being merely a technical
one. Where such is the case, it, may entail undue tax burden to apply the commencement
115
and Cessation rules. In that respect the Decree says that the FBIR may at its discretion
direct that:
(i) The provisions regarding new business and cessation of business shall not
apply.
(ii) Assets sold or transferred, for the purpose of Capital allowances, be
deemed to have bee sold for an amount equal to the residue of the asset on
the day following such sale or transfer, and
(iii) The company acquiring each such asset shall not be entitled to initial
allowance and any allowance deemed to have been received by the vendor
company.
The Board may direct any of the company in the sale or transfer to guarantee or give
security for payment in full of all tax due or to become due by the company selling or
transferring such trade or business.
6.2.1 Merger Proposals to Be Submitted

Proposals for merger or take over of companies must be submitted to the FBIR to assess
the tax implications before such combination takes place.
Exercise
1. A, B and C have been in partnership for many years sharing profit and losses in
the ration of 2:1:2. A, B and C respectively contributed N 20,00, N 10,000 and N 20,000
as capital at 10% interest p.a. B granted a loan of N 4,000 at 10% interest p.a. After
taking into account the following items, the adjusted profit of the firm was N 40,000 for
the accounting period ended October 31, 20001.
Kogi Abu Etim
Interest on Capital 2000 2,000 2000
Interest on loan 400
Salaries and Allowances 7,000 4,000 5,000
Leave passage 1,800 1,400 1,200
Consulting fee 2,000 - 4,000
Rent received - 2,200
Use of private vehicle for partnership
Business 800 - -
There was a capital allowance of N 8,000 during the accounting period. The following
information is also available:
A B C
Marital status Married Married Married
Number of children 6 4 3
116
Dependent Relatives 3 2 1
Adopted Children - - 2
Life Assurance Policy:

Capital assured N 6,000 N 8,000 N 7,000
Annual premium 1,500 3,000 2,000

(a) The partners’ incomes assessable to tax
(b) The partners’ tax relief, and
(c) The partners’ incomes chargeable to tax.
2. The adjusted profits of two businesses that operate similar trade are as follows.
A B
N N
It has been agreed that one company is taking over the other business with effect from
31st March 1995. The profits of the company after the taking over as at 31st March 1996
are estimated to be as follows:
N N

From A’s business 150,000
From B’s business 260,000 410,000

From A’s business 140,000
From B’s business 320,000 460,000
Assuming the company taken-over to go into liquidation, you are required to advise
which company should take over the other to secure maximum tax advantage assuming:
(i) The two companies are in similar trade, and

(ii) Are not in similar trades.
Ignore Capital Allowances.
3. U who has been trading for a number of years decided to from a

partnership with L with effect from 1st January; 31st December. Qualifying expenditures
on plant and machinery were:
117
Purchased by cost Date of
N purchase
U 40,000 1/4/1998
U 30,000 20/12/1999
U 70,000 1/1/2000
U and L 50,000 10/1/2001
U and L 30,000 1/6/2001
Compute the Capital Allowance of the individuals for all the years affected.
118
CHAPTER SEVEN
PETROLEUM PROFIT TAX
7.0 Petroleum Profit Tax

Petroleum embraces crude oil and gas, and it is critical to stress that petroleum
profit tax is applicable only to companies engaged in petroleum operations. This is
defined as (Petroleum operation) the winning or obtaining and transportation of
petroleum or chargeable oil in Nigeria. This operation can be by or on behalf of a
company for its own account, by any drilling, mining, extracting or other like operations
or process. This does not include refining at a refinery, in the course of a business carried
on by the company engaged in such operations and all operations incidental thereto any
of or any disposal of chargeable oil by or on behalf of the company is applicable to this
definition.
Crude oil is oil in its crude form; it is graded according to its quality or pureness
in API gravity. The American Petroleum Institute (API) degree is an international quality
reference standard for all grades of crude oil and it is inversely proportional to the
specific gravity of the crude oil hence the higher the API value the lighter the crude. In
Nigeria, the crude available and their API standards are as follows:
1. Bonny Light 370 API

2. Forcados Blend 310 API
3. Bonny Medium 260 API
4. Qua Iboe Light 370 API
5. Escravos Light 360 API
6. Brass Blend 420 API
7. Pennington Light 360 API
Now, as soon as the crude is produced the API is compared with the standard API
and which can be either higher or lower. This will further have complication with the
price of the crude oil, the higher the API, the higher the price of the crude oil.
Furthermore, the disposable value of the crude oil or gas for petroleum profit tax
purposes is not the price at which the oil producing company sells the crude oil, but a
value determined by the government. Generally, there are many pricing methods, they
include; the posted price, official selling price, and the offset price.
Posted price is the price fixed for crude oil by government for the purpose of
computing the revenue derivable from the oil business. Prices are fixed according to the
grade of the Nigerian crude oil in question. If the grade of crude oil is different from the
standard API, then the posted price is escalated or discalated by a specified amount for
each 10 API above or below the standard API respectively. This means that if the actual
API is higher the posted price is adjusted upwards and adjusted downward if the actual
API is less than the standard API for that type of crude oil.
119
Illustration
Assume that the actual gravity of crude oil produced by Boby oil is
Bonny Light 420 API
Bonny medium 260 API
Calculate the adjusted posted price for valuing the crude oil produced.
Notes: that the posted price and standard gravity of the products are:
Bonny Light 380 API at $20.50
Bonny medium 280 API at $19.50
If the grade of crude oil is different from the standard API, then the posted price
escalated or discalated by 2 cents ($0.02) for each 10 API above or below the standard
gravity.
Solution
Bonny light Bonny medium
Standard API 380 280
Actual API 420 260
Increase/decrease 40 (20)
Posted price $20.50 $19.50
Price adjusted 40 X 0.02 =.08 (20) X 0.02 =.04
Adjusted price $20.58 $19.46
($20.50 + .08) ($19.50 - .04)
Under the petroleum profit tax act 1959 the price used in the computation of the
sales value is the higher of
1. The posted price
2. The selling price
It should also be noted that crude oil is not useful for anything until it is refined
into petrol, kerosene, lubricating oil, automotive gas oil or diesel oil, fuel oil, asphalt
(bitumen), e.t.c. it should also be noted that companies engaged in manufacturing and
selling of the refined products are not subject to petroleum profit tax, they are taxed under
the companies income tax act.
The Gas aspect of the crude refers to the gas obtained from natural gas before it is
refined. Therefore, cooking gas (liquefied petroleum gas) and other forms of gas
consumed are refined gas and the companies dealing in refined gas are not subject to
petroleum profit tax but under the companies income tax act. ‘Casing head petroleum
spirit’ is any liquid hydrocarbon obtained from natural gas by separation or by any
chemical or physical process, but before the same has been refined, transformed or
otherwise treated.
This has brought us to the understanding that there may be companies that engaged
themselves in the oil industry but not taxable under the petroleum profit tax. They include
for example:
120
1. Oil service companies which engage in drilling, logging, exploration and other
similar services as contactors for oil producing companies.
2. Refining operations.
3. Contractors under service contracts with oil producing companies.
4. Transporters of crude oil from Nigeria to other countries.
They are therefore taxed under the companies income tax act.
Petroleum profit tax arises on actual year basis at 85% of taxable or chargeable profit
obtained as follows.
Net profit reported X

Add
Non allowable expense X
Taxable income not reported X X
X
Deduct
Non taxable income X
Allowable expenses not reported X X
Adjusted profit X
Losses X
Relieved X X
X
Add
Balancing charge X
Assessable profit X
Capital allowance X
Relieved X X
Taxation/chargeable profit X
Steps to Compute Chargeable Profit
Step 1: Identify the net profit or loss per the account presented
Step 2: Add non-allowable expenses and taxable incomes that were not reported in the
account, such as taxable income may be reported in the note to the
accounts. It may also be that only a portion of the income that should be
subjected to tax was reported in the account. In this case there will be the
need to determine the short fall and add back.
Step 3: Deduct non-taxable incomes and allowable expenses that were not previously
reported in the account. Such allowable expenses will need to be identified
either as a note to the account or as one that may not even be indicated. An
example of an allowable expense that may not be indicated is the
allowable education tax.
Step 4: Deduct losses brought forward
Step 5: Add back balancing charges arising form the disposal of assets
121
Step 6: Deduct capital allowance from the assessable profit to obtain taxable or
chargeable profit.
Step 7: Apply the petroleum profit tax rate of 80% on the taxable or chargeable profit to
obtain the assessable tax.
Step 8: Tax offsets and MOU credit from assessable tax to obtain chargeable tax.
7.1 Royalty
The royalty is payable on quantity produced whether for export or for refining in Nigeria.
Royalty is calculated on the fiscal value of he oil or gas produced.
The rate used in the computation is as given below:
On shore production 20%
Off shore production in areas:
Up to 100 meters of water 18.5%
Beyond 100 meters of water 16.5%
The license authorizes the holder to explore and prospect for petroleum in a specified
area usually measured in acres of land in case of land prospecting (on shore) or meters of
depth into the sea in the case of water prospecting (off-shore). The total life span of an
OPL is 5 years after which if petroleum is not found the explorer must quit. Yearly rent is
payable for each field covered by OPL and an oil prospecting company may obtain many
OPLs.
An oil prospecting company which is able to establish commercial petroleum discovery

in any part of the area covered by an oil prospecting license granted to it can apply for the
conversion of the license to oil mining lease. Yearly rent is payable for each field leased
and the life span of an OML is between 20-30 years.
OPL/OML rents payable for the area petroleum is produced may be deducted from the
gross royalty in computing the net royalty payable if the OPL and OML granted the
company allow for such deduction. Where the rent is higher than the royalty the excess is
called non-productive rent and is an allowable expense. Further, where under the same
OPL one field has a non productive rental and another has a net royalty, the later may be
used to reduce the non productive rental or offset it altogether. Therefore, this implies
that royalty should be calculated field by field.
Illustration
The following example illustrates the method of comparing the gross royalty liability and
deductions of OPL and OML rentals allowed in arriving at the net royalty payable and
deal briefly with the procedure involved.
122
The following data are extracted from the books and records of Mawa oil company for
the accounting year ended 31st December 2000.
Oil Oil Field Production Standards Posted OML

prospecting mining Qty in API API price as rental
licence lease barrels Gravity Gravity advised
by
NNPC
101 15A A 695,500 26 30 20.12
S 245,750 34 30 19.88 2,000,000
C 138,750 26 30 20.12
155 D 65,500 37 37 20.00 1,700,000
E 24,500 40 37 19.91
102 167 J 40,000 40 40 20.00 2,100,000
168 G 48,000 36 40 20.12 1,720,000
201 214 H 32,000 37 40 20.09
Other relevant details are:

1. For every escalation/de-escalation of API gravity the posted price is adjusted
accordingly by $0.03
2. US $1.00 is equivalent to N100.00
3. The company’s operations are carried out wholly on shore.
4. OPL 201 /OML 214 are granted under the terms of the petroleum act 1969 and
there is no provision for deduction of rental from gross royalty liability.
5. Rental deductions form royalties are permitted by the other OPLs/OMLs.
You are required to calculate the royalty liability.

Computation of posted price
Field Producing Standard Posted Adjusted Rate of Posted price
quantity API gravity price posted exchange Per Total
gravty nnpc price barrel
A 695,500 26 30 20.12 20.00 100 2,000 1,391,000
S 245,750 34 30 19.88 20.00 100 2,000 491,500
C 138,750 26 30 20.12 20.00 100 2,000 277,500
D 65,500 37 37 20.00 20.00 100 2,000 131,000
E 24,500 40 37 19.91 20.00 100 2,000 49,000
J 40,000 40 40 20.00 20.00 100 2,000 80,000
G 48,000 36 40 20.12 20.00 100 2,000 96,000
H 32,000 37 40 20.09 20.00 100 2,000 64,000
123
Computation of net royalty payable
OPL OML Field Fiscal Gross OML Net Non
value of royalty rental royalty productive
oil rent
101 154 A 1,391,00 278,200 - 278,200
S 0 98,300 2,000 96,300
C 491,500 55,500 55,500
155 D 277,500 26,200 1,700 24,500
E 131,000 9,800 9,800
49,000 468,000 3,700 464,300
2,340,00
0
102 167 J 80,000 16,000 19,000 3,000 3,000
168 K 96,000 19,200 1,720 -17,480
176,000 35,200 20,720 14,480
201 214 P 64,000 12,800 12,800
NET ROYALTY PAYABLE 491,580
It should be noted that from the quantities produced, an allowance is made for the
following quantities which must be certified by the ministry of petroleum.
1. Usage by the company in carrying on its operation
2. Quantities re-injected into formation
3. Reasonable loss due to evaporation
The resulting quantity is then term net barrels produced. Further all cost certified by the
head of petroleum inspectorate as applicable to handling, treating and storing that
reduced quantity and in transporting it to a tanker at a Nigerian port or to a refinery in
Nigeria is deductible from gross royalty. The barrel is the cost unit for crude oil while
standard cubic feet or meter is for gas.
Crude oil and gas taken by government free of cost is not subject to royalty payment
7.2 Allowable expenses

1. Any contribution to a pension fund approved by the joint tax board
2. Any interest on a loan obtained for the purpose of petroleum business
3. Any rent of accommodation for member of staff provided this does not
exceed 100% of the basic salary of the staff
4. Bad debt written off
5. Provision for doubtful debt of specific nature
6. Education tax from 1996 tax year
7. Intangible drilling costs
8. Any cost of drilling the first two appraisal wells
124
9. Royalties both on local and export sales
10. Productive and non productive rents
11. Custom duties whether on essential or non essential items
12. All sum of liability for which was incurred by the company during the
period to the federal government of Nigeria by way of duty (including
stamp duty) other than tax imposed by the petroleum profit tax act, or
any rate, impost, fees other similar charges.
13. Legal expenses including
i. General legal advisory service
ii. Renewal of a short lease
iii. Retainer fees and
iv. Cost of protecting or defending the business
14. Any expenses wholly, reasonably, exclusive necessarily incurred for
petroleum business
7.3 Non allowable expenses

The following expenses are considered as inadmissible for petroleum profit tax purpose.
1. Depreciation of assets
2. Tangible drilling cost
3. Any capital expenditure
4. Any cost of obtaining information as to the extent not existence of petroleum
deposit
5. Any sum recoverable under an insurance or contract of indemnity
6. Any contribution to a pension fund not approved by the joint tax board
7. Income tax provisions
8. Fines and penalties
9. Donations because this is not specifically provided for under the act.
10. Preliminary or preoperational expense
11. Legal expenses such as
i. Renewal of a long lease
ii. Acquisition of a new lease
iii. Cost of defending a tax appeal and
iv. The cost of defending a traffic offence
7.4 Non Taxable Income

The following incomes are deemed as non-taxable under the petroleum profit tax
act:
1. Any profit on the disposal of a fixed asset
2. Any reversal into income of a previously disallowed expense
3. Income from the transportation of oil by an ocean-going oil tanker.
4. Income from refinery operation
7.5 Treatment of income from transportation business

The income derived from the transportation of crude oil by an ocean-going oil
125
tanker is not an income derived from petroleum operation. Consequently, the
income is not chargeable to tax under the provisions of the petroleum profit tax
act.
The position of the law is that such an income should be subjected to tax under
the provisions of the company income tax act.
It should be noted that any expense incurred to earn the income from the
transportation of crude oil shall be treated as a non-allowable expense under the
petroleum profit tax act. Such an expense should be used to reduce the income
before being subjected to tax under the company income tax act.
The same principle discussed on the treatment of income derived from the
transportation of oil will be fully applicable to the treatment of income from
refinery business.
7.6 Computation of Allowable Education Tax

The education tax payable is treated as an allowable expense from 1996 year of
assessment. It is to be noted however that the education tax is itself not an
expense to be generally included in the profit and loss account of the petroleum
company.
The significance of this is that in the determination of the tax liability of a

company engaged in petroleum operation, the allowable education tax must be
determined by extrapolation. This is achieved using the relationship below.
Education tax allowed = NP + NAE - NTI +BC -LS x 2

102
Where:
NP = Net profit or loss reported
NAE = On-allowable expenses and taxable income not previously treated
now added back.
NTI = Non-taxable incomes and allowable expenses not previously
reported now being deducted
BC = Balancing charges
LS = Losses being deducted
The principle here is very straight forward the education tax allowable should be
2% of assessable profit. In accordance with provisions of the act, assessable profit
under the petroleum profit tax act is obtained when balancing charges are added
to and losses deducted from adjusted profit.
7.7 Petroleum income

This is defined to include
1. Value chargeable oil sold
2. Value chargeable oil disposed
126
3. Value natural gas sold
4. Miscellaneous income
7.8 Value of chargeable oil sold

This is obtained when the posted price is multiplied by the number of barrels of
crude oil sold.
Value of chargeable oil sold = price X number of barrels sold
Illustration
Aa oil incorporated sold 300,000 barrels a day to its market in Nigeria at a price of N18
barrel. You are to estimate the value of chargeable oil sold.
Solution
Value of oil sold = price X number of barrels sold
= N18 X 300,000
= N5, 400,000.
Posted price is defined as the price free on board at the Nigerian port of export as agreed
between NNPC and Companies operating in the petroleum sector.
Note that the posted price is defined by the quality of the crude oil. The quality of the
crude oil is half defined by the standard API gravity. The higher the API gravity the
higher the quality of the crude and consequently the higher the price it will attract. Where
the actual of the crude oil is not the same as the standard quality, the posted price will be
appropriately adjusted depending on the agreed rate of change.
Also note that the actual price of the crude oil may be provided. The posted price will
usually be compared to the actual price of the crude. The general practice of the Federal
Inland Revenue service is to assess the tax payer based on the higher of the two prices.
Steps to Obtain Value of Oil Sold

Step 1: Identify the difference by the standard API gravity and the actual API gravity of
oil sold
Step 2: Multiply the difference by the agreed price for rise or fall in API gravity
Step 3: Add the obtained value in step 2 to the standard posted price if the actual API
gravity is higher than the standard API gravity. Deduct there-from if the reverse is
the case.
Step 4: Multiply the actual posted price by the rate of exchange to the local currency,
where applicable to obtain the posted price in local currency
Step 5: Compare the price obtained in Step 4 to the actual price at which the crude oil was
sold. Where the actual price is not stated in local currency, then no conversion
should be undertaken in Step 4.
The higher of the posted and actual prices would be chosen.

Step 6: Multiply the number of barrels sold by the price chosen in step 5 to obtain the
value of oil sold.
127
Illustration
Ab boys petroleum limited sold 4000 barrels of crude oil to one of its customers in the
inland. The crude oil has an API gravity of 35o. The standard API of crude oil is 30o with
a price of $15.00. It has been agreed that or every degree rise or fall in API the price shall
rise or fall by $0.50. The rate of exchange is N100 to $1.
You are required to determine the value of oil sold if the actual price is N1200 per barrel.
Solution
Value of oil sold = price X number of barrels sold
= N1200 X 400,000
= 480,000,000
Standard API 30o

Actual API 35o
5 X 0.50 = 2.50
Posted price = 15.00
= $15 X N100
= N1500
Actual price = N1200
The higher of the posted and actual prices is used to determine the value of the oil sold.
7.9 Value of Chargeable Oil Disposed

This is the value of oil delivered to a refinery. It is obtained by adding the following
quantities.
1. Value of oil for royalty purpose. This is simply the number of barrels
delivered to the refinery multiplied by the posted price.
2. The cost of transportation of the crude oil through the pipeline. This is the unit
cost of transportation multiplied by the number of barrels of crude oil
delivered to the refinery.
3. The cost of maintaining the pipeline through which the crude oil is delivered
to the refinery. It is usually made up of both cash and non-cash cost. The non
cash cost is mainly the depreciation charge on the pipeline.
In determining the cost of maintenance of the pipeline, the amount to be appropriated

must relate to the crude delivered to the pipeline relative to the actual number of barrels
which may be delivered to the pipeline i.e. the capacity of the pipeline.
Illustration
A pipeline was constructed for N10, 000,000. The total capacity of the pipeline is
4,000,000 barrels. During the year under review only 200,000 barrels of oil was
transported to the refinery. The total cash cost was N600,000 while the depreciation
charge for the year at 10% amounted to N1,000,000.
128
Solution
COM = AVDD X TCM
AVD
Where;
COM = Cost of maintenance
AVDD = Actual volume delivered
TCM = Total cost of maintenance
AVD = Actual volume delivered
Therefore, COM = 200,000 X 1,600,000

4, 000, 000
= N80, 000
7.10 Value of natural gas sold

In a sale contract, the value of the gas contract may not be fully subjected to tax because
discount is granted for possible losses arising from spillage and evaporation.
The amount of discount to be granted is determined by the quality of the gas while the
quality of the gas is itself defined by the load factor. The stated load factor has a
corresponding gas factor as shown below. The gas factor or G- factor means the gas
production cost adjustment factor.
Load Factor Gas Factor

500 16.9%
600 15.5%
700 14.3%
800 13.6%
Where the actual lead factor for a gas contract differs from the stated standard shown
above, the corresponding gas factor will be determined by extrapolation.
Step 1: Identify the actual load factor of the gas contract
Step 2: Determine where the actual load factor can be located on the table if the
load factor does not exist on the table. For example, a load factor of 67 0 falls
between 600 and 700 .
Step 3: Deduct the actual load factor from the lower of the standard load factor
between which the actual load factor is located. Divide this by the difference
between the lower and the higher standard load factors. Equate this to the
equivalent gas factors. The corresponding gas factor for the actual load factor may
be represented by X%
Step 4: Determine the value of X%
129
Step 5: Multiply X% by the value of the contract sum to determine the value of
gas sold that may be subjected to tax.
Step 6: Deduct the value of discount from the contract sum to determine the value
of gas sold that may be subjected to tax.
Illustration
Danda oil company entered into a gas contract with kaka oil company of London. The
value of the contract is $6 million. The load factor of the gas was recorded as 670.
You are required to determine the value of gas sold.
Solution
Contract sum 6, 000 ,000
Less level of discount 988,800
Value of gas sold 5, 011, 200
Note: the actual load factor of 57 lies between 50 and 60 on the standard table.
50 – 57 = 16.9 – X
50 – 60 16.9 – 15.5
0.3 x 1.4 = 16.9 – X

X = 16.9 – 0.42
= 16.48%
Therefore, discount = 16.48% X 6,000,000
= 988,800.
Miscellaneous Income
The following are considered as miscellaneous income under the petroleum profit tax act.
1. Interest on fixed deposit
2. Services provided to other petroleum companies
3. Rent of classified into paid by the NNPC
4. Sublet of accommodation
5. Rent/ hire of equipment.
7.11 Treatment of losses

Losses incurred by a company engaged in petroleum operation may be carried forward
indefinably. Indeed for a company subjected to tax under the petroleum profit tax act, it is
possible for the relief of the loss to be deferred to the succeeding accounting period upon
a formal application to the relevant tax authority. The application for deferment should be
made not later than 5 months after year end.
This position must be compared to the provisions of the company income tax act where
losses may only be carried forward for a maximum period of four years except fro
agricultural business.
130
7.12 Capital Allowance
The only Capital Allowances granted for PPT are:
(1) Petroleum Investment Allowance
(2) Annual Allowance, and
(3) Balancing Allowance (if any),
The Balancing charge would also be made as in the case of Companies Income Tax Act.
Before 1st Jan. 1999 P. I. A. was called "Investment Tax Credit" and treated as a tax
offset.
7.13 Qualifying Expenditure

The expenditures on which both Petroleum Investment Allowance and Annual Allowance
can be claimed are:
(1) Plant, machinery and fixtures

(2) Pipelines and storage tanks.
(3) Buildings, Structures and works of a permanent nature.
(4) Tangible drilling expenditures other than those classified under (1) and (2) above
on
(a) The acquisition of rights in or over petroleum deposits;
(b) Searching for or discovering and testing petroleum deposits or winning

access thereto; or
(c) the construction of any works or building that are likely to be of little or
no value when petroleum operations for which they were constructed
ceased to be carried on.
Qualifying expenditure must not include any expenses allowed as deduction in arriving
at the adjusted profit.
7.14 Basis Period for Capital Allowance

As stated earlier, the basis period for PPT is the "actual" accounting period, hence only
Expenditure incurred during the accounting period will qualify for Capital Allowance.
Therefore, capital allowance is claimed on qualifying capital expenditure on the straight
line basis over a period of 5 years at the following r
Year 1 20% per annum

The balance of 1% represents the residual value of the qualifying capital expenditure.
131
This must be retained for as long as the asset has no been sold. Also note that even where
the asset is disposed, approval must be obtained from the minister of petroleum resources
before the residual value can be expunged from the books.
Restriction of Capital Allowance

The capital allowance that may be claimed din any year must be the lower of:
A capital allowance for the year XX
Capital allowance brought forward XX
Balancing allowance XX
Petroleum investment allowance XX
XX
B 85% of assessable profit XX

Less: 170% of petroleum investment allowance XX
XX
Illustration
Sam limited has an assessable profit of N80 million for 1898 tax year. The following
information was provided:
Capital allowance for the year N36 million

Capital allowance brought forward N27 million
Balancing allowance N7millon
Petroleum investment allowance N3millon
You are required to compute the capital allowance to be claimed and the taxable profit.
Solution N
Assessable profit 80 ,000
Capital allowance
The lower of:

A Capital allowance for the year N36,000
Capital allowance brought forward N27,000
Balancing allowance N7,000
Petroleum investment allowance N3,000
N73,000
B 85% of assessable profit 68,000

(85% X 80,000)
Less: 170% of petroleum investment allowance 5,100
(170% X 3,000) 62,900 62,900
Unutilized capital allowance 10,100
132
7.15 Expenditures before Sale or Disposal of Chargeable Oil
It will be recalled that Oil Company is chargeable to tax only when it makes a sale or
disposal of chargeable oil; hence that day marks the beginning of its "accounting period".
By the nature of the Oil industry, many years are usually spent in searching for oil and
during these years expenses both capital and revenue are of course incurred in petroleum
operations. What then happens to these expenditures? The answer is that they should be
accumulated and would be regarded as having been incurred on the "first day of the
accounting period. The only exception is the expenditure incurred for purchasing
information about existence and extent of petroleum deposits which is specifically
excluded from qualifying expenditure test:
7.16 Annual Allowance

The rate of annual allowance for all qualifying expenditures are:
1st year 20% of cost

2nd year 20% of cost
3rd year 20% of cost
4th year 20% of cost
5th year 19% of cost.
Thus one per cent of the cost of the asset is left at the end of the fifth year as tax written
down value until the asset is sold or scrapped when the sale proceeds would be set against
the WDV to arrive at Balancing Allowance or Balancing Charge as the case may be.
Annual Allowance is not given "per annum" hence if the asset is owned and used for
Petroleum Operation for only one month (or less) of the accounting period, full allowance
would be given.
7.17 Balancing Charge

The principles of Balancing allowance and Balancing charge taught in the Lessons on
Companies Income Tax apply here also and are not repeated. Thus the Balancing Charge
is restricted to the Capital Allowance (granted) if it is more.
7.18 Petroleum Investment Allowance

Petroleum Investment Allowance is calculated on expenditure incurred on asset qualified
for Annual allowance purposes. The conditions for the granting of Petroleum Investment
Allowance (PIA) are:
(1) The Oil Company must be the owner of the asset (PIA not granted on
leased asset).
(2) The asset must be in use for Petroleum operation.

Only assets incurred in the accounting period qualify for PIA C for that accounting
period. The rates are:
133
Rate per annum
On-Shore operations 5
Off-Shore Operations:
100 meters of water depth 10
100 -200 meters of water depth 15
It should be noted that, petroleum investment allowance was a replacement for

investment tax credit which use to be part of the tax offset items. The change took place
by the 1995 amendment to the petroleum profit tax act.
The tax off set was used up to the end of 1994 year of assessment, the provision of the act
is that tax offset should be used to reduce the assessable profit to obtain the tax
chargeable profit.
Tax offset items include the following:

1. non-productive rent
2. royalties on local sales
3. customs duties on essential items
4. investment tax credit
The amendment of 1995 abrogated the provisions concerning tax off set. All items of
expenditures were to be considered as allowable expenses under the provisions of the act.
Consequently, non-productive rent royalties on local sales and customs duties on
essential items are now considered as allowable expenses. This can be seen under the
allowable and non allowable items.
Example
Adamu Petroleum Company (Nigeria) Limited is in the Oil Producing business. Its
accounts for 1999 are as follows:
N N
Net fiscal value of crude oil sold 63,580,960
Other incomes 20.000
63,600,960
Less: Expenses:
Recurrent expenditure 15,380,000

Intangible drilling 3,460,980
Exploration incentives 1,239,500
Royalties 1,900,000
Rentals 10,000
Customs duties 17,480 22,007,960
Net Profit 41,593,000
You are required to compute the chargeable tax taking the following into
consideration.
134
(1) The Petroleum Profit Tax rate is 85 per cent
(2) Royalties include N935,000.00 in respect of royalties on exported crude oil.
(3) The company is entitled to Petroleum Investment Allowance of N56,560.
(4) Annual allowance for the year is N43,580,463.
Solution
ADAMU PETROLEUM COMPANY LIMITED
Computation of Petroleum Profit Tax
1st January - 3ist December 1999
N N
Revenue
Fiscal Value of Oil sold 63,580,960
Other Incomes 20,000
63,600.960
Deduct allowable expenses

Recurrent expenditure 15,380,000 .
Royalties on Local Crude Oil 965,000
Customs duties 17,480
Exploration incentives 1,239,500
Royalties on export crude 935,000
Rentals 10,000
Educationtax 2/102 x 41.593.000 = 815,549 22,823,509
Adjusted Profit 40,777,451
Less Loss b/f nil
Assessable Profit 40,777,451
Less Capital Allowance (A) 43,637.023

85%ofN40,777,451 34,660,833
Less 170% of Petroleum Investment Allowance 96,152
(B) 34,756.985
Lower of (A) or (B) 34.756.985

Chargeable Profit 6,020,466
(Unrelieved Capital Allowance c/f.) 8,370,625
Assessable Tax/Chargeable Tax
(85% of N6,020,466) N5,117,396
Education Tax 2% of N40,777,451 = N815,549
135
Note: It is assumed that "other incomes" is incidental to petroleum Operation.
Recurrent expenditure is revenue expenditure.
Example
Zarewa Oil Company Limited is engaged in Petroleum Operation. The following
information is extracted from the books of accounts of the Company for the year ended
31st December, 2001.
Crude Oil exported 5,000,000 barrels

Selling price per barrel N20.85
Posted price per barrel N22.06
Administrative expenses 5,592,000
Production expenses 2,147,000
Intangible drilling expenditure 13,000,000
Petroleum Investment Allowance 1,179,000
Annual Allowance 24,550,000
Other Income 182,496.
Royalty allowable is 20% of the fiscal value of chargeable oil. For 2001 year of
assessment, compute
(a) Fiscal value of chargeable oil

(b) Royalty payable for the year
(c) Chargeable tax.
Solution
ZAREWA OIL COMPANY LIMITED
(a) Fiscal Value of Chargeable Oil

= Crude Oil exported x posted price
= 5,000.000 x N22.06 = N110,300,000
(Note: higher of the two prices is used)
(b) Royalty Payable at 20%

= N110,300,000 x 20% = N22,060,000.
(c) Chargeable tax for 2001
136
N N
N
Fiscal value of Oil 110,300,000
Other Income 182,496
110,482,496
Less: Allowance expenses:
Administrative 5,592,000
Production 2,147,000
Royalties Allowable 22,060,000
Education tax 2/^ x 67,683,496 == 1,327127
44,126,127
Adjusted profit/Assessable Profit 66,356,369
Less Annual Allowance 24,550,000
(A) CAPITAL ALLOWANCE 25,729,000
or 85%of66,356,369 = 56,402,913
Less 170% of Petroleum Investment Allowance 2,004,300
(B) 54,39S.613
Lower (A) or (B) 25,729,000
Chargeable Profit 40,627,369
Chargeable tax at 85% = 34,533,263
Education Tax 2% ofN66.356.369 == N1,327,127
Example
Mangal Oil (Nigeria) Ltd. is an oil producing company. Crude oil lifting for the 2001
accounting period were at the rate of 4,000 barrels per day The company confirmed that
95 per cent of the crude oil lifted was exported while the remaining 5 per cent was sold in
the home market (i.e. domestic sales). Other relevant details are:
(a) Gross posted prices of crude oil of 35°was N20.55 and it had been agreed with
the Federal Government that for every degree decrease in the API gravity of Crude
exported, the posted price was to be reduced by 11 kobo. The API gravity of Crude Oil
exported was 30°.
N N
(b) Sale of crude oil

Export 26,353.000
Domestic 1,095,000
27,448,000
137
Less Production Cost 584.000
Transportation 1,500.000 2,084,000
25,364,000
Deduct:
Salaries 500,000
General Overheads 70,000
Bank Interest/Charges 75,000
Interest on bills payable 95,000
Interest on loans from Subsidiary Company 160,000
Loss on disposal of fixed assets 25,000
Depreciation 1,450,000
Royalties & Producing rents 6,500,000
Non-producing rents 60,000
Harbour dues 24,000 8,987,000
16,377,000
(c) The company had capitalized intangible drilling costs amounting to N1,500,000.
(d) Royalties on domestic sales were N92,000.
(e) Capital allowances for the year were:
Petroleum Investment Allowance N1,000,000
Annual N700,000
Balancing charge 14,000
(f) Capital allowance brought forward from previous years were N250,000.

(i) Posted price of oil exported.
(ii) The assessable profit of the accounting period.
(iii) Chargeable Petroleum Profit
(iv) Chargeable tax.
For the purpose of this exercise, assume that petroleum profits both from export and
domestic sales are taxable at 85 percent and all calculations should be made to the
nearest naira.
Solution:
MANGAL OIL NIGERIA LTD
(1) Posted price for Standard Crude 35° = N20.55
138
Actual gravity of crude 30°
Reduction in gravity 5°
De-escalation =50x11k (0.55)
Adjusted posted Price N20.00
(2) Computation of Assessable Profit

Crude Oil lifted per year 1.460.000 barrels
4,000 x 365 days 1,387,000
Export 95% 73,000
Domestic
Fiscal Value of Oil: N‘000 N'000

Export 1,387,000 x N20
27,740
Domestic 73,000 x -^20
1,460
29,20
0
Balancing charge
15
29,215
Deduct:
Salaries 500
General Overheads 70
Bank Interest/Charges 75
bills payable 95
Royalties and producing rents (export) 6,208
Production Cost 584
Non-producing rents 60
Transportation 1,500
Customs duties 30
Intangible drilling 1,500
Royalties on local crude oil 292
Harbour dues 24
Education tax V^18.277 358
11.296
(ii) Adjusted Profit/Assessable Profit 17,919
Less Capital Allowance (A) 1,950
or 85% of N17,919 15,231
Less 170% of Petroleum Investment Allowance 1,700
(B ) 16.931
Lower of (A) or (B)

1.950
139
(iii) Chargeable Profit 15,969
(iv) Assessable and Chargeable Tax at 85% 13,573,650
(v) Educational Tax 2% of N17,919,000 = N358,380
Notes;
(1) The fiscal value of the oil is greater that the sales value, if it were lower we would
have taken the sales figure per the accounts.
(2) "New producing rentals" is considered as mistake which should have been "non
producing rentals".
Stock and PPT Computation

As we have seen, the quantities of oil and gas disposed of are valued at higher of the
posted price or actual selling price (realizable price) to arrive at the fiscal value of the
petroleum from which arc deducted the allowable expenses to arrive at "adjusted profit".
It follows therefore that stock of crude oil unsold does not come into the computation at
all. However, examination questions have been set without giving adequate information
for the computation of the fiscal value of oil, instead opening stock. Sales, Closing Stock
and Production cost are given following the usual accounting treatment in a
manufacturing organization. Questions of this nature are purely academic and the student
has no choice but to answer them academically
Example
Tankos Petroleum Production Co. Ltd., has been in business for many years. It’s Profit
and Loss Account for the year ended 31st December, 2001 showed the following:
Sales N N
Closing Stock 34,000,000
1,000,000
35,000,000
Less Opening Stock 500,000

Production & Transportation cost 6,300,000 6,800,000
Gross Profit 28,200,000
Less Administration expenses 1,389,500
Loan Interest 3,400,000
Royalties, Customs duties etc. 7,000,000
Stamp duty on debenture 20,000
Depreciation 5,000,000 16,809,500
Profit before taxation 11,320,500
140
Notes:
(1) Interest on loans from a subsidiary (N2,000,000) is included in the loan
interest of N3,400,000.
(2) Royalties on local sale of crude oil was N620,000.
(3) Harbour dues N200.000, Customs duties N300,000 and Dead rent
N150,000 are included in the N7,000,000 charged to the account.
(4) Intangible drilling expenditure incurred during the year N2,650,000 has
been capitalized as Petroleum expenditure.
You are required to prepare the adjusted profit of the company for the purpose of
Petroleum Profit Tax.
Solution:
TANKOS PETROLEUM PRODUCTION CO. LTD.
N
Profit per accounts 11,390,500
Add Disallowable charges:
Stamp duty on debentures 20,000
6,410,500
Less Intangible drilling expenditure 2,650,000
Adjusted Profit 13,760,500
APPORTIONMENT OF EXPENSES
Where examination question gives different tax rates for local and exported crude oil,
then expenses should be apportioned between the two sources based on the number of
barrels. Some expenses, of course, my be identified with a particular market and therefore
should not be apportioned but allocated to the particular source of revenue.
141
Example
OLA Oil Company Limited is engaged in Petroleum Operations. The following
information are extracted from the books of accounts of the company for the year ended
Crude Oil exported 850,000

barrels
Domestic Crude Oil Sales 370,000
barrels
N
Posted price for export crude 300 per
barrel
Posted price for domestic crude 20 per
barrel
Miscellaneous income 500,000
Value of Chargeable oil sold as per
audited accounts 17,500,000
Administrative and operating expenses 4,425,000
Royalty on oil exported 7,470,000
Royalty on local oil sales 536,000
Intangible drilling costs 45,000
Customs and other duties 75,000
Capitalized expenditure for

1998 17,600,000
1999 12,400,000
2000 13,425,000
2001 19,500,000
The additions for 2001 are classified as:

N
(i) OnShore 12,000,000
(ii) Off Shore (up to and Including 100
metres of water depth) 7,500,000
For 2001 year of assessment, compute

(1) Net fiscal value of chargeable oil
(2) Total Income
(3) Assessable Profit
(4) Capital Allowance
(5) Chargeable Profit
(6) Assessable Tax
(7) Petroleum Investment Allowance
(8) Chargeable Tax.
142
Solution
OLA OIL COMPANY LIMITED
(1) Fiscal Value of chargeable Oil:

Export 850,000 x N300 = 255,000,000
Domestic 370,000 x N20 = 7,400,000
262,400,000
Miscellaneous Income 500,000
(2) Total Income 262,900,000
(4) Annual Allowance for 2001
1998 (4th year) 17,600,000 x 20% = 3,520,000

1999 (3rd year) 12,400,000 x 20% -=2,480,000
2000 (2nd year) 13,425,000 x 20% = 2,685,000
2001 (1st year) 19.500,000 x 20% = 3,900,000
Total Annual Allowance for 2001 12,585,000
(7) Petroleum Investment Allowance N

On shore N12,000,000 x 5% = 600,000
Off Shore N7,500,000 x 10% = 750.000
1,350,000
Computation of Assessable Profit, Chargeable Profit

Assessable Tax and Chargeable Tax for 2001
N
N
Total Income (as computed (1) above 262,900,000
Less: Allowable expenses
Admin/operating 4,425,000
Royalties on local crude oil 530,000
Royalties on export 7,470,000
Intangible drilling 45,000
Education tax 4,908,922
17,453,922
(B) Adjusted Profit/Assessable Profit 245,446,078

Less Capital Allowance (A) 13.935,000
85% of N245,446,078 208,629,166
143
Less 170% of Petroleum Investment Allowance
2,295,000
(B) 210.92466
Lower of (A) or (B) 13,935,000
(5) Chargeable Profit 231,511,078
(6) Assessable Tax at 85% 196,784,416
(8) Chargeable Tax (from 1995 same as Assessable tax) 196,784,416
Education Tax 2% of N245,446,078 N4,908,922
ACCOUNTING PERIOD
In the first year the accounting period of an oil producing company is deemed to
commence on the day the company first makes a sale or bulk disposal of chargeable oil
under programme of continuous production and sales, to 31st December of that year.
For subsequent years it is a period of one year commencing on 1st January of that year
and ending on 31st December of the same year. In the year of cessation, it is from 1st
January of that year to the date of Cessation of business.
PAYMENT OF PPT
Petroleum Profit Tax is payable in advance. Every company engaged in petroleum
operation is obliged to submit a statement of its estimated PPT liability for the accounting
period, within 2 months of the commencement of the accounting period.
The estimated taxed is then payable in equal monthly installments as follows:

(1) The first monthly installment is due and payable not later than the third month of
the accounting period. Where the accounting period is less than one year, the
installment is an amount equals to monthly proportion of the amount of the
estimated tax for the period. If the accounting period were 6 months for example,
the installment would be equal to 1/6th of the tax estimated to be paid 4pr the
accounting period.
(2) Each of the following monthly installment is due and payable not later than the
end of each subsequent month.
(3) The final installment of tax will be the amount of tax assessed for that accounting
period less all installments paid on accounts and is due and payable within 21
days after the service of notice of assessment of the tax for such accounting
period.
PENALTY FOR NON-PAYMENT OF TAX

Where any installment of tax due and payable is not paid within the stipulated date:
(1) The sum equal to 5% of the installment would be added to the installment.
(2) The FBIR will serve demand note upon the company assessed or on the person in
whose name, the company is assessed, and if payment is not made within one
144
month of the service of such demand note, the Board may proceed to enforce
payment.
(3) The penalty imposed will not be deemed to be part of the tax paid for the purpose
of the provisions of the Act other than those relating to the enforcement and
collection of any tax.
ACCOUNTS AND RETURNS

Every Company engaged in petroleum operations is to submit audited accounts to the
FBIR within 5 months after the end of its accounting period. In addition, the following
returns are required:
(1) The computation of the assessable profit of the year.
(2) Capital allowance computation, showing:
(a) The residues of its assets;

(b) All qualifying drilling expenditures
(c) Assets disposed off during the year
(d) The capital allowance due for the period.
(3) Computation of its chargeable profits for the period;

(4) A statement of tax offsets.
(5) Adjustment in respect of previous years affecting chargeable tax; and
(6) A computation of its estimated chargeable tax for that period.
OTHER PPTA PROVISIONS

Other provisions of the PPTA relating to appeals, offences, repayment of tax, relief in
respect of errors, etc. are similar to the provisions of the Companies income tax Act and
therefore are not discussed here.
DIVIDEND PAID OUT OF PETROLEUM PROFIT

Dividend paid out of profit which has been charged PPT is exempted from withholding
tax and income tax under any tax law whatsoever.
GAS DEVELOPMENT PROTECTS TO BE TAXED UNDER CITA 1979. AS

AMENDED
All gas development projects, including those engaged in power generation, liquid plants
and distribution pipelines arc to be taxed under Companies Income Tax Act effective 1st
January 1998 and not under Petroleum Pix>fit Tax Act.
Where there is an integrated oil and gas operations, oil profits will be separated and taxed
under PPTA, and all expenditure pipeline are to enjoy the following incentives effective
1st January 1998 :
a. Initial Tax holidays increased from 3 to 5 years

b. Gas is transferred at zero percentage PPT and royalty
c. Investment allowance increased from 5 % to 15 %
145
d. Interest paid on loans for gas projects is to be deducted in computing taxable
profit, provided prior approval of the Federal Ministry of Finance was obtained.
e. Dividends paid during the tax holiday periods are exempted from tax.
Gas Exploration
Gas exploration is an upstream operation and therefore taxable under PPT Act 1959. Gas
exploration involves operations necessary to separate gas from the reservoir into useable
form at utilization or designated custody transfer points, either through pipeline or
tankers. This operation is to help reduce or completely eliminate gas flaring.
The fiscal incentives approved in 1992 under the Associated Gas Fiscal Arrangement are
reviewed as follows:
1. All investments necessary to separate oil and gas from the reservoir into
Its usable products is considered part of oil field development.
2. Capital investment facilities to deliver associated gas in usable form at

utilization or designated custody transfer points will be treated to fiscal
purposes as part of the capital investment for oil development.
Production Sharing Contract (PSQ Oil Companies
The provisions of the Finance Miscellaneous Taxation Provisions Decree 1999 regarding
a crude oil producing company which is under a "production sharing contract are"
1. Such companies will continue to claim and be granted "Investment Tax Credit3""
as a tax offset in accordance with such contract.
2. The rate of ITC is 50% flat rate of chargeable profit for duration of the (PSC).
3. Investment Tax Credit is deducted from assessable tax" to arrive at ^ax payable".
Further incentives to gas exploration companies under PPTA 1959 as amended

by finance Miscellaneous Taxation Provisions Decree 1999.
From 1st January 1999:

1. All Capital Investment relating to the gas-to-liquids facilities will be treated as
chargeable capital allowance. This is equivalent to granting 100% capital
allowance on such expenditure in the first year and no more.
2. The "Petroleum Investment Allowance" on all capital investment for natural gas
liquids (NGL) is increased from 15% granted to gas utilization companies under
CITA to 35%. This provision in the 1999 Budget has not been enacted by the
Finance Decree 1999.
3. Gas transferred from NGL facility to the gas-to-liquid facilities are to be at zero %
PPT and zero % royalty as stated in 1998 Budget (as applicable to gas utilization
146
undertakings).
4. All incentives granted to associated gas investment are to be applicable to non-

associated gas investment.
147
MEMORANDUM OF UNDERSTANDING (MOU)
ON PETROLEUM PROFIT TAX
Introduction:
Chartered Accountants who qualified through the old examination syllabus would, on
taking up appointment with an oil producing company discover that the petroleum profit
tax practice is much different from what he studied. The difference is due to a document
called the "Memorandum of Understanding" (MOU) signed by the Federal Government
and each of the oil producing companies.
The MOU is a "gentleman's agreement". It is a modification of the tax regime currently

applicable to the oil industry. This lesson is based on the MOU signed on 1st January
1991, which is the current one, an earlier MOU of 1st Jan 1086 has been replaced by the
1991 understanding.
Objective of the MOU

The MOU was conceived at the time Nigeria had problems with marketing her share of
crude oil produced by the joint venture with the oil companies.
Its objectives are stated to be:
(i) To enhance crude oil exports by giving incentives to the oil companies to
lift the NNPCs share of the crude oil which the corporation could not sell.
(ii) To encourage investments in exploration and development activities and
in the area of enhanced oil recovery and gas utilization activities.
The Incentives
Apart from giving tax offsets, (to be dealt with later), the incentives to the oil producing
companies which are a parties to the MOU are:
1 Guaranteed Margin:
NNPC Crude Oil $ 1.15 per barrel
Own Crude Oil $2.30 per barrel
Maximum notional technical cost $2.50 per barrel
2 Where in any year the company's actual technical cost per barrel is equal to or
exceeds $1.50 per barrel, the following guaranteed margin and notional technical
cast will apply:
Guaranteed Margin:
NNPC Crude $1.25
Own Crude $2.50
Maximum notional technical! cost $3.50
148
"Actual technical cost" is otherwise called "actual production cost" and is made up of two
components:
1 Production operating expenses (T1):

a Direct production expenses
b Admin. and general expenses allocated to production
c Customs duties and gross rentals allocated to production
d Extraordinary/prior year expenses/incomes.
2 Capital investment costs which qualify for expensing for PPT calculation (T)
a Exploration Drilling Costs
b 1st and 2nd Appraisal wells
c Intangible Drilling and Development Costs
d Capital allowances
Actual technical cost per barrel is therefore obtained by summing up these expenses and
dividing by the number of barrels produced during the year.
Government Take
The term "governments take" is defined as petroleum royalty and PPT payable to the
Government.
Under the MOU the petroleum profit tax is to be computed on the lower of:
(i) Computation under the PPTA 1959 as amended, which uses Official
Selling Price (OSP) in replacement of posted price, and
(ii) Computation using "Offset pricing formula".
The offset pricing formula imputes the notional figures stated above under the incentives,
into the PPT computation in an attempt to ensure that the company earns the minimum
margin also specified above.
Offset Pricing formular

RGT = OP - (TR X TC) - OT
Where RGT == Revised government take
OP= Offset price == B x RP
RP = Realizable price
B == K [(1 - ROY) x TR + ROY ]
K = Factor as follows:
1.0042 for notional margin $2.30

0.9869 for notional margin $2.50
ROY== Royalty rate

TC == Technical cost, i.e. allowable expenses, capital allowances and loss brought
forward, if any.
149
TR = PPT tax rate (85%)
OT= Tax Offset
RP<$23
For realizable prices below $23 per barrel, the K factors are to be computed using the
under noted "Self -Adjusting Mechanism" to restore the desired guaranteed notional
margin.
K = 1.1364 (1-M+0.15Fc)
RP
Where
M = Guaranteed notional margin

FC = Notional fiscal technical cost
Therefore when M is $2.30

K = 1.1364 (1- $2.30 + 0.15 ($2.50)
RP
and, when M is $2.50
K = 1.1364 (1 - $2.50 + 0.15 ($2.50)
RP
RP < $12.50
The following mechanism is applied for establishing the guaranteed notional
margin for realizable prices less than $12.50:
M = (1-FC) (RP1 a1 + RP2 a2 + RP3 a3)

RP
where M= Guaranteed notional margin

RP= Realizable price
PC = Notional fiscal technical cost
a = Company's percentage share of field profit
For:
Company's share applicable
Realizable Price to price range
in the Range FC== $2.50 = $3.50
0 -< $5.00 a1 =0.30 0.365
$5 -<10.00 a 2 =0.22 0.263
$10-<12.50 a 3=0.11 0.131
150
Example
If the Realizable Price is $12.50 and Notional technical cost is $3.50, M the guaranteed
margin is computed thus:
M= (1 -_3_50) (5x0.365+5x0.263 +2.50x0.131)
12.50)
= 0.72 x (1.825 + 1.315 + 0.13275) == $2.50
The Realizable Price is broken into lots of

$5 =RP1
$5=RP2
$2.50 = RP3
Example
Eganza Petroleum Plc. sold the following blends of Crude oil from its equity share:
Bonny Light 200,000 bbis
Bonny Medium 150,000 bbis
Qua Iboe Light 100,000 bbis
Realizable prices advised by the NNPC were:
Bonny Light $20 per barrel
Bonny Medium $ 19 per barrel

Qua Iboe Light $18 per barrel
Compute the Offset value of the Crude oil. The exchange rate for $1 = N80 company's
production is on-shore.
Solution
(i) Calculation of K factors:
K = 1.1364 (1 -M+0.15FC)
RP
Bonny Light = 1.1364 (1 - 2.30 + 0.15 (2.50)
20
= 1.1364x0.86625 = 0.9844
Bonny Medium =1.1364 (1-2.30 + 0.15 (2.50)
19
= 1.1364x00.8592 == 0.9764
Qua Iboe Light == 1.1364 (1-2.30 + 0.15 (2.50)
18
= 1.1364x0.8514 = 0.9675
(ii) Calculation of B factors:

B = K [(1- ROY ) x TR + ROY)
151
Bonny light = 0.9844 [(1-0.20) x 0.85 + 0.20]
= 0.9844 [0.88] = 0.866
Bonny medium = 0.9764 x 0.88 = 0.859
Qua Iboe light = 0.9675 x 0.88 = 0.51
(iii) Offset Price =B x RP

Bonny light = 0.866 x $20 = $17.32 per barrel
Bonny Medium == 0.859 x $19 == $ 16.32 per barrel
Qua Iboe Light = 0.851 x $18 = $15.32 per barrel
(ib) Offset Value of Oil

Bonnu light == 200,000bbs x $17.32 x N80 = N277,120,000
Bonny Medium = 150,000bbls x $16.32 xN80 = N195,840,000
Uua Iboe light = l00,000bbIs $15.32 xN80 = N122,560,000
Total Value = N595,520,000
Tutorial Notes
1 Royalty rate used is 20%
2 PPT rate used is 85%
3 In effect the K factors of
1.0042 for Notional margin $2.30

0.9869 for Notional margin $2.50
apply when RP > $ 23 per barrel
Tax Offsets
The MOU has given the oil companies two tax offsets namely:
1 Capital investment relief
2 Reserve additional bonus
Capital Investment Relief

It is provided that where in any year the actual technical cost exceeds $3.50 per barrel
and the excess is due to capital investment costs which is equal to or exceeds $1.50 per
barrel, the company shall be entitled to a tax offset against its PPT liability for that year.
The tax offset is calculated thus:
10% x (LIBOR + 1%) x (0.80 T,) x Equity production

where LIBOR is London Inter-bank Borrowing Rate for 3 months US dollars as
quoted in the London Financial Times on 1st January; 1st April, 1st July and 1st October,
or the next succeeding quotation day.
152
T2 = The following costs which qualify for expensing for PPT calculation and
Capital Allowance:
1 Exploration Drilling Costs
2 1st and 2nd Appraisal wells costs
3 Intangible Drilling costs
4 Capital Allowances
To calculate capital investment cost per barrel simply involves summing up T2

components and dividing by the total number of barrels of oil produced.
Example
Shell oil Pic operates an NNPC/Shell Joint Venture with participating interests of 60/40.
During the year total oil production amounted to 180 million barrels. Actual technical
cost per barrel amounted to $3.80 out of which capital investment cost is $1.65 per barrel.
LIBOR rate is 15%. Compute capital investment tax offset.
Solution:
Shell Oil Plc.
Calculation of Capital Investment tax Offset.
Formula = 10% [ LIBOR + 1%) x 0.80 T2] x Equity production
= 10% [(15% + 1%) x 0.80 (1-65)] x 72 million barrels
= 0.10 (0.16x 1.32) x 72,000,000 = $1,520,640
NNPCs Share
0.10 (0.16x 1.32) x 108.000,000bbls = $2,280,960
Reserves Addition Bonus

Reserves addition bonus is granted in any year in which the Unlimited Recovery (UR)
exceeds the production for that year.
Ultimate Recovery is the sum of "Proven" (P1) and "Probable" (P2) crude oil and
condensate reserves. It is calculated for each year in tranches determined by reference to
the Addition/Production Ratio (R) where
R = UR at end - UR at beginning
Annual Production
For
Addition/Production Applicable Bonus Rate

Ratio (R) in the range for incremental equity barrel
1-<1.25 X1 = $0.10
153
1.25<1.50 X2 = $0.25
1.50-< 1.75 X3 = $0.40
1.75 > X4 = $0.50
Bonus given on the excess over 1 in tranches of 0.25
Bonus = [ R1 X1 + R2 X2 + R3 X3 ) Pe
where R = Incremental reserve addition/production ratio
X = Bonus rate for various values of R
P=Annual production
e = Equity ratio
Example
SISCo Oil Company Ltd operates a joint venture with NNPC in a participating ratio of
70% NNPC and 30% SISCO. The joint venture operates three producing oil fields and
during 1999 the production from the fields were as follows:
Field Quantity
A 100 million barrels
B 150 million barrels
C 200 million barrels
The reservoir engineers have furnished the following reserves statistics:
Reserves at fields
end of the year Beginning of the year
(million of barrels) (million of barrels)
Proven (P1), Probable (P,) Proven (P1); Probabl (P2)
A 700 500 700 300
B 1760 1000 2000 600
C 540 200 340 100
Required: Calculate reserve addition bonus tax offset for 1999
Solution
Sisco Oil Company Ltd.
(i) Reserve addition/production ratio:

Field addition/production ratio:
Field A 1200- 1000 ÷ 100 = 2
B 2760 - 2600 ÷ 150 = 1.067
C 740-440÷ 200 =1.5
(ii) Reserve addition Bonus:

Field A = (0.25 x 0.10 + 0.25 x 0.25 x 0.40 + 0.25 x 0.50 ) x 100x0.30
= (0.025 + 0.0625 + 0.10 + 0.125) x 30 = $9,375,000
Field B = (0.067x0.10) x 150x0.30 =
= 0.0067x 45 = $301,500
154
Field C = (0.25 x 0.10 + 0.25 x 0.25) x 200 x 0.30
= (0.025 + 0.0625) x 60
= $5,250,000
Total Reserve Addition Bonus:

Field A $9,375,000
Field B $ 301,500
Field C $5,250,000
$14,926,500
Example
Port-Harcourt oil company V Ltd is an operator in a joint venture with the Nigerian
National Oil Corporation (NNPC). NNPC interest in the venture is 60% while the
company has 40%. The following data relate to the venture for the year ended 31st
December 1997:
1 Company's share (40%)

of Crude oil produced
and exported (Bonny light) 12,400,000bbls
2 Company's share of expenses N

Administration and general 78,000,000
Intangible drilling and development costs 52,000,000
Operating expenses 14,000,000
Drilling costs of first two appraisal wells 13,250,000
Capital allowances 42,000.000
Exploration costs 60,000,000
3 Customs duties 860,000

Non-producing rentals 140,000
4. The company’s reserve data arc:
Field Ultimate Recovery Ultimate Recovery
at end of the year at beginning of the year

(million of barrels (million of barrels)
A 72 60
B 80 70
C 97 80
5. Production statistics were:
155
Field A 5 million barrels
Field B 2.4 million barrels
Field C 5 million barrels
6. The Official Selling price for Bonny Light is $ 18 per barrel

7. The company's oil is from offshore operation beyond 100 meters depth
8. Realizable price as advised by NNPC is $23 per barrel
10. $=N80
Required: Compute
a Government Take
b Revised Government Take
c Petroleum profit tax liability
Solution
PH Oil Company
(a) Royalty $
Field A 5,000.000 x$l 8 x 162 /3 %= 14.994m

Field B 2,400,000 x $18x162 /3 %= 7.197m
Field C 5,000,000 x $18 x 16 2 /3 % 14.994m
$37.185m
x N80 = N2,974,8 million
PPT Under the Act Nm

Fiscal value of oil (12.4m x $18 x N80) 17,356.00
Less Allowable charges: Nm
Royalty (exports) 2974.80
Admin & General 78.00
1DDC 52.00
Operating costs 14.00
Appraisal wells (1st & 2nd) 13.25
Exploration costs 60.00
Customs duties 00.86
Non-producing rentals 00.14
3,193.05
Adjusted/Assessable profit 14,662.95
Less Capital Allowance (no restriction) 43.20
Chargeable/taxable profit 14.619.75
PPT at 85% 12,426.7875m
156
Government Take: N
Royalty 2,974.8000
PPT 12,426.7875
Total 15,401.5875
(b) Revised Government Take computation is by the Offset pricing formula and
before that is done, the applicable notional guaranteed margin and notional technical cost
must be determined. So find out first the actual technical
cost per barrel;
T1 = Operating expenses N14. 00m
Admin & general 78.00m
Customs duties 00.86m
Non-producing rentals 00.14m
93.00m
T2 = Exploration Costs 60.00m
Appraisal wells (1&2) 13.25m
1DDC 52.00m
Capital allowances 43.20m
261.45m
per barrel = 261.45 = N21.08

12.4
Divide by N80 to $ = $0.26 per barrel which is less than $1.50 per barrel. Therefore
applicable:
Guaranteed margin:
Own Crude Oil $2.30 per bbl
Max notional technical cost $2.50perbbl
Net step is to compute K factor for the crude oil blend. Since the realizable price is not
below $23, the applicable K factor for the notional margin of $2.30 is 1.0042
Next step is to calculate B factor, which is

B=K [(I - ROY) x TR + ROY]
= 1.0042 [(1-0.1666) x 0.85 + 0.1666)
= l-0042f0.8334x0.85 + 0.1666)
= 1.0042x0.875 = 0.878675
Offset price then = RP x B

=$23x0.878675 = $20.21
157
Calculation of tax offsets:
(i) Capital investment relief

This is inapplicable since the actual technical cost is less than $3.50 per barrel
and, T, capital investment cost component is $0.16 per barrel.
(ii) Reserve Addition Bonus
Field A = 72 - 60 = 2.4
5
Field B = 85 - 70 = 6.25
2.4
Field C= 97 - 80 = 3.4
5
Bonus:
Field A (0.25x0.10 + 0.25x0.25 + 0.25x0.40

+ 0.65 x 0.50) x 5m barrels x 40% = $980,000
Field B (0.25 x 0.10 + 0.25 + 0.25 + 0.25 x 0.40
+ 4.5 x 0.50) x 2.4m barrels x 40% = $2,318,400
Field C = (0.25 x 0.10 + 0.25 x 0.25 + 0.25 x 0.40

+ 1.65 x 0.50) x 5 million barrels x 40% = $1,980,000
Total Reserve Addition bonus: - $
Field A 980,000
B 2,318,400
C 1,980,000
5,278,400
RGT = OP - (TR x TC)-OT

where OP == $20.21 x 12.4m = $250.604m
TR+TC == 85% of 261.45m = $2.777m
N80
OT = Reserve Bonus $5.2784m
RGT = $250.604m - $2.777m - $5.2784m
= $242.5486m
This may be set out as follows: -

Offset Price N250.6040m
Less 85% of Actual technical
Cost (85% of 2601m) ( 2.777m)
158
N80
Tax Offsets ( 5.2784m)
RGT $242.5486m
(c) PPT liability is the lower of
GT(a) N15,401,587m = $192.5198m

N80
RGT(b) $242.5486m
.:PPT payable = $192.5198m
Tutorial Notes
In practice, royalty (on petroleum) and PPT are computed and payable in US dollars that
is why the MOU is expressed in US dollars. The RGT may be taken to naira to compare
with GT which was computed initially in naira.
NNPC's Crude Oil

The above illustrations were concerned with the oil company's crude oil exported by
them. The provisions regarding NNPC's Crude oil lifted by the company under the MOU
are:
1 The oil company will pay royalty and PPT on such crude oil to the
appropriate authorities - DPR for royalty and FIRS for PPT
2 Payment for each lifting to be made to NNPC at notional transfer cost.

3 Notional transfer cost is the sum of a notional technical cost $2.50b
notional profit margin $1.15
4 At year end, the interim payments under (2) will be adjusted to actual
transfer cost.
5 Actual transfer cost is actual technical cost (T1 + T2) per barrel multiplied
by the annual volume of NNPC crude oil lifted by the company’s plus one-half of
the margin resulting from the application of the Realizable price multiplied by the
annual volume of NNPC crude oil lifted by the company.
Example
Exxex Oil is in joint venture with NNPC and lifted 1 million barrels of NNPCs equity
crude oil which NNPC could not lift. The crude oil type is Porcados Blend with a
realizable price of$10 per barrel and actual technical cost of $5 per barrel. The company's
operation is on-shore and total tax offset amounted to $810,000.
You are required to calculate
a Revised Government- Take, and
b Amount payable to NNPC by Exxex
159
Solution
Exxex Oil
(a) Computation of Revised Government Take
Workings
RGT = OP (0.85 x TC) - OT
OP = B x RP
B = K f (1-0.20) x 0.85 + 0.20
Since actual technical cost perbarrel is $5 (exceeds $1.50), the maximum notional
technical cost of $3,50 per barrel applies. Further, since realizable price is less than
$12.50 per barrel, the guaranteed notional margin is computed thus (instead of
$1.25)
M = (1- FC (RP, a^ + RP^ + RP^ a,)

RP
= (1-3.50) x (5x0.365 + 5 x 0.263)
10
= 0.65 x (1.825 + 1.315) = $2.04

50% there of= $1.02 per barrel
K = 1.1364 (1- 1.02 + 0.15 (3.50)
10
= 1.1364x0.8455=0.96
B = 0.96 [(1 -0.20) x 0.85 + 0.20}
= 0.96 x 0.80 x 1.05 = 0.8064
Onset Price (OP) = $10 x 0.8064 = $8.06
Note it can be argued that since the computed margin is $1.02 per barrel, the guaranteed
minimum notional margin applies, i.e $1.25
(a) Revised Government Take
$
Offset price = 1,000,000 x $8.06= 8,060,000
Less Technical costs Allowable:
85% x 1,000,000 x $5 = 4,250,000

3,810,000
Tax Offsets 810,000
160
Revised Government Take $3,000,000
(b) Amount payable to NNPC:

TC == 1,000,000 x $5 $5,000,000
Margin 50% of $2.04
x 1,000,000 = 1,020,000
$6,020,000
Tutorial Note
Let's present the data in the form of Profit and Loss Account;
$
Realizable Price of Oil 10,000,000
Less Technical costs 5,000,000
Profit before Tax 5,000,000
Less Royalty/PPT (RGT) 3,000,000
Profit after tax 2,000,000
Less Profit + NNPC 1,020,000
($ 1.02 x 1,000,000)
Profit due to the company 980,000
Thus the MOU shares the profit on NNPC oil lifted and sold by the oil company between
the oil company and NNPC, an unfortunate situation.
Another point to note is that the oil company pays technical costs to the NNPC because
under the Joint Venture agreement, NNPC pays for its share of the technical costs of
producing its share of the oil.
Realizable Price: Realizable price is the "net back value" of the crude oil, which is the
FOB value of its yield. For its calculation see "Corporate Finance and Financial Strategy"
Packs.
Lifting Procedure of NNPC's crude oil

The procedure for the oil company's lifting of NNPC's crude oil is by notice. Where
NNPC gives the oil company 15 days notice to lift a specified volume of its crude oil,
such lifting is known as "Notice Volume". Where NNPC does not give the 15 days
notice, the volume of crude oil it requires the oil company to lift is known as "Emergency
Volume".
Revenue Practice
The MOU was designed by NNPC. Accordingly, the staff of Federal Inland Revenue
Service is not conversant with the tax computations under the MOU. Therefore in
161
practice, when the MOU tax liability is lower than that computed under the Act, they call
the difference "MOU Credit" and deduct it from PPT computation under the Act to arrive
at the MOU figure.
The practice is however, wrong because RGT is the sum of "Royalties" and Petroleum
Profit Tax whereas Inland Revenue's computation under the Act is only Petroleum Profit
Tax Petroleum royalty is payable to Department of Petroleum Resources and not to FIRS.
Exercise
1. KT Oil Company Limited is engaged in Petroleum Operation. The following
information is extracted from the books of accounts of the Company for the year ended
Crude Oil exported 6,000,000 barrels

Selling price per barrel N22.85
Posted price per barrel N25.06
Administrative expenses 5,643,000
Production expenses 2,341,000
Intangible drilling expenditure 11,000,000
Annual Allowance 25,340,000
Other Income 198,326.
Royalty allowable is 20% of the fiscal value of chargeable oil. For 2001 year of
assessment, compute
(a) Fiscal value of chargeable oil

(b) Royalty payable for the year
(c) Chargeable tax.
2. Madugu Oil (Nigeria) Ltd. is an oil producing company. Crude oil lifting for the
2001 accounting period was at the rate of 5,000 barrels per day. The Company confirmed
that 95 per cent of the crude oil lifted was exported while the remaining 5 per cent was
sold in the home market (i.e. domestic sales). Other relevant details are:
(a) Gross posted prices of crude oil of 35°was N21.55 and it had been agreed with
the Federal Government that for every degree decrease in the API gravity of Crude
exported, the posted price was to be reduced by 11 kobo. The API gravity of Crude Oil
exported was 30°.
N N
(b) Sale of crude oil

Export 22,241,000
Domestic 2,131,000
162
24,372,000
Less Production Cost 484,000

Transportation 1,250,000 1,734,000
22,638,000
Deduct:
Salaries 450,000
General Overheads 80,000
Bank Interest/Charges 65,000
Interest on bills payable 90,000
Interest on loans from Subsidiary Company 120,000
Loss on disposal of fixed assets 20,000
Royalties & Producing rents 7,500,000
Non-producing rents 50,000
Harbour dues 54,000 9,719,000
12,919,000
(c) The company had capitalized intangible drilling costs amounting to N1,200,000.
(d) Royalties on domestic sales were N82,000.
(e) Capital allowances for the year were:
Petroleum Investment Allowance N1,100,000
Annual N800,000
Balancing charge 45,000
(f) Capital allowance brought forward from previous years were N300,000.

(i) Posted price of oil exported.
(ii) The assessable profit of the accounting period.
(iii) Chargeable Petroleum Profit
(iv) Chargeable tax.
For the purpose of this exercise, assume that petroleum profits both from export and
domestic sales are taxable at 85 percent and all calculations should be made to the
nearest naira.
3. Port-Harcourt oil company V Ltd is an operator in a joint venture with the

Nigerian National Oil Corporation (NNPC). NNPC interest in the venture is 60% while
the company has 40%. The following data relate to the venture for the year ended 31 st
December 1997:
163
1 Company's share (40%) of Crude oil produced and exported (Bonny light)
20,400,000bbls
2 Company's share of expenses N

Administration and general 88,000,000
Intangible drilling and development costs 71,000,000
Operating expenses 34,000,000
Drilling costs of first two appraisal wells 26,250,000
Capital allowances 22,000.000
Exploration costs 30,000,000
3 Customs duties 800,000

Non-producing rentals 210,000
4. The company’s reserve data arc:
Field Ultimate Recovery Ultimate Recovery
at end of the year at beginning of the year

(million of barrels (million of barrels)
A 72 60
B 80 70
C 97 80
5. Production statistics were:

Field A 10 million barrels
Field B 2.4 million barrels
Field C 8 million barrels
6. The Official Selling price for Bonny Light is $ 18 per barrel

7. The company's oil is from offshore operation beyond 100 meters depth
8. Realizable price as advised by NNPC is $23 per barrel
10. $=N80
Required: Compute
a Government Take
b Revised Government Take
c Petroleum profit tax liability
164
CHAPTER EIGHT
PIONEER COMPANIES
8.0 PIONEER COMPANIES

Where the government is satisfied that any industry is not being carried on in
Nigeria on a scale suitable to the economic requirement of Nigeria or at all or there are no
favorable prospects of further development or establishment of any industry in Nigeria by
the federal government of Nigeria will react declaring the industry to being a pioneer
industry and any other product of the industry to be a pioneer product. The law governing
the pioneer status of a company is the Industrial Development Income Tax Decree of
1971. The decree empowers the Federal Executive council to publish a list of industries
and products as pioneer industries and products if it is satisfied that:
(i) The industry is carried on in Nigeria on a scale suitable to the economic
development of Nigeria; or
(ii) There are favorable prospects of further development of such
Industries in Nigeria; or
(iii) It is expedient in the public interest to encourage the development or
establishment of such industries in Nigeria.
The essence of granting tax holidays is to encourage persons to carry out

industrial activities or the production of the pioneer products on a commercial basis. The
companies that are certificated to be pioneer companies are given tax holidays.
8.1 Qualification for Application

A company incorporated in Nigeria or a group of persons on behalf of a company,
which is to be incorporated in Nigeria, may qualify to be granted pioneer status. The
conditions necessary for the pioneer status to be granted to a company starts with an
application. The application for pioneer Certificate may be made to the Minister in
respect of any published pioneer industry provided that the Qualifying Capital
expenditure to be incurred on or before the production day is in excess of: -
(i) N50, 000 in respect of an indigenously controlled company.
(ii) N150, 000 in respect of any other company.
Further more the application must:-

1. State whether the company is or the proposed company will be
Indigenously controlled;
2. Give particulars, source, and estimated cost of asset on which
Qualifying capital expenditure will be incurred
i on or before the production day,
ii. during a period of three years following the production day.
3. State the place in which the assets will be situated;
4. Estimate the probable date of production day of the company or proposed

company;
165
5. Specify the product and by-product (where this is not a pioneer product) to be
produced, the estimated quantities, and the values of the product and by-
product during the first year from the production day;
6. Give particular of loan and share capital of the company including the dates of
issue and the sources of the capital;
7. In the case of a proposed company, give the names, addresses, and

nationalities of the promoters.
8. Contain a declaration signed by the applicants that al the particulars contained

therein are true;
9. Include a non-refundable fee of N100, which will be transferred to the

consolidated revenue reserve fund of the federal government of Nigeria.
Where an application is approved for a proposed Company that company must be

incorporated within four months of approval and the pioneer certificate will not be issue
until the company has been incorporated.
8.2 Pioneer Certificate and Production Day

Not later than one month after production in marketable quantities, the pioneer
company must apply in writing to the director, Industrial Inspectorate Division, federal
minister of trade and industries to certify date as its production day and give the reason
for proposing such a date.
Where the certified production day is more than one years later than the date
estimated in the application for pioneer certificate, the pioneer certificate may be
cancelled unless the company can show sufficient reason why the certificate should not
be cancelled.
Also, within one month of the certification of the production day the pioneer
company must apply to the Federal Board of Inland Revenue to Certify the Qualified
capital expenditure incurred prior to the production date. Where any asset is sold before
the production days, the qualifying capital expenditure is reduced by the realized value of
such asset, the sale of which must be at arm’s length.
Where the Board certifies the Capital expenditure incurred before the production
day to be:
(i)
[[[[
Less than N50, 000 in the case of indigenous controlled company, or
(ii) Less than N150, 000 in any other case, the pioneer certificate shall be
cancelled.
8.2.1 Effective Date of Cancellation of Pioneer Certificate

A pioneer certificate previously granted may be cancelled on the happening of
one or more of the following events.
166
a. Where the value of the qualifying capital expenditure is
less than N50, 000 for an indigenously controlled company
and N150, 000 for other.
b. Actual production day is more than one year later than
stated in the original application
c. On the application of the pioneer company itself
d. Where any condition laid down by the minister is not
satisfied
Where the pioneer certificate is cancelled, the effective date for the cancellation
shall be the production day (the pioneer date) or the last anniversary thereof, whichever is
the later.
The effective date of cancellation shall be:
a. Where the company has been in operation as a pioneer company
for a period of less than 1 year after the pioneer date, then the
effective date of cancellation shall be the pioneer date. i.e. is it
assumed that the certificate was never granted.
b. Where the company has been in operation for not less than 1 year
after the pioneer date then the effective date of cancellation shall
be the last anniversary of the pioneer date.
Illustration
Determine the date of cancellation of the following pioneer certificates:
1. Asaku limited was granted a pioneer status on 1st May, 2000 but had this
cancelled on 29th March 2001.
2. Ashamu limited was granted a pioneer status on 1st May, 2000 but had this
cancelled on 29th March 2003.
Solution
The effective dates of canceling the certificates are as follows:

1. Asaku limited’s certificate is deemed cancelled on 1st May, 2000 may because it
was cancelled before the end of the first year.
2. Ashamu limited certificate was deemed cancelled on 1st May, 2002 which is
the date of its last anniversary.
8.3 Tax Relief Period

The tax relief period (tax free) is there years from the production day. If
application is made for the extension of this period and certain conditions are fulfilled the
period may be extend to a maximum of five years. The profit made during his period is
exempted from tax provided the federal Inland Revenue Service certifies it.
At the end of its pioneer period the company is treated as though it had
commenced a new business and the normal “Commencement” provisions apply. Thus the
business carried on during the tax relief period is regarded as having as ceases and a new
business commenced on the first day following the end of the tax relief period.
167
The tax relief period may at the end of the three years be extended for
a. A period of one year and thereafter for another period of one year
commencing from the end of the period of extension
b. For one period of two years
c. If the company is established in a disadvantaged rural area the maximum
period shall be 7 years.
8.3.1 Condition for Extension of Pioneer Period

a. Where the board is satisfied as to the rate of expansion standard of efficiency and
the level of development of the company
b. In the implementation of any scheme: for both the utilization of local raw
materials in the processes of the company and the training and development of
Nigerian personnel in the relevant industry.
c. The relative importance of the industry in the economy of the nation
d. The need fro extension having regard to the location of the industry
e. Any such relevant matters as may be required.
This application should be made not later than one month after the expiration of
its initial tax relief period of 3 years.
8.4 Accounting Date

The accounting date of the pioneer company for the purpose of ascertaining
profits or loss will be as follows:
(1) A period not exceeding one year from the production day.
(2) Successive periods of one year thereafter
(3) A period not exceeding one year ending on the date when its tax relief
period ends
In making up the first accounts of its “new” trade or business, the pioneer
company shall take as the opening figures for the accounts of the new business, the
closing figures of the assets and liabilities of the “old” business. This is merely stated as a
formality since treats the business as such.
8.5 Computation of Profit or Loss for Tax Purposes

The profit of a pioneer company is computed in accordance with the income tax
rules. However, the board has the power to direct that receipts treated in the pioneer
period be treated in post-pioneer period if they are properly to be so treated.
Similarly, expenses treated in the first year of the post – pioneer period may be
attributable to the free period.
In ascertaining the loss for any accounting period the Board may only allow
reasonable amounts in respect of:
(1) Director’s remuneration
(2) Interest, agency, and service charge paid to a shareholder or any one
controlled by the shareholder.
168
When a loss has been so ascertained the board will issue a certificate. Losses
incurred in any year or year of the tax – free period must be netted off against profits of
the other periods of the tax-free period, and only the “net” loss can be carried forward the
post-pioneer period, which is carried forward to the new business”.
Losses carried form the pioneer period to the “new business” can only be set-off
against the total profits of the first year of the new business. Where the net loss exceeds
the total profits of the new business in the first year, such unrelieved loss cannot be
carried forward to the second year of the new business and will therefore lapse. This is
because there is no provision that that the net loss of the pioneer period is deemed to be
incurred by the company in its new trade or business. The “net” loss as explained is
deemed to be incurred on the first day on which the new business commenced.
The normal relief and restrictions apply to losses incurred in the new business and
such losses may be carried forward up to the maximum period of four years.
8.5.1 Capital Allowances

Capital expenditure incurred during the pioneer period is regarded, for capital
allowance purchases, to be incurred on the first day of the new business, which is the
first day after the end of the tax relief period.
8.5.2 Dividends Paid Out of Pioneer Profits

Pioneer profits certified by the Board must be credited to an account called “Section
17 Account” and any cash dividends or distributions in the form of bonus share shall be
debited to that account. Dividends paid out pioneer profits are exempt from withholding
tax and income tax in the hands of the shareholders. Profit distributions cannot exceed the
amount at the credit of the account.
Where a pioneer certificate has been cancelled or where adjustments are made by the
Board regarding transfer of receipts or expenses from pioneer period to post-pioneer
period or vice versa, so that profit and dividends which have been exempted from tax
ought not to have been so exempted, additional assessments will be made on the pioneer
company or the shareholder, as the case may be, within six years of the cancellation or
adjustment.
The steps in the computation of tax payable

Step 1: Identify the end of the pioneer period. This is usually three calendar years
from the pioneer or production dates
Step 2: Identify the day following the end of the pioneer business, this determines
the year of commencement of a new business. Pick two additional tax
years
Step 3: Determine the basis period for assessable profit for the three years of
assessment under the commencement rule.
Step 4: Compute the assessable profits of the three years as identified in step 3
above
Step 5: Determine the basis period for capital allowance and allocate the
qualifying capital expenditure into the respective tax years.
Step 6: Compute the capital allowance due for the relevant years of assessment
169
Step 7: Capital allowance obtained in step 6 above is used to reduce the assessable
profit obtained in step 4 above to arrive at the taxable profits for the
relevant tax years
Step 8: Compute tax payable by applying the rate of company income tax on the
taxable profits obtained in step 7.
8.5.3 Restriction on Trading and Loans

During the pioneer period, the company must not carry on any trade or business
other than its pioneer enterprise, and if it derives any other earnings, they are subject to
tax. A pioneer company must not grant loans without the permission of the Minister.
Example 1
Eilon Nigeria Ltd was granted a pioneer certificate with production day given as
1st July 1991. The following information was extracted from the company’s records.
[
N
Accumulated profit as at 30th June 1994 94,000
Capital expenditure incurred up to and including year
Ended 30th June 1994 as Certified by the Federal
Board of Inland Revenue:
Industrial buildings 56,000
Non-industrial buildings 22,000
Motor vehicles 60,000
Plantation 142,000
The trading result for the year ended 30th June 1995 is as follows:
Net profit was N172, 000 after charging depreciation N42, 000 and with holding
tax on rent included in expense was N10, 500. Extension of the initial pioneer period was
not sought nor granted.
You are required to compute the tax liability of the company for the relevant years of
assessment.
Solution
Eilon Nigeria Ltd
The Pioneer period will include the first 3 years of the business transaction. It
should also be noted that the amount of N92, 000 accumulated profits has been exempted
from tax.
1st July 1991 – 30th July 1992

Pioneer period ended 30th June 1994 and from 1st July 1994 a new business is
deemed to have commenced.
170
Eilon Nigeria ltd.
Commencement of new Business
Year of Basis period

Assessment
1994 1/7/94 – 31/12/94 (6 months) actual
1995 1/7/94 – 30/6/95 (first twelve months)
1996 preceding year, 1/7/94 – 30/6/95
Computation of Adjusted profit for 1996 Assessment:

N
New profit per accounts 172,000
Add back:
Depreciation 42,000
Withholding tax 10,500
224,500

year Industrial Other Plant and Motor Plantation Total
building building machinery vehicle allowance
199 Cost 56,000 22,000 158,000 60,000 142,000

4
Initial 8,400 1,100 31,600 15,000 35,500 91,600
allowance
47,600 20,900 126,400 45,000 106,500
Annual 2,380 1,045 6,320 4,500 7,988 22,233
allowance
199 TWDV 45,220 19,855 120,080 40,500 98,512
5
Annual 4,760 2,090 12,640 9,000 15,975 44,285
allowance
199 TWDV 40,460 17,765 107,440 31,500 82,537
6
Annual 4,,760 2,090 12,640 9,000 15,975 44,285
allowance
TWDV 35,700 15,675 94,800 22,500 66,562
It should be noted that the basis period for 1994 is 6 months, therefore, the annual
allowance granted is one half of the annual rate which means what ever is the amount of
the annual allowance you divide by 2 to get the 6 months. Furthermore, all the assets
bought during the pioneer period, that are said to be the qualifying capital expenditure of
the company are deemed to have been purchased on 1 st July 1994, which is the first day
of the start up of the new business after the pioneer period.
171
INCOME TAX ASSESSMENT 1994
N
Adjusted profit 6/12x N224, 500 = 112,250
Less
Capital allowance 113,833
Relieved 112,250 112,250
Total Income 0
Capital Allowance c/f 1,583
Income Tax Liability NIL

N
Adjusted profit 224,500
Less:
Capital allowance b/f 1, 583
Capital Allowance for the year 44,285 45,868
Total profit 178,632
Income Tax Liability

35% of N178,632 = 62,521

N
Adjusted profit 224,500
Less Capital Allowances 44,285
Taxable profit 180,215
Income Tax Liability

35% of N180, 215 = 63,075
It should be observed that there is no restriction on the capital allowance that may be
relieved for a manufacturing company. If it where a company that is not a manufacturing
business the restriction of 2/3 on capital allowance to be relieved would applied.
Example 2:
Metro pioneer Ltd, an indigenous controlled company commenced production on
1st January 1987 having been granted a pioneer certificate earlier on. It’s adjusted profits
(losses) are as follows:
N
172
Year ended 31st December 1989 (loss) (35,000)
Period ended 31st March, 1996 70,000
Its business cased with effect from 31st March 1996. During the above period it
incurred qualifying capital expenditure were as follows:
On the production day 60,000

In February 1988 10,000
In June 1990 10,000
In January 1991 30,000
In May 1993 20,000
Note that:
(a) The company enjoyed the maximum relief period possible under the
provisions of the appropriate Act;
(b) It availed itself of its right within the commencement provisions of the
appropriate Act;
(c) That during the whole period it did not declare dividend, and
(d) The rates of Capital allowances applicable to all the qualifying

expenditure for all period are:
(i) Initial 20%
(ii) Annual 10%
You are required to compute

(i) The assessable profit for each of the operating periods listed above.
(ii) The balance on the company’s section 17 Account.
(iii) and the capital allowances for each of the relevant years of
assessment to 1993.
Solution
METRO PIONEER LIMITED
Maximum pioneer period = 5 years
173
Pioneer profits: N
Tax exempted 100,000
New Business- Basis period (normal)

Assessable profit
N
1992 Actual 1/1/92 – 31/12/92 50,000
1993 First 12 months – 1/1/92 – 31/12/92 50,000
1994 Preceding year 1/1/92 – 31/12/93 50,000
150,000
Tax payer’s Option – Basis Period

1992 Actual 1/1/92 – 31/12/92 50,000
1993 Actual 1/1/93 – 31/12/93 70,000
1994 Actual 1/1/94 -31/12/94 45,000
165,000
This means the tax payer will not exercise his option as it will mean paying more tax.
1995 Penultimate year, higher of

Preceding year basis N45,000
Actual N80,000 N80,000
1996 year of Cessation:

Actual 1/1/96 -31/3/96 - 70,000
(1) Assessable Profits

N
1992 50,000
1993 70,000
1994 45,000
1995 80,000
1996 70,000
(2) Section 17 Account

N N
1989 loss 35,000 1987 profit 15,000
Bal c/d 100,000 1988 profit 25,000
1990 profit 50,000
1991 profit 45,000
174
135,000 135,000
Bal b/d 100,000
(3) Computation of Capital Allowance N
Year
1992 Cost – production day 60,000
Additions -
February 1988 10,000
June 1990 10,000
January 1991 30,000
110,000
Initial Allowance 20% 22,000

88,000
Annual Allowance 10% 8,800
W.D.V. 79,200
1993 Addition - may 1993 20,000

99,200
Initial Allowance
20% of N20,000 = N4,000
Annual Allowance:
Old Asset 8,800
New 10% (20,000-4,000) 1,600 14,400
W.D.V. 84,800
N
Capital Allowances
1992 30,800
1993 14,400
8.5.4 Profit from Non-Pioneer Product during the Pioneer Period

Where a pioneer company trades in a non-pioneer product during the pioneer
period such a profit of derived there from shall be fully subjected to tax under the
relevant tax laws. This is because; pioneer status and tax exemptions are only granted on
the pioneer products.
Illustration:
Adamu limited was granted pioneer status to manufacture pulp for the paper
industry with a production of 1 June 1993. The result of the business during the pioneer
period was as shown below:
175
1st June 1993 to 31st December, 1993 loss N340, 000
st st
1 January 1994 to 31 December, 1994 loss N150, 000
1st January 1995 to 31st December, 1995 profit N250, 000
st st
1 January 1996 to 31 may, 1996 profit N200, 000
During the pioneer period, the company was also involved in the importation of
hard paper, which was sold to the market. The result of the paper business shows the
following
1st June 1993 to 31st December, 1993 profit N210, 000

you are required to determine the assessable profit for the relevant tax years.
Solution:
Adamu limited
Basis period for assessable profit
Tax year basis period assessable profit
1993 1/6/93 - 31/12/93 N210, 000
1994 1/6/93 - 31/5/94 N335, 000*
1995 1/1/94 - 31/12/94 N300, 000
* N210, 000 + (5 * 3000, 000)/12 = N335, 000

Note: that the period 1 June 1993 to 31 may 1996 represent the pioneer period.
During the pioneer periods, no tax is payable. The net balance of the four accounts
amounting to N40, 000 is the loss that is deemed to be incurred on the first day of the
new business.
Meanwhile, the importation of paper for sale is not a pioneer business. The
pioneer status was given on account of the manufacture of pulp for the paper industry.
Consequently, the profit arising from the sale of the paper is itself chargeable to tax under
the provision of the Company Income Tax Act.
The commencement rule is applied in the determination of the chargeable profit
because the importation business commenced as soon as the pioneer status was granted.
8.6 Pioneer Status by Location
Pioneer status by location is granted to companies located in the rural area whose
location is not less than 20 Km from normal facilities. Such pioneer status is given by
way of a tax credit i.e. investment tax relief.
No facility at all 100 percent of tax payable
No electricity 50 percent of tax payable
176
No water 30 percent of tax payable
No tarred road 15 percent of tax payable
No telephone 5 percent of tax payable
The relief is granted for a maximum period of 3 years and it is not available for
companies already granted pioneer status by product.
8.7 Additional Information

The following should be noted
1. No capital allowance shall be claimed during the pioneer period
2. Qualifying capital expenditure incurred prior to or during the pioneer
period shall be brought forward to the new trade or business or shall be
deemed to have been acquired on the first day of the new business.
3. All losses incurred during the pioneer period must be certified by the
relevant tax authority
4. Any profit balance at the end of the pioneer period cannot be disbursed
within 6 years unless with the permission of the minister
5. Any loss balance at the end of the pioneer period shall be used to
determine the total profit in the new trade since such a loss is deemed
to have been incurred on the first day of the new business.
6. Dividend can be paid out of a credit balance during the pioneer period
7. Such dividend paid shall not be chargeable to tax in the hands of the
first recipient
8. Loans from the accounts cannot be granted without the consent of the
minister
9. Remuneration to director’s interest services charged by any
shareholder can only be deducted with permission of the Minster.
EXERCISE
1. Jalingo Nigeria Ltd was granted a pioneer certificate with production day given as
1st July 1991. The following information was extracted from the company’s records.
[
N
Accumulated profit as at 30th June 1994 82,000
Capital expenditure incurred up to and including year
Ended 30th June 1994 as Certified by the Federal
Board of Inland Revenue:
Industrial buildings 62,000
Non-industrial buildings 34,000
Motor vehicles 80,000
Plantation 183,000
The trading result for the year ended 30th June 1995 is as follows:
Net profit was N192, 000 after charging depreciation N31, 000 and with holding
tax on rent included in expense was N20, 500. Extension of the initial pioneer period was
not sought nor granted.
177
You are required to compute the tax liability of the company for the relevant years of
assessment.
2. Madingo pioneer Ltd, an indigenous controlled company commenced

production on 1st January 1987 having been granted a pioneer certificate earlier on. It’s
adjusted profits (losses) are as follows:
N

Period ended 31st March, 1996 70,000
Its business cased with effect from 31st March 1996. During the above period it
incurred qualifying capital expenditure were as follows:
On the production day 80,000

In February 1988 20,000
In June 1990 10,000
In January 1991 20,000
In May 1993 30,000
Note that:
(a) The company enjoyed the maximum relief period possible under the
provisions of the appropriate Act;
(b) It availed itself of its right within the commencement provisions of the
appropriate Act;
(c) That during the whole period it did not declare dividend, and
(d) The rates of Capital allowances applicable to all the qualifying

expenditure for all period are:
(i) Initial 20%
(ii) Annual 10%
You are required to compute

(i) The assessable profit for each of the operating periods listed above.
178
(ii) The balance on the company’s section 17 Account.
(iii) and the capital allowances for each of the relevant years of
assessment to 1993.
3. Kawo limited was granted pioneer status to manufacture pulp for the
paper industry with a production of 1 June 1993. The result of the business during the
pioneer period was as shown below:
1st June 1993 to 31st December, 1993 loss N250, 000

1st January 1994 to 31st December, 1994 loss N310, 000
st st
1 January 1996 to 31 may, 1996 profit N100, 000
During the pioneer period, the company was also involved in the importation of
hard paper, which was sold to the market. The result of the paper business shows the
following
1st June 1993 to 31st December, 1993 profit N230, 000

You are required to determine the assessable profit for the relevant tax years.
179
CHAPTER NINE
Education Tax
9.1 Introduction
The education tax decree 1993 introduced a new form of income tax to be assessed on the
assessable profits of companies effective 1st January 1993
The tax imposed on companies registered in Nigeria. The decree also established an
education fund into which the tax collected is to be paid and a board of trustees to
manage and administer the fund. The fund is to be disbursed to federal state and local
government educational institutions including secondary and primary schools, for the
restoration rehabilitation and consolidation of education in Nigeria.
The education tax rate is 2% of the assessable profit of a company registered in Nigeria.
The assessable profit of a company is to be ascertained under income tax or petroleum
profit tax principle as the case may be. The tax is an allowable charge against petroleum
profit tax computation.
The federal board of Inland Revenue is the assessing and collecting authority and is to
collect the tax along with companies’ income tax and petroleum profit tax.
The education tax is due within 60 days after the board has served notice of the
assessment on a company
9.2 The Board of Trustees

The federal board of Inland Revenue is required to pay the tax collected into the
education fund and submit a return to the board of trustees showing
1. The name of the company making the payment

2. The amount collected
3. The assessable profit of the company for the accounting period
4. Such other information as the board of trustees may require
The board of trustees is to comprise the chairman and such other number of persons with
considerable experience in business and financial management from the public and
private sector of the economy to be appointed by the president of the federal republic of
Nigeria on the recommendation of the minister of education.
9.3 Sharing Ratio

The disbursement of the total amount collected in a year is shared between the various
levels of education in the following ratios:
1. Higher education 50%
2. Primary education 40%
3. Secondary education 10%
180
The higher education portion is to be distributed between universities, polytechnics and
colleges of education in the ratio of 2:1:1.
The projects for which the fund is to be used are:

1. work centre and prototype development
2. staff development and conference attendance
3. library system at the different levels of education
4. research equipment procurement and maintenance
5. higher education book development fund
6. redressing any imbalance in enrolment mix as between the higher educational
institution
7. execution of the 9 year compulsory programme and any other matters
ancillary to the above
A person who contravenes or fails to comply with the provision of the education tax
decree is guilty of an offence under the decree. If the tax due is not paid within the time
specified earlier, the board of inland revenue is obliged to serve on the company a
demand note of the tax unpaid plus 5 percent of the tax and if this sum is not paid within
2 months of the demand the company is guilty of an offence. The federal Inland Revenue
may waive in part or in whole, the 5 percent added in default.
Where an offence under the decree is committed by a body corporate or firm or other
association of individuals:
1. Every director manager, secretary or other similar officer of the body
corporate
2. Every partner or officer of the firm
3. Every person concerned in the management of the affairs of the association or
4. Every person who was purporting to act in any of the capacity as aforesaid.
If severally guilty of that offence and liable to be proceeded against and punished for the
offence in like manner as if he had himself committed the offence unless he proves that
the act or omission constituting the offence took place without his knowledge consent or
convenience.
A person who is guilty of offence shall on conviction be liable for a first offence, to a fine
of N10,000 or imprisonment for a term of three years and for a second and subsequent
offence to a fine of N20,000 or imprisonment for a term of 5 years or both such fine and
imprisonment. It should also be noted that the imposition of a penalty does not relieve a
company from liability to pay the tax due.
181
CHAPTER TEN
PERSONAL INCOME TAX
The law regulating taxation of individuals is contained in the income tax management act
1961 as amended by yearly finance acts or decree. The persons subject to personal
income tax law mean any individual or body of individuals including family and any
corporation sole, trustee or executor, having any income which is chargeable with tax
under the provisions of income tax management act.
Personal income tax is payable to the state in which the individual has his principal
residence. Each state has a board of internal revenue for the purpose of personal tax
administration and collection. Determination of where a person is resident is very
important in accounting for income tax to the relevant tax authority residence means a
place available for domestic use of the individual in Nigeria on a relevant day and does
not include any hotel, rest-house or other place at which he or she is temporarily lodging,
unless no more permanent place is available for his or her use on that day.
The relevant day refers to 1st January of any year. Thus where an individual is resident in
Lagos state on 1st January of a year, he will be deemed to be deemed to be resident in
Lagos state throughout that year and his income tax for that year is payable to Lagos state
even though his income may be derived from other states of the federation and he is
resident in another state later in that year.
The question of principal place of resident arises where an individual has two or more
places of residence on the 1st January of the year. In such a case, his tax is due to the state
in which he has his principal place of residence. The principal place is determined as
follows:
(a) an individual with no source of earned income other than pension in Nigeria,
the principal place of residence is that place in which he usually resides.
(b) An individual who has a source of earned income other than pension in
Nigeria, the principal place of residence is the place nearest to his usual place
of work
(c) An individual who has source or sources of incomes in Nigeria, the principal
place of residence is that place in which he usually resides.
In the case of foreign employment i.e. the duties of which are carried out outside Nigeria,
the place of residence of the employee is whichever the principal office of his employer
is situated on 1st January. The residence of an individual who takes up foreign
employment during the year is where the principal office of his employer is situated when
the employment commenced.
A foreigner who takes up employment in Nigeria during the year of assessment is

deemed to be resident in the state in which he has a place of residence on that day or on
the day on which he enters upon the full duties of that employment in Nigeria.
182
There are incomes that once the individual derived income from such sources, then
personal income tax is payable, they include:
1. employment
2. trade and business
3. profession or vocation
4. investment
5. pensions and annuities
6. royalties and rents
7. foreign incomes brought into Nigeria
8. agricultural profit
The incomes from employment include:

(a) salaries and wages
(b) fees and allowances
(c) gratuities paid to an employee who has served less than 10years services,
(d) gratuities in excess N50,000, with effect from 1996 all gratuities are expected
from tax
(e) bonus, commissioner and premiums
(f) benefits in kind
(g) incomes from employment whose duties are performed outside Nigeria and is
exempted from tax in the country where the duties are performed
Remunerations from duties wholly or mainly exercised in Nigeria are taxable even if the
money is paid abroad.
10.1 Non-taxable incomes and benefits from employment

There are incomes from employment that are not taxable; they include the following:
1. reimbursement to the employee of expenses incurred by him in the performance
of his duties
2. medical or dental expenses
3. cost of passage to or from Nigeria
4. Cost of maintenance or education of a child if such sums shall be deductible from
the personal relief to be granted to the tax payer.
5. utility allowance of N10,000 p.a. or less
6. meal subsidy N5,000 p.a. or less
7. with effect from 1996 the following are not taxable;
(a) Foreign remunerations of teachers, nurses, doctors and other
professionals provided such remuneration are deposited into a
domiciliary account with approved by the government.
(b) Foreign dividends, interest, royalties and fees for Nigerian residents,
provided repatriated into Nigeria and deposited into a domiciliary
account with approved bank in Nigeria.
(c) Foreign income of authors, sportsmen and women, playwrights,
musicians e.t.c is 10 percent exempt provided repatriated and
deposited into a domiciliary account with a bank approved for that
purpose in Nigeria.
183
8. remunerations from employment which;
(a) duties are performed on behalf of a non-resident employer
(b) the employee is not in Nigeria for 183 days or more in a year of
assessment
(c) the remuneration is liable to tax in any country
(d) the duties are performed outside Nigeria and the employer is in
Nigeria.
9. compensation for loss of employment
10. Rent allowance or housing allowance of not exceeding 28% of annual basic salary
subject to maximum of N100, 000 p.a. with effect from 1st January 2001 N15, 000
p.a.
11. Car allowance or transport allowance of N15, 000 p.a. or under. With effect from
1/1/2001 N20,000 pa. or under.
12. wages paid to gardeners and watchmen
13. cost of repairs and maintenance of premises and contents
14. Leave traveling allowance (of 10% annual basic salary w.e.f. 1/1/99).
15. entertainment allowance (of N6,000 p.a. or under w.e.f. 1/1/99)
16. touring allowance
17. uniforms overalls or protective clothing
18. Reasonable removal expenses, including a temporary subsistence allowance
where a change in place of employment necessitates a change in place of
residence.
19. gratuities payable to a public officer, and private sector N10,000 w.e.f. 1996
gratuity is not taxable
20. pension granted to any under the windows and orphans pension ordinance
21. wound and disability pensions granted to members of the armed forces
22. sums received by way of death gratuities or as considered compensation for death
or injuries
23. any sum withdrawn or received by an employee from a pension provident or other
retirement benefit fund, society or scheme approved by the joint tax board.
10.2 Benefit In Kind

The taxable benefits in kind should be noted:
1. provision of free accommodation:
(a) the amount taxable is the rateable value of the premises occupied. In the
absence of rateable value the authorities will determine an equivalent value.
This value will be used only where the amount of rent incurred by the
employer for the employees residential accommodation is deemed to be
income received by the employee, where the employee is charged some rent
by the employer for the official accommodation provided and the rent so
charged is less than the annual value of the premises or the rent paid by the
employer, the employee is deemed to have received emolument equal to the
differences between the rateable value of the premises or the rent paid by the
employer as the case may be, and the rent paid by the employee.
184
(b) Annual rental of any hired asset in the flat or building
(c) The cost of rapiers and maintenance to premises and contents is not
considered to be a benefit
(d) Wages of garners and watchmen are not considered benefits as their prime
function is to service and protect the company’s property
(e) Wages of stewards paid by the employer is taxable benefit. However, it might
be possible for a good case to be made that one steward is emplyed at the
company’s expense because of the amount of entertainment done and or
visitors accommodation
(f) Electricity paid by the employer or electricity allowance if given. A
reasonable average figure is to be used.
(g) Contents in the building or flat that is, furniture and fittings is taxable at 5% of
the cost or of the estimated market value at the date of occupation.
2. Car allowance or transport allowance in excess of N20, 000 p.a. in taxable.
3. If the employee has free use of a company’s vehicle and does not pay for
private mileages, benefits can be computed as follows: 5 percent of the cost of
vehicle, plus 5 percent of estimated annual running cost including drivers’
wages if the driver is specifically allocated to and works sorely for the
employee.
4. Excess rent allowance over 28 percent of annual basic not exceeding N100,
000 p.a. with effect from 1st January 2001. Excess rent over N150, 000 p.a.
5. Meal subsidy or meal allowance en excess of N5, 000 p.a. effective date 1st
January, 1999.
6. Utility allowance in excess of N10, 000 p.a.
7. Entertainment allowance in excess of N6, 000 p.a.
8. leave grant in excess of 10% of annual basic salary
Incomes may be classified under two groups earned incomes are incomes derived from a
trade, business, profession, vocation or employment carried on or exercised by the
individual and a pension derived from previous employment.
Unearned incomes are derived from other sources not included in the earned sources.
They are mainly incomes from investment e.g. dividends, interests and rents. Incomes
from royalties are also unearned incomes. The profit of a sleeping partner is unearned
income because he does not take active part in producing the profit.
10.3 Unearned Incomes

Dividend, interest, royalties and rents are subject to withholding tax at source as. Such
incomes must be brought into the assessment of the individual beneficiaries at gross, the
tax suffered at source is available for set-off against the income tax liability of the tax
payer. However with effect from January 1996, withholding tax becomes a final tax,
hence income taxed at source will be excluded from general tax computation.
Incomes, generally taxable in Nigeria are those derived from, accrued in or brought into
Nigeria.
185
Interest is deemed to be derived from Nigeria where.
1. there is a liability to payment in Nigeria of the interest, regardless of what
form the payment takes and whatever the payment is;
2. the interest accrues in Nigeria to foreign company or person regardless of
whichever way the interest may have accrued.
10.4 Income from Trade

All the rules for computing assessable profits for a trade or business carried on by
companies apply to trade, business, profession or vocation carried out by individuals
either as sole proprietors or as partners in a partnership. The rules referred to are:
1. allowable and disallowable expenses
2. commencement, cessation rule and the taxpayer’s option
3. relief for business losses
4. change of accounting date
5. capital allowance computations and rates
6. sale or transfer of business
The following do not apply:

1. standard income tax rate
The following important notes should be noted:

1. Where expenses relate to both private and business apportionment may be
agreed to by the state international revenue authorities. In such a case the
portion relating to private use cannot be used to reduce the taxpayer’s incomes
from other sources.
2. Deduction of tax at source can only be made as it relate to the business an
individual who is not in business cannot, for example, deduct withholding tax
when paying rent to his landlord. But if the property is rented by the business,
it is obliged to deduct tax and remit accordingly.
3. An individual can claim to set off loss against other incomes of the first year.
This is shown s current year relief for losses.
Basis period
The basis periods for personal tax rate as follows:
Source of income basis period
Employment actual income received in the year of
Assessment.
Trade, business or professions preceding year basis subject to

commencement and cessation rule
Unearned incomes incomes received in the proceeding year
Trust and estate preceding year incomes
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10.5 Total income
The computation of total incomes of an individual is similar to that of a company.
Income from employment X

Unearned incomes X
Incomes from trade or business X
Profession or vacation X
Other incomes X
Balancing charges X
Less capital allowance X

As restricted X X
Total income X
There is one provision relating to losses not found in the company tax law and it is that
where land and building are let by an individual for the purpose or producing income and
there is a loss. That is, the allowable expense exceed the income from the property, the
loss may be treated as a loss from trade or business and therefore relieved against that
source of income.
10.6 Claim for loss relief

A claim for relief of business loss is required to be formally made within 12 months of
the year when the loss was incurred. In practice, a submission of tax computation
claiming the relief is enough
10.7 Personal Relief

An individual is entitles to certain relief in arriving at his taxable or chargeable income
for tax purposes provided he has made a claim for the relief by filling the appropriate
sections of the income tax returns form.
1. Personal allowance: the allowance is given on earned income only that
is, profit from trade, business or profession and incomes from
employment. The relief is the sum of N5, 000 plus 20% of earned
income, and the additional for disabled person is higher of N3, 000 or
20% of earned income.
2. Child allowance: an allowance of N2, 500 is granted for each child
maintained by the tax payer not necessarily his children provided that
the child is unmarried and is under 16 years of age. Where, however,
the child is over 16 years of age the relief will be granted provided he
or she is attending full time instruction in a recognized educational
establishment or under articles or indentures in a trade or profession.
The allowance is for a maximum of 4 children.
It should be noted that:

Where two or more persons maintain the child, the allowance is shared among them in
their ratio of maintenance cost.
187
The allowance is not granted for a female child who is married
A widow who remarries is entitled to the allowance for children born for her late husband
If the husband claims the allowance the wife cannot; usually the allowance is not granted
to a married woman unless there is evidence that she is the one maintaining the child or
where she is a widow
The allowance ceases on the child attaining the age of 16 or on graduation from an
educational or apprenticeship establishment
Child’s income below N2, 500 is used to reduce the allowance.
3. Life assurance: the premium paid on a life assurance policy taken on

the life of the taxpayer or his spouse who secures a capital sum at
death is available for relief.
4. Defendant relative allowance: a maximum amount of N2, 000 is
granted is relief for a close relative maintained by the tax payer.
Effective 1st January, 1998. the allowance is N2,000 per defendant and
maximum defendant is two, provided that:
4.1 the close relative is incapacitated by old age or infirmity from maintaining
himself,
4.2 the income of such a relative is not over N2,000 if the actual amount spent
on the close relative is less than N2,000, then that amount will be the
relief. The allowance may be claimed for 2 relatives provided the total
relief is not more than N4, 000 from 1st January 1998 for both. If two or
more persons maintain the relative then the allowance of N2, 000 will be
shared between them in proportion to their maintenance cost.
5. Pensions contribution relief: the contribution of the tax payer to

pension scheme or retirement benefit scheme approved by the joint tax
board is allowable as a relief provided that the total contribution does
not exceed 255 of the total salary of the employee.
6. contribution as paid on national trust fund is also available as a relief
7. Contribution to widows and orphans pension ordinance is also
available.
8. professional fees: fees payable to approved professional bodies of
which the taxpayer is a member are relievable
9. Pension insurance premium relief for self employed. Self employed
people are entitled to additional relief for pension insurance subject to
a maximum of 10% total income
Personal reliefs are given for the tax year and not on per annum basis. In other words the
relief cannot be apportioned on a time basis. Further the reliefs are given based on
circumstances existing as at 31st December last. The reliefs are given as a deduction from
total income to arrive at chargeable or taxable income.
The chargeable income of an individual was taxable at the following rates, from 1 st
January, 2001.
188
Income tax rate
N1 - 30,000 5%
30,001 - 60,000 10%
60,001 - 110,000 15%
110,001 - 160,000 20%
Over N160, 000 25%
The rates from 1998 to 2000 were

First N20, 000 5%
Next N20, 000 10%
Next N40, 000 15%
Next N40, 000 20%
Over N120, 000 25%
With effect from 1st January 1998, anyone who earns N30, 000 p.a. or below is exempted
from income tax.
10.8 Minimum tax

Where the total reliefs granted are more than the total income of the taxpayer, the
taxpayer is chargeable to minimum tax usually called guaranteed minimum tax of ½ % of
the total income.
Example
Magama commenced trading in Abuja as a wholesaler, supplier of cosmetics. His
accounts are made up to 31st march each year and the adjusted profits for the first two
accounting periods were:
6 months to 31st march 1999 4,200

He purchased capital assets as follows:

October 1998 motor vehicle 1,380
June 1999 machine 640
Agreed rates of allowances were:

Initial 20% and Annual 10%
His profit and loss account for the year to 31st march, 2001 showed;
Salaries 7,320 gross profit 20,753
Rent 1,780 bank interest 30
Electricity 476
Bad debts 623
Trade expenses 1,549
Depreciation 225
Loan interest 700
189
Net profit 8,110
20,783 20,783
Bad and doubtful debt is made up of:

Bad debt written off as irrecoverable 438
Reserve of 2% on debtors (March 2001) 720
Less reserve at March 2000 535 185
623
Trade expenses made up of:

Stationery 569
Redecoration of offices 272
Accounting fees 210
Subscription:
Ama onion 280
Trade association 50
Miscellaneous (allowable) 168
1,549
Magama is married with 2 children, the first aged 17 and the last aged 13, the first child’s
has his school fees paid as N500. for the year. He also has life assurance policy with a
capital sum assured of N20,000 on which he pays an annual premium of N1, 500. he
maintains his widowed mother with N300 per month.
You are required:

1. to complete the original and final income tax assessments for all years
affected by the results set out above and
2. to calculate the income tax chargeable for the year 2002.
Solution
MAGAMA
COMPUTATION OF ADJUSTED PROFIT
Net profit per account 8,110

Less Bank interest 30
8,080
Add disallowable expenses
Bad debts provision 185
Depreciation 225
Subscriptions 330
Adjusted profit from trade 8, 820
Basis period
1998 actual 1st October 1998 - 31st December 1998 = N2, 100
190
1999 first 12 months 1/10/98 - 30/9/99
N4,200 + 6/12 X N13,600 = N11,000
2000 preceding year (31/3/99)
6 month but we repeat the 2nd year tax = N11, 000
Tax Payers’ Option

1999 Actual 1/1/99 - 31/12/99
3/6 X N4, 200 + 9/12 X 13,600 = N12, 300
2000 actual 1/1/2000 - 31/12/2000
3/12 X 13,600 + 9/12 X 8,820 = N10, 015
The tax payer will be paying higher tax if he exercises his right of election. It is therefore
not advisable.

Motor vehicle machine total
Initial allowance 20% 20%
Annual allowance 10% 10%
Cost October 1998 1380

Initial allowance 276
1,104
Annual allowance(3/12) 28
1, 076
1999 cost june 1999 640

Initial allowance 128
512
Annual allowance 110 51
884 461
2000 annual allowance 110 51
WDV 774 410
2001 Annual allowance 110 51

WDV 664 359
2002 Annual allowance 110 51

WDV 554 308
191
MAGAMA INCOME TAX ASSESSMENT
Earned income
Profit trade 3/6 X 4,600 2,100
Less capital allowance 304 1,796
Unearned income nil

Total income 1,796
Less reliefs
Personal (5,000 + 20% of 1,796) 5,359
Children allowance N2,500 x 2 5,000
Life assurance 1,500
Dependent relative 300 12,159
Excess of relief over income 9, 067
Computation of income tax liability

1999 income tax assessment
Earned income
Unearned income nil
Total income 10,711
Less relief
Personal (5,000 + 20% of 10,711) 7,142
Chargeable (3, 231)
Therefore income tax liability will be the minimum tax payable

1% of N10,711 107.11
2000 Income Tax Assessment

Earned income
Unearned income nil
Total income 13,439
Less relief
Personal (5,000 + 20% of 13,439) 7,688
Chargeable (1, 589)
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1% of N13, 349 134.39

Earned income
Unearned income nil
Total income 13,439
Less relief
Personal (5,000 + 20% of 13,439) 7,688
Children allowance N2, 500 x 2 5,000
Chargeable (1, 049)

1% of N13, 439 134.39

Earned income
Unearned income 30
Total income 8,689
Less ban interest 30
8,659
Less relief
Personal (5,000 + 20% of 8,659) 6,732
Children allowance N2, 500 x 2 5,000
Chargeable (4, 873)

1% of N13, 439 134.39
And the withheld tax on loan interest 105.00
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Exercise
1. Madugu commenced trading in Abuja as a wholesaler, supplier of cosmetics. His
accounts are made up to 31st march each year and the adjusted profits for the first two
accounting periods were:

He purchased capital assets as follows:

October 1998 Motor Vehicle 1,500
June 1999 Machine 6,000
Agreed rates of allowances were:

Initial 20% and Annual 10%
His profit and loss account for the year to 31st march, 2001 showed;
Salaries 5,420 gross profit 25,753
Rent 2,560 bank interest 300
Electricity 1,000
Bad debts 600
Trade expenses 1,500
Depreciation 250
Loan interest 500
Net profit 8,110
20,783 20,783
Bad and doubtful debt is made up of:

Bad debt written off as irrecoverable 438
Reserve of 2% on debtors (March 2001) 720
Less reserve at March 2000 535 185
623
Trade expenses made up of:

Stationery 569
Redecoration of offices 272
Accounting fees 210
Subscription:
Ama onion 280
Trade association 50
Miscellaneous (allowable) 168
1,549
Magama is married with 2 children, the first aged 17 and the last aged 13, the first child’s
has his school fees paid as N500 for the year. He also has life assurance policy with a
194
capital sum assured of N20, 000 on which he pays an annual premium of N1, 500. he
maintains his widowed mother with N300 per month.
You are required:

3. To complete the original and final income tax assessments for all years
affected by the results set out above and
4. To calculate the income tax chargeable for the year 2002.
195
CHAPTER ELEVEN
THE TAXATION OF NON RESIDENTS IN NIGERIA
11.0 Introduction
The concept of residency chiefly determines the extent to which the income of a taxpayer
would be subjected to tax. It also determines the scope of deductions that may be allowed
for the purpose of computing tax liability. In Nigeria, the premises on which a resident
company or individual is exposed to tax differ from that of a non-resident. Whereas a
resident is assessable to tax on the global income irrespective of whether or not he has
branches outside Nigeria, a non-residents principally charged to tax on the income
derived or received in Nigeria. The resident tax payer is liable to tax on the income or
profits “accruing in, derived from, brought into or received in Nigeria.
11.1 Definition of Residency

11.1.1 Resident Individual
An individual is said to be resident in a particular year of assessment if he:
1. Is domicile in Nigeria
2. Sojourns in Nigeria for a period or periods in all amounting to 183 days or
more in a 12 year period
3. Serves as a diplomat or diplomatic agent of Nigeria in a country other than
Nigeria.
In respect of a resident individual who is employed liability to tax is based on the place of
residence while income or profits from any trade, business, profession or vacations
chargeable to tax irrespective of the period such was carried out in Nigeria.
11.1.2 Non Resident Individual

A non resident individual is one who is not domiciled in Nigeria or who stays in Nigeria
for less than 183 days or more in a twelve months period but derives income from
Nigeria.
A non- resident becomes liable to tax from the day he commences to carry on trade or
business in Nigeria. He only becomes liable to tax on employment income when he
becomes resident.
In respect of an individual tax liability will arise in the state where he is normally
resident. Where he can be deemed to be resident in more than one state, then he is
subjected to tax in the state where he has his principal place of residence. For individual
the principal place of residence means
(a) his usual residence, where pension is only source of earned income
(b) the place nearest to his place of work, where the source of earned income is
other than pension
(c) His usual residence, where he has sources of unearned income.
196
Where there is a dispute between tax authorities as to the determination of the principal
place of residence, the joint tax board determines the tax jurisdiction. The usual
determining factor where there is a dual residency problem in practice is the source of
earned income.
11.2.1 Resident Company

A company is said to be resident if it is incorporated in Nigeria. The global income is
chargeable to tax.
11.2.2 Non-Resident Company

This is a company that is not registered or incorporated in Nigeria but derives income
from Nigeria. The fact that a company has been exempted from incorporation does not
mean exemption from Nigeria’s income tax payment. Whether or not a company is
resident, it shall be subjected to tax on the income derived from Nigeria.
In respect of companies, there may be an international dual residency problem arising

from the difference in the definition of residency. Under the Nigerian tax provisions, a
company is deemed to be resident in Nigeria if it is incorporated in Nigeria. This means
that residence is defined based on the place of incorporation. On the hand, there are
certain countries of the world where residence is defined based on the place of
management or palace of residence of the directors. The problem of dual residency is
usually resolved through the application of the double taxation provisions.
Under the provisions of the companies income tax act, a branch of a non resident
company is treated as a full taxpayer in Nigeria and the income or profit derived by him
in Nigeria will be charged to tax.
The exceptions of this rule or the conditions under which a branch will not be subjected
to tax are:
(a) if the branch is used sorely for storage or display of goods or merchandise
(b) if the branch is used sorely for the collection of information
A subsidiary should be registered in Nigeria so that it can operate as a separate legal

entity of the parent company. Under the current dispensation, the equity holding of a
foreign company is its Nigerian subsidiary may be 100%. The significance of this is that
the subsidiary will be fully tax in Nigeria based on the income derived from Nigeria.
11.3 Treatment of expenses

Expenses incurred in Nigeria to generate income will be allowed for tax purpose if they
are wholly, reasonably, exclusively and necessarily incurred for the purpose of the
business, whether resident or non-resident. For the non-resident company rent, interest,
royalties, management fees, head office expenses and other similar expenses will be
197
treated as allowable if they can be proved to have been wholly, reasonably, exclusively
and necessarily incurred for the business in Nigeria.
Fixed base of the business
The fixed base of a non-resident company is the place from where it carries on its
business or trade in Nigeria. The fixed base must be easily identifiable and must posses
some degree of performance. A fixed base will include:
1. facilities such as a factory, an office, a branch, a mine or an oil well;
2. activities such as building construction, assembly or installation, and
3. furnishing of services in connection with the activities above
It is important to note that the following cannot be considered as a fixed base:

1. facilities used sorely for storage or display of goods or merchandise
2. facilities used sorely for the collection of information
For an individual the profit of an individual carrying on a trade or business in Nigeria

through a fixed base shall be the profit attributable to that fixed base.
Specifically,
(a) if the business is through a dependent agent, the profit attributable to that
agent
(b) If the business involves turnkey projects the profit from the contract.
(c) If the business as through related parties, the profit determined on arms length
principle by the relevant authority.
11.4 Agency operations

Where a non-resident does not have a fixed base in Nigeria but habitually operates a trade
or business through a person in Nigeria.
1. authorized to conclude contracts on its behalf or on behalf of some other
companies controlled by it or which has controlling interest in it; or
2. Habitually maintains a stock of goods or merchandise in Nigeria from which
deliveries are regularly made by a person on behalf of the company.
Then an agency arrangement is deemed to have arisen. The profit deemed to have been
derived from Nigeria is the profit attributable to the business or trade or activities carried
on through the agent.
There may be 2 types of agents

1. Independent agent: an agent is regarded as possessing independent status
when it deals on behalf of a non-resident company in its ordinary course of
business. The implication of this arrangement is that the agent carries on its
own trade along with his function as an agent of the non resident company.
Therefore, if the non-resident company stops trading in Nigeria, the
independent agent is not materially affected as it will continue in its own
business.
2. Dependent agent: this occurs where the agent devotes its activities wholly or
almost wholly on behalf of the non-resident company. Where a dependent
agent makes an isolated sale of goods on behalf of the principal, such a profit
198
may not necessarily be subjected to tax in Nigeria. Where however the sale of
goods on behalf of the principal is on a regular basis, then the agent is deemed
to trade habitually in the goods and the profit derived there from is chargeable
to tax in Nigeria.
11.5 Turnkey Projects
This is a trade or business or activity which involves a single contract for the surveys,
deliveries, installation or construction. For Nigerian income tax purpose, the profit from
such s turnkey project is considered as derived from Nigeria. Consequently, it is fully
chargeable to tax in Nigeria because no allowance would be given for the profit to be
divided into Nigerian and offshore.
11.6 Sales Outlet
A sales outlet would be taken to be a fixed base. Where a facility is exempted as a fixed
base but it is to be used for some other purposes other than those originally intended the
facility will qualify as a sales outlet and treated as a fixed base for the non-resident
company. Income derived or profit arising from a sales outlet is taxable.
Project awarded to a non-resident company but subcontracted to a branch or subsidiary.

The project will be fully subjected to tax in Nigeria but the sub-contract to be treated as
allowable expenses will be limited to the actual cost to the main contractor.
Projects awarded to a Nigerian company but sub-contracted to non-resident company.

The profit from such a project would be subjected to tax in Nigeria while the expenses of
the sub-contract to be allowed shall be the cost to the main contractor.
Where the both the contracts awarded are to the same company, the profit on a contract
of supply will not be subject to Nigerian tax provided the prices reflect open market
situation. If the company is resident abroad, the liability to tax on the construction,
assembly or installation project will depend on the existence of a permanent
establishment in Nigeria.
i. for construction or assembly, the existence of a site for more than two months
constitutes a permanent establishment
ii. For installation a permanent establishment is constituted if the charge for the
installation exceeds 10 % of the sales price.
11.7 Related Party Transaction
Any transaction that is not at arm’s length is a related party transaction. The provision of
the Nigerian tax law is that the relevant tax authority may make appropriate adjustments
to the profit of the taxpayer.
The following circumstances may constitute a transaction that is not at arm’s length.
199
(a) where there is a controlling interest in the Nigerian company
(b) The presence of a control of a Nigerian company may be exercised directly or
indirectly by parent company or any other company associated to it.
(c) The implication of conditions in the financial and commercial relationship by
the controlling interest
(d) The condition imposed by the controlling interest must be different from what
will be obtained between independent parties or in any open market situation.
(e) The relationship must have led to the transfer of goods and services at prices
not at arm’s length with the result that the profit declared for Nigerian income
tax purposes is understated.
11.8 Turnover Basis of Assessment

Under this basis, the turnover is used to be applied under any of the following conditions
1. When the trade or business has produced no assessable profit
2. When the assessable profits produced appear less than might be expected to
arise from such a trade or business or
3. When the true amount of the assessable profits of the company cannot be
readily ascertained.
This applies to both residents and non-residents. For a non-resident company or
individual with a fixed base in Nigeria, the turnover that can be assessed and charged is
only that portion that is attributable to the fixed base.
The modalities for determining fair and reasonable percentage of the turnover of a non-
resident company, the policy for determining a fair and reasonable percentage is:
1. Where the activity carried on through the fixed base involves construction,
assembly or installation, or in the case of turnkey projects, the percentage of
the turnover to be adopted to determine the assessable profit is 10%. The
capital allowances are deemed to have been granted and at the current rate of
30% this gives an effective tax rate of 3% of turnover
2. Where the activity carried on through the dependent agent involves
consultancy, management, technical or agency services, the 10% withholding
tax is final tax.
11.9 Double Taxation Relief
If any Nigerian company which has paid or is liable to pay common wealth income tax in
a year of assessment is again due to pay or has paid or is liable to pay tax
under the companies income tax act or an individual under the personal
income tax decree for that of its profits, a relief from the tax payable shall be
due.
Double taxation relief is mostly available for tax payers who operate in a country with
whom Nigeria has a double taxation agreement. The relief is however also available
where there is no agreement.
200
Where There is an Agreement
Where there is a double taxation agreement between Nigeria and the home country of the
non-resident tax payer, the amount of relief available shall be determined by the
provisions of the agreement. Specifically, the following key information should be taken
under such arrangements:
1. Any tax payable in a country which under the arrangement is to be allowed as

a credit against tax payable in respect of the income being subjected to tax in
Nigeria is defined as a foreign tax
2. The credit is not allowed against tax for any year of assessment when the
person entitled to it is not resident in Nigeria for that year.
3. The total amount of credit to be allowed in any one year shall not exceed the
tax payable for tat year. The implication of this practice is that no refund is
available against a foreign tax
4. Where a tax payer is not desirous of taking the relief by way of credit, such a
taxpayer may elect accordingly
5. Any claim for a credit shall be made not later than two years after the end of
the relevant year of assessment
6. Any dispute concerning the amount of credit allowance shall be the subject of
the objection and appeal procedures.
Features of a Double Taxation Relief

The following are some of the key features of a double taxation relief agreement:
1. The names of the countries involved in the agreements would be stated
together with the definition of residence and person affected.
2. The rates of tax applicable in the countries would be stated with a caveat that
the rates may be changed without notice
3. The transactions on which double taxation relief is applicable. This will
usually include business profit, fees, capital gains tax e. t. c.
4. The arrangement for the exchange of information between the two tax
authorities so as to minimize the incidences of tax evasion
5. The appeal procedures in the event of a dispute
6. The available diplomatic privileges for the tax payers
7. The date of coming into force of the agreement and the possible termination
date
8. Connected businesses including enterprises in the two countries under
common control or where one has control over the other
9. The distinction in industrial and commercial profits especially for enterprises
engaged in business partly in Nigeria and partly in other countries
10. The profits exempted from tax
11. The methods by which the effect of double taxation is eliminated.
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Where There is no Agreement
Where there is no agreement, the arte of relief shall be computed as follows:
If the common wealth rate of tax does not exceed one-half of the Nigerian rate of tax,
the rate of relief shall be the common wealth rate of tax.
CWR ≤ I/2CITAR, CWR
If the common wealth rate of tax exceeds one-half of the Nigerian rate of tax, the rate
of relief shall be the Nigerian rate.
CWR > 1/2CITAR, 1/2CITAR
Non-Nigerian Company or Non-Resident individuals
If the common wealth rate of tax does not exceed the Nigerian rate of tax, the rate of
relief shall be the common wealth rate of tax.
CWR ≤ CITAR, 1/2CWR
If the common wealth rate of tax exceeds the Nigerian rate of tax, the rate of relief
shall be the amount by which the Nigerian rate exceeds one-half of the
common wealth rate.
CWR > CITAR, CITAR - 1/2CWR
Notes:
In computing the Nigerian Rate of tax and the common rate of tax the
following relationship is used:
Nigerian Rate of Tax = tax paid/tax payable
Total profit/ taxable profit X 100
The common wealth Rate of Tax = tax paid/tax payable abroad

Total profit/ taxable profit X 100
General procedures for the computation of the tax payable of a tax payer with
foreign income would be achieved as follows:
1. Determine the global income of the tax payer by including the
income derived from abroad
2. Determine the taxable profit of such taxpayers. If it is a business,
add and deduct and allow capital allowance. If an individual, allow
personal relief to be claimed
3. Determine tax payable by applying the applicable rates of tax to
the taxable profit determine in (b) above. This represents the
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Nigerian tax.
4. Calculate the Nigerian rate of tax by dividing the tax computed by
the taxable income i.e. dividing (c) by (b)
5. Calculate the common wealth rate of tax by dividing the tax paid
on the foreign income by the gross amount of the foreign income.
6. Compare the common wealth rate of tax with either one-half of the
Nigerian rate of tax or with the Nigerian rate of tax depending on
the tax position of the taxpayer. Using the rate earlier on discussed,
determine the rate of relief.
7. Compute the amount of double taxation relief by multiplying the
rate of relief obtained in (f) above by the amount of gross foreign
income
8. The amount of relief obtained above is deducted from the tax
liability computed in (c) above to determine the final tax payable.
Example
The Income of Salami Nigeria plc, for the accounting year ended 30th September, 1990
are as given below:
Profit from trade in Nigeria 33, 200.00

Dividend (net) from Ghana 5, 250.00
The withholding tax rate suffered on the dividend is 25%.
You are required to calculate the tax due in Nigeria and the net tax liability of the
company.
Solution N Tax
Profit from Nigeria 33, 200.00
Dividend gross (5,250 X 100/75) 7, 000.00 1, 750.00
Profit from all sources 40, 200.00
Income tax due in Nigeria 9, 960.00

(33, 200.00 at 30%)
Withholding tax (N7, 000 X 5%) 350.00
10, 310.00
Less common wealth tax credit 175.00
(N7, 000 X 2.5%)
Net tax payable 10, 135.00
Example
The Income of Salami Nigeria plc, for the accounting year ended 30th September, 1990
are as given below:
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Profit from trade in Nigeria 33, 200.00
Dividend (net) from Ghana 5, 950.00
The withholding tax rate suffered on the dividend is 4%.
You are required to calculate the tax due in Nigeria and the net tax liability of the
company.
Solution N Tax
Profit from Nigeria 33, 200.00
Dividend gross (5,250 X 100/96) 6, 198.00 248.00
Profit from all sources 27, 002.00
Income tax due in Nigeria 9, 960.00

(33, 200.00 at 30%)
Withholding tax (N6, 198 X 5%) 310.00
10, 270.00
Less common wealth tax credit 248.00
(N6, 198 X 4%)
Net tax payable 10, 022.00
Illustration
Okpara Nigeria limited has investment in a foreign country with double taxation
agreement with Nigeria. For the year ended 31 September 1990. The following figures
are provided.
Profit derived from Nigeria 180,000

Dividend received from the foreign country,
(Net withholding tax thereon is N7, 500) 22,500
Foreign surtax attributed to profit paid as the dividend 1,000
Unrelieved loss brought forward 120,000
You are required to compute the company’s foreign tax credit and the income tax
payable.
Solution
Profit liable to tax
Profit derived from Nigeria 180,000
Less:
Loss brought forward 120,000 130,000
Total Profit 50,000
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Profit liable to withholding tax
Foreign dividend 31,000
Tax liability
Income tax N50, 000 x 30%= 15, 000
Withholding tax N31, 000 x 5% = 1, 550

16, 550
Less
Foreign tax credit
Actual paid on dividend N8, 500
Limited to Nigerian rate 1, 550
Net Tax Liability N15, 000
205
CHAPTER TWELVE
CAPITAL GAINS TAX
12.0 Nature of Capital Gains Tax:

Profit arising on the disposal of fixed assets and investments are subject to capital gains
tax under Capital Gains Tax Decree 1967. Under the provision of the Capital gains tax
act tax liability arise on the actual basis, when the chargeable asset is disposed. That is,
the gains arising in the year is taxed in that year, the year of assessment is the calendar
year. The rate chargeable for capital gains tax was 20 per cent until 1998. With effect
from 1st January 1998, Capital gains tax is reduced to 10%.
12.1 Computation of Capital Gains:

Capital gains will arise where the sales proceed on the disposal of the chargeable asset is
more than the cost of acquisition. The taxable gain is computed thus: -
Sales proceeds - cost of asset + allowable expanses = capital gains.
Sales proceeds X
Less allowable expenses X
Net sales proceed X
Deduct cost of acquisition X
Capital gains X
Capital gains tax 10% x X = X
Step1: Identify the sales proceed on the disposal of the chargeable asset
Step2: Deduct allowable expenses from the sales proceed to obtain the net sales
proceed
Step3: The cost of acquisition and other capital costs are then deducted from the
net sales proceed to obtain the capital gains
Step 4: Compute the capital gains tax liability by applying the capital gains tax
rate of 10% on the capital gains obtained in step 3.
Disposal is taken to be the sale, exchange or gift of a chargeable asset. Not

withstanding that no asset is acquired by a person paying a capital sum disposal is said to
have taken place where a capital sum is derived from sale, lease, transfer, assignment,
compulsory acquisition or any other disposition.
Further, where a capital sum is received or derived from the action and listed below, such
events are taken as "disposition":-
(a) Compensation for loss of office or employment
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(b) Settlement of a policy of insurance on the risk of any kind or damage or injury to, or
the loss or depreciation of assets.
(c) Forfeiture or surrender of rights, or for refraining from exercising rights.
(d) Consideration for use and/or exploitation of any asset.
(e) Amounts received in connection with or arising by Virtue of any trade, business,
profession or vocation, as opposed to loss of office or employment as in (a) above.
(f) Part disposal of asset, interest or right therein.
The market value of the asset disposed off may be used in place of actual sale proceeds in
the following circumstances
(a) Where the bargain is not made at arm's length.
(b) Where the consideration cannot be wholly or partly valued.
(c) Where the asset is acquired with loss of office or diminution of emoluments.
(d) Where the asset is acquired as trustee for creditors of the person making the disposal.
(e) Where acquisition or disposal is by way of gift (except for gift at death).
(f) Where the transaction is between connected persons.
(g) Where the asset is acquired by a creditor in satisfaction of a debt.
12.2 Chargeable Asset:

Chargeable assets are assets whose gains on disposal are liable to capital gains fax.
Examples are:
(a) Options, debts and incorporeal property generally.
(b) Currencies other than Nigerian naira.
(c) all qualifying capital expenditure
(d) Any form of property created by the person disposing of it or otherwise coming
to be owned without being acquired.€
Capital gains tax is chargeable on disposal of assets on which capital allowance has been
claimed.
12.2.1 Options
The capital gains on the disposal of an option is the actual amount paid for the option
because no cognizance is given to its cost of acquisition
Note that where the subject on which the option was exercised is subsequently disposed
the cost for determining the capital gains should be actual cost of the asset and the cost of
the option.
Illustration
CA. sold an option on a piece of land at adaja village for the sum of N250,000 to Agai
who subsequently exercised the right by purchasing the land for the sum of N1,245,000.
You are required to compute the capital gains tax liability of CA. and the capital gains tax
liability of Agai in the event he sells the property later for N3.5.
Solution
207
Computation of capital gains tax
Sales proceed 250,000
Capital gains tax 10% 25,000
AGAI
Computation of capital gains tax
Sales proceed N3, 500,000
Deduct:
Cost of land N1, 245,000
Cost of option N250,000 N1,495,000
Capital gains N2, 005, 000
Capital gains tax at 10% N200,500
12.2.2 Debts
Capital gains will arise where an asset acquired in exchange for a debt is disposed. No
capital gains tax transaction will arise if the asset acquired in exchange for the debt is not
disposed. The capital gains chargeable shall be the difference between the amount of debt
and the value obtained on the disposal of the asset acquired in exchange for the debt.
Illustration
Musa collected a piece of land in exchange for the debt of N248, 000 owed. The value of
the land obtained in exchange was N200, 000. The piece of land was subsequently
disposed for N350, 000. You are required to compute the capital gains tax liability.
Solution
Computation of capital gains tax liability
Less value of land 248,000
Capital gains 102,000
Capital gains tax at 10% 10,200
Note that no capital gains tax liability arises in the event the asset acquired in exchange is
not disposed. In a similar manner, the capital gains is not the difference between the sales
proceed and the value of the asset but the difference between the sales proceed and the
value of the debt.
12.2.3 Incorporeal properties

These are in accounting sense, fictitious assets; examples of this include patents, copy
rights, and trademarks.
The capital gain on the disposal of an incorporeal is the actual sales proceed on its
disposal. No cognizance is given to the cost of acquisition. The only allowable expense is
the legal cost of protecting such properties.
208
12.3 Allowable Expenses:
Expenses allowable in computing capital gains tax are those wholly, exclusively and
necessarily incurred on the asset or property in question, either for the purposes of
acquisition or disposal. Examples of such expenses are:
(1) Cost of acquisition in money or money's worth given by the new owner or on his
behalf.
(2) Incidental cost of acquisition.
(3) Expenditure incurred for the purpose of enhancing the value, state or nature of
the asset before disposal. The expenses must not have wasted away e.g. extension
is allowed while painting is disallowed.
(4) Expenditure incurred in establishing, preserving or defending the title or right
over the asset.
(5) Incidental disposal cost e.g.
- Cost of advertisement to find a buyer,
- Valuation costs
- Ascertainment of market value for the purpose of capital-gains tax computation.
(6) Fees, commission or remuneration paid for the professional services of any
Surveyor, Valuer or Auctioneer or Accountant or agent or legal adviser and cost
of transfer or conveyance (stamp duty inclusive).
12.4 Disallowable Expenses:

The following expenses are not allowable:
(1) Expenses deductible for income tax and petroleum profit tax purposes.
(2) Insurance premium in relation to the asset (this is of course an expenses) deductible
for income tax purpose).
12.5 Chargeable Persons

A chargeable person is one who deals in a chargeable asset. A chargeable person may be
1. A limited liability company
2. An individual
A limited liability company will remit its tax liability to the federal Inland Revenue
service while an individual will remit its tax liability to the state internal revenue service.
It should also be noted that a chargeable gain will arise where upon the disposal of a
chargeable asset, the sales proceed on disposal exceeds the cost of acquiring the
chargeable asset disposed and all other incidental expenses to the disposal.
The principle in the concept of asset disposal involves the consideration that assets are
said to be disposed where any capital sum is derived from a sale, lease, transfer, an
assignment, a compulsory acquisition or any other disposition of asset. The disposal is
209
deemed to have taken place even where no asset was acquired by the person paying such
a capital sum.
Specifically, disposal is deemed to have taken place where:

1. Any capital sum is derived by way of a compensation for loss of office or
employment
2. Any sum is received under a policy of insurance and the risk of any kind of
damage or injury to or loss or depreciation of assets.
3. Any capital sum received in return for refraining from exercising rights
4. Any capital sum is received as consideration for use or exploitation of any assets
5. Any capital sum is received with or arises by virtue of any trade, business,
profession or vacation.
12.5.1 Connected Persons:

Transactions between connected persons whether individuals or companies, are regarded
as not being at arm's length bargain. Consequently, such buying and selling would be
deemed to have been effected at the market value of the assets.
The following arc persons regarded as connected:
Individuals
(1) The taxpayer and his/her husband or wife, the husband/wife of a relative
(brother,
sister, ancestor or linear descendant of the taxpayer or his wife)
(2) A trustee of a settlement and a settlor and any person who is connected
with the settlor.
(3) A partner and other partners and with the husband and wife or a relative
(brother, sister, ancestor or linear descendant) of any of them
Company:
(1) A company is connected with another company
(a) if the same person has control of both companies, or a person has control of
one and persons connected with him, or her and persons connected with him have
control of the other;
(b) If a group of two or more persons have control of each company, and the
group either consists of the same persons or could be regarded as consisting of
the same persons by treating (in one or more cases) a member of either group
as replaced by a person with whom he is connected.
(2) A company is connected with another person
(a) if that person has control of it, or
(b) if that person and persons connected with him together have control of
the company;
(3) Any two or more persons (or those acting on direction of any of them)
acting together to secure or exercise control of the company
210
Illustration
Amadi bought a house from her father in law for the sum of N560, 000. The original cost
of the house when it was constructed by chike was N148, 000. The current market value
of the building is N700, 000. What is the chargeable gain arising from the transaction?
Solution
Computation of chargeable gain
Market value 700,000
Less cost of acquisition 148,000
Chargeable gain 552,000
12.6 Part Disposal of Asset.

Where a part of the asset is sold, the cost of the asset sold is ascertained by the following
formula:
A x C
A+B
Where A = Amount of consideration for disposal

B = Market value of un-disposed part
C = Cost of the whole asset.
The general rule is that the cost of the part disposed is determined using the relationship
above. The implication of this relationship is tat the proposition that the sales proceed
bears to the market value of the whole asset is appropriated on the total cost of acquiring
the whole asset.
It is critical to make a distinction as between real partial disposal and disposing a part of a
group of asset. Where a two wing duplex is acquired but one of the wings is disposed at
some point such a disposal is deemed to be a partial disposal. On the other hand, where
an estate made up of four buildings is acquired but one of the buildings is subsequently
sold, this is not a partial disposal. The key issue in the two examples sited is that whereas
it is possible to easily identify the cost of the building within the estate because it is an
entity on its own it may not be easy to determine the cost of one of the wings of duplex
constructed together.
Illustration
Madam kwasau acquired a box of trinkets in Bonn during a trip in 1990 for N590, 000.
during 1999, she disposed off the necklace for N350,000. The remaining items in the box
were valued at N950,000. The cost of valuation was 5% while brokerage was paid at 2%
of sale. You are required to compute the capital gains arising form the disposal.
Solution
Computation of capital gains
211
Sale proceed N350,000
Less valuer’s fee N47,500
Brokerage fee 7,000
54,500
Net sale proceed 295,500
Deduct
Cost of acquisition
350,000 X 590,000
350,000 + 950,000 158,846
CGT = 10% of N136,654 = N13,665.
Illustration
Amaka is the owner of a block of flats which he built at a cost of N= 300,000 many years
ago. On April, 9th 2001 he sold a flat for N= 200,000; the market value of the unsold flat
is given as N= 1 million. The expenses of selling the flat amounted to N= 10,000.
Compute his capital gains tax liability
Solution:
AMAKA
2001 Capital Gains Tax Computation
N
Sales proceeds 200,000
Less of cost of flat
200,000 x 300,000 = 50,000

200,000 + 1,000,000
Selling expenses 10,000 60,000

Capital Gains 140,000
Capital gains tax at 10% = 14,000
12.7 Mortgaged Or Pledged Assets:

For the purpose of capital gains tax an asset is treated as being acquired free of any
interest or right by way of security subsisting at the time of acquisition and as being
disposed of also free of any such interest and where an asset is acquired subject to any
such interest or right, the full amount of the liability thereby assumed by the buyer shall
form part of the consideration for the acquisition and disposal in addition to any other
consideration.
12.8 Acquisition/Disposal by a Creditor;

Where an asset is acquired by a creditor in satisfaction of his debt or part thereof, the
asset shall not be treated as disposal by the debtor or acquired by the creditor for a
consideration greater than the market value of the asset at the time of the creditor's
acquisition, and where the asset is subsequently disposed of by the creditor; the
212
chargeable gain accruing shall be reduced so as not to exceed the chargeable gain which
would have accrued if he had acquired the property for a consideration equal to the
amount of the debt.
Illustration
Kantudu gave his property with a market value of N= 12,000 for a loan of N= 14,000
from the bank, Kantudu defaulted and the bank disposed of the security for N=25,000.
What is the capital gains tax payable by the bank?
Solution
Sale proceeds 25,000
Less consideration for property 14,000
Chargeable gain 11,000
Capital gains tax 10% 1,100
If the cost of property were taken to be the market value of N= 12,000, the chargeable
gain would have been 13,000, but according to the principle above, the gain is restricted
to N=11,000.
12.9 Instalmental Payment of Disposal Consideration:

Where the consideration for disposal of a chargeable asset is payable instalmentally
beginning when disposal takes place and exceeding 18 months, the capital gain shall be
computed by reference to the whole consideration receivable, but the chargeable capital
gains tax for a year, will be proportionate to the consideration.
In the initial assessment, no account will be taken of any discount for postponement of
the right to receive any part of the consideration and without regard for the risk that any
part of the consideration might be irrecoverable. If, however any part of the consideration
brought into account is proved to be irrecoverable, relief will be given either by way of
discharge or repayment of tax already paid.
Chargeable capital gains

Of an installment
Amount paid on installment A
Total amount payable x Total Capital Gains
Steps to follow in the computation
Step 1: Compute the total capital gains chargeable
Step 2: Identify the dates that each installment is paid
Step 3: Identify the corresponding years of assessment that the dates of

installment fall into
213
Step 4: Compute the chargeable gain for each installment using the relationship
above.
Step 5: Compute the capital gains tax payable on each installment made for the
relevant tax years by applying the relevant rate of tax.
Illustration
Baba sold an antique material to mama. The sale proceed was N300, 000 to be paid over
6 equal half yearly installments starting from 1st march 198. The original cost of the
antique was N60, 000. Determine the capital gains and the relevant years of assessment.
Solution
Installment Date Tax year Capital gains Reference:
1 1/3/98 1998 40,000 (50X240)/300
2 1/9/98 1998 40,000 (50X240)/300
3 1/3/99 1999 40,000 (50X240)/300
4 1/9/99 1999 40,000 (50X240)/300
5 1/3/00 2000 40,000 (50X240)/300
6 1/9/00 2000 40,000 (50X240)/300
Illustration
On l5th June, 2001, Aman sold her property for N= 200,000 to Amma, the consideration
payable instalmentally as follows-
15th June 2001 N=100,000

15th June 2002 N=50,000
15th June 2003 N=50,000
The initial cost of the property was N= 80,000 and all the instalmentals were received by
Aman.
Show the Capital gains tax for each year of assessment.
Solution:
Sale proceeds N 200,000
Less Initial Cost 80,000
Chargeable Gains 120,000
2001 Capital Gains tax

100,000 x 120,0000 x 10% = N6,000
200,000
2002 Capital Gains tax
214
50,000 x N=120,000 x 10% = N3,000
200,000
2003 Capital gains tax

50,000 x 120,000 x 10% = N6,000
200,000 N=24,000
If for instance, the last instalmental went bad, the realized capital gains would be
N=150,000 N80,000 == N= 70,000 and the capital gains tax payable N= 7,000. It would
be expected that the relevant tax authority would refund N= 2,000 out of the tax paid in
2002.
12.10 Rollover relief
Rollover relief is granted where the sales proceeds on the disposal of certain chargeable
assets is utilized in the acquisition of a new asset of the same class. The key benefit
where a roll over relief is granted is that the capital gain tax payable may not be paid
immediately. It may be fully deferred or only a portion of it may be deferred into the
future. This gives some cash flow advantage to the tax payer.
Roll over relief is claimed on the following classes of chargeable assets.

Class 1 land and building
Class 2 plant and machinery
Class 3 ships
Class 4 aircraft
Class 5 goodwill
The significant of this limitation is that even if the sale proceed on the disposal of any
other chargeable asset is reinvested in the acquisition of another asset in the same class
no roll over relief is available.
Steps for Determining the Roll over Relief Available

Step 1: Compute the capital gains on the disposal of the asset
Step 2: Compare the sales proceed on the disposal of the asset to the amount
invested in the new asset acquired in replacement for the one disposed
Step 3: Choose the lower of the two
Step 4: Deduct from step3 above, the original cost of acquiring the asset disposed.
This gives the amount rolled over.
Step 5: The amount rolled over obtained in step 4 is deducted form the capital
gains computed in step 1 above to determine the net capital gain
Step 6: Apply the relevant rate of tax on the net capital gain to obtain the net
capital gain tax payable.
215
Step 7: Compare the capital gain tax payable in step 6 above to the capital gain tax
that would have became payable if the rate of tax were applied on step 1.
The following conclusions should be reached upon the comparison.
Full roll over relief where no tax is payable after the relief is computed
Partial roll over relief where only a portion of the tax computed per step 1 is
immediately due
No roll over relief where the full amount computed per step 1 is immediately
due.
Types of Roll over Relief

There are basically two types of roll over relief. These include.
1. full roll over relief
2. partial roll over relief
3. third may be added, no roll over relief
Full Roll Over Relief

This occurs where the amount reinvested in anew asset is not less than the sale proceed
on the disposal of the old asset. The implication of this is that for a full roll over relief to
be exactly equal to the sales proceed on the disposal of the old asset or it must exceed it.
Where there is a full roll over relief, no capital gain tax liability is immediately due. The
full amount of tax computed is deferred into some future dates when the newly acquired
asset is eventually disposed.
Illustration
Abc limited disposed off its plant for N600,000 in 1997. The plant was actually acquired
for N250,000 in 1992. a new was plant was acquired to replace the disposed one within
eight mounts for N750,000. What is the amount of relief obtained by STG.
Solution
Computation of roll over relief for 1997 tax year
Deduct the lower of
a) Sales proceed 600,000

b) amount reinvested 750,000
less cost of acquisition 250,000 350,000
216
Amount roll over
Net capital gains nil
The above illustration shows that no capital gains tax is due. Meanwhile since the capital
gain on the disposal of the asset was N350, 000, capital gain tax liability at 10% should
have been N350, 000. But then, the grant of a roll over relief results in no tax payable.
The full N350, 000 has been deferred to the future since the capital gain of N350, 000 has
been fully rolled over.
Partial roll over relief

This is obtained where the amount invested in the new asset acquired to replace the
disposed one is less than the sale proceed on the disposal of the asset. There must in
addition be a key condition that the amount must not be lower than the original cost of
acquiring the asset disposed.
This means that for a relief to be granted the taxpayer must invest nothing less than the
cost of the old asset disposed.
The implication of a partial roll over relief is that only a portion of the capital gain tax
payable is immediately due. The balance may be deferred to the future when the newly
acquired asset is subsequently disposed.
Illustration
Abc limited disposed off its plant for N600, 000 in 1997. The plant was actually acquired
for N250, 000 in 1992. A new was plant was acquired to replace the disposed one within
eight mounts for N540, 000. What is the amount of relief obtained by STG.
Solution
Deduct the lower of

b) amount reinvested 540,000
less cost of acquisition 250,000 290,000
Amount roll over

Net capital gains 60,000
Capital gain tax upon disposal is N350, 000 being 10% of the capital gain of N350, 000.
upon the acquisition of another asset of the same class in replacement however, the net
217
capital gain has been reduced to N60,000. This means that the capital gain tax liability is
just N6, 000. This is because only N290, 000 of the N350, 000 has been rolled over.
No Roll Over Relief

There is no roll over relief where the amount invested in the new asset is even less than
the cost of the original asset disposed. Where this occurs the full of capital gain tax
computed is immediately due.
Illustration
Abc limited disposed off its plant for N600, 000 in 1997. The plant was actually acquired
for N250,000 in 1992. a new was plant was acquired to replace the disposed one within
eight mounts for N200,000. What is the amount of relief obtained by STG.
Solution
Deduct the lower of

b) Amount reinvested 200,000
less cost of acquisition 250,000 nil
Amount roll over

Net capital gains 350,000
The implication of the above is that no portion of the capital gain has been rolled over.
The capital gain before and after is N350, 000. No relief is therefore available.
Carrying cost
Where an asset on which roll over relief has been taken advantage of is subsequently
disposed, the capital gain arising on the disposal is not the difference between the sales
proceed and the carrying cost.
The carrying cost of an asset is the difference between the cost of acquisition and the
amount rolled over.
The significance of the carrying cost of an asset is that the capital gain deferred upon
being grated roll over relief will eventually precipitate upon the disposal of asset.
Illustration
218
Abc limited disposed off its piece of land costing N350,000 for N780,000 in 1992. the
company immediately bought another piece of land for N800,000 in 1993 which was
subsequently disposed for N1,600,000 in 1998.
You are required to determine the amount rolled over and the capital gains payable in
1998.
Solution
Deduct the lower of
a) amount reinvested 800,000

b) Sales proceed 780,000
less cost of acquisition 250,000
amount roll over 430,000

net capital gains nil
Computation of capital gains tax for 1998 tax year.

Sales proceed N1600, 000
Deduct:
Cost of acquisition 800,000
Less amount roll over 430,000
Carrying cost 370,000

Capital gains 1,230,000
Capital gains tax at 10% 123,000.
12.11 Hire-Purchase Transactions:

Where an asset is sold on a hire-purchase system, the seller is deemed to have disposed of
the asset at the beginning of the period of which the buyer takes possession of the asset
and the tax is assessed enbloc. The law here is not fair because the seller would be
assessed tax on consideration not yet realized and the sale may be a nullity if the buyer
defaults.
12.12 Assets Situated Outside Nigeria
219
Capital gains tax on assets situated outside Nigeria is chargeable on only the amount, if
any, received or brought into Nigeria by the owner. The charge is on all persons resident
in Nigeria, all Nigerian companies and all others that fall into any of the below:
(I) Individuals in Nigeria for temporary purpose only and not with any view or intent
to establish residence in Nigeria, and if the sums of periods for which he is present in
Nigeria in that year of assessment exceeds 182 days;
(II) Personal representative in Nigeria of a company whose activities are managed or
controlled outside Nigeria.
It should also be noted that where the asset is situated outside Nigeria; the time of
disposal is taken to be when the capital sum is received in Nigeria; and the assessment is
made when all amounts paid for use and enjoyment of the asset is repatriated to Nigeria.
12.13 Bargain Comprising Two or More Transactions;

Where a single bargain for disposal comprise two or more transactions, all of them will
be treated as a single disposal.
Where separate consideration arc agreed for any two or more transactions contained in
one bargain, those consideration will be treated as altogether constituting an entire
consideration for the transaction and shall be apportionable between them accordingly
However, where such apportinment results in a lesser consideration than that agreed in
the bargain attributable to the disposal of the assets the separate consideration agreed in
respect of those assets will be deemed to be the consideration for disposal.
12.14 Asset Lost Or Destroyed - Full Application Of Capital Sum To Replace The
Asset:
Where capital sum is received by way of compensation for loss or destruction of the
asset, under an insurance policy or otherwise, and the amount is applied within 3 years, in
the acquisition of another asset in replacement of that lost or destroyed, the owner may
claim as follows:
(i) That the old asset is deemed to be disposed of at the cost of the asset, so that there
is neither a gain or loss;
(ii) and that the cost of the new asset be reduced by the gain in disposal of the old
asset.
Example
Air Nigeria Ltd. received N= 45m from an insurance company on 1st June in respect of
its aircrafts which crashed and which was purchased for N= 40m. A new aircraft of the
type destroyed was purchased on 28th December, 2001 for N= 50m.. Show the effect of
a capital gains tax on the transactions.
Solution:
Without the claim:
Disposal proceeds N45m
Cost N40m
Chargeable gain N5m
220
Capital gains tax at 10% N500, 000
With the claim made:
Disposal proceeds deemed N40m
Cost of acquisition N40m
Chargeable gain 0
New Aircraft cost N50m
Less Gain on old aircraft N5m
Net cost N45m
Whenever the new aircraft is sold, the deemed cost would be N45m^capitsd gains tax
purposes.
12.15 Partnership
When a partner transfers personal assets to a partnership, there is a disposal to the extent
that such asset becomes the property of the other partners, where, however, a new
partnership is formed from an existing one, no disposal has taken place.
Exemption and Relief;
The following gains are exempted from capital gains tax:
(a) Conveyance or transfer of an asset as a security for a debt and retransfer of the
asset on redemption of the debt.
(b) Gifts arising from death.
(c) Disposal of assets held as a nominee or trustee.
(d) Gains from disposal of government securities.
(e) Gains accruing from disposal of a decoration awarded for valour orgallant
conduct.
(f) Gains accruing from any superannuation, pension or provident fund (such funds
or Compensation or damages for any wrong or injury suffered by an individual in
his person or in his profession or Vocation.
(h) Compensation for loss of office is exempted up to N= 10,000, the excess is
chargeable.
(i) Gains accruing to Local and Native Authorities.
(j) Gains arising from disposal of interest in an insurance policy or a contract for
deferred
annuity where the person making the disposal is the original beneficial owner.
(k) Gains accruing from the disposal of an individual's only main residence or
dwelling house.
(m) Assets acquired by way of gift.
(n) Gains accruing to a diplomatic body which includes a diplomatic representative, a
foreign envoy a foreign consular officer and an employee of any foreign state.
(o) Disposal of land to an authority with compulsory power as to so acquire the land.
(p) Capital gains accruing to the following bodies: -
(1) An ecclesiastical, charitable or educational institution of a public
character.
(2) A statutory or registered friendly society
(3) Any trade union registered under the Trade Union Act.
221
(q) Gains from sale of shares and stocks.
The conditions for which the bodies mentioned under (p) are exempted are
(1) The gain is not derived from disposal of any assets acquired in connection
with any trade or business carried on by the institution or society
(2) The gain is applied purely for the purpose of the institution or society
where the organization disposes of its own property
(3) Where the property held in trust ceases to be so held, the trustee shall be
treated as if they have been disposed of and immediately re-acquired the
property for a consideration equal to its market value.
(4) if and so far as any of that property represents, directly or indirectly the
having accrued consideration for disposal of assets by the trustees, any
gain accruing on that disposal will be treated as not.
(q) Statutory Corporations or any company established by or under any law in
Nigeria for procuring goods for export or economic development of any part of Nigeria
are exempted from paying capital gains tax. The gain must not accrue from disposal of
investments and assets or other interest owned or possessed by the corporation in
connection with any trade or business carried on by it or on its behalf by some other
person or authority
(r) Disposal of currency.
(s) Disposal of tangible moveable property (chattle) whose value does not exceed
N1000 (sales value) in any year of assessment is exempted from capital gains tax.
12.16 Life Assurance Policy:

On payment of the sum assured under a policy of life assurance, or on the occasion of the
surrender of a policy or a receipt of the first instalment of a deferred annuity, a disposal
of the policy is deemed to take place. The disposal value will be the market value at that
time, in addition to further installments of annuity
No capital gains tax will accrue where the interest in right under any life policy or
contract for deferred annuity is disposed of other than realization as stated in the previous
is the original beneficial owner. Where the disposal is made by a person other than the
original beneficial owner, tax liability would accrue.
Deferment of Gains from Abroad:

Chargeable gains accruing to a person from disposal of assets situated outside Nigeria
may have the tax liability deferred if any or all of the following provisions apply:
(1) The tax payer was unable to repatriate the gains to Nigeria
(2) Inability to repatriate the proceeds was due to the laws of the foreign government
or impossibility of obtaining foreign exchange
(3) Inability to repatriate the proceeds was not due to any want of reasonable
endeavour on his part.
222
The claim for deferment of assessment must be made by the tax payer within six years of
disposal of the chargeable asset.
12.17 Tangible Moveable Property:

As explained earlier, gains arising from sale of tangible moveable property whose value
does not exceed N1000 is exempted. If the consideration exceeds N= 1,000, the capital
gains tax payable shall not exceed half the difference between the amount of that
consideration and N1000, whichever is lower.
Example
Mr. OLA sold tangible moveable assets as follows:
A B C
N N N
Cost of acquisition 800 850 900
Expenses of sale 25 10 100
Disposal proceeds 990 1,060 1,500
Year of disposal 2000 2001 2,002
Compute capital gains tax payable.
Solution:
MR. OLA
CAPITAL GAINS TAX ASSESSMENT 2000
N
Disposal proceeds 990
Less cost 800
Expenses 25 825
Gains 165
Gains exempted from tax since the sale proceeds are not more than N1000.
2001 ASSESSMENT
N N
Less cost 850
Expenses 10 860
Gains 200
Capital gains tax lower of
10% of N 200 = N= 50 or (1060 -1000) == N15

Capital gains tax liability N15
223
2002 ASSESSMENT:

Less cost 900
Expenses 100 1000
500
Gain

10% of N= 500 =N 50 or % (1500 -1000) = N= 250
Capital gains tax liability = N50
Where a tangible moveable property of a small value is partly disposed of, the limitation
of tax to half the difference between the disposal proceeds and N= 1000 is multiplied by
the ratio.
A
A+B
In order to determine the portion relating to the asset sold. In the formula:
A == the consideration for the part sold

B = market value for the other part retained.
The same ratio is also used to ascertain the cost relating to the asset sold.
Example
Maikafu disposed of three quarters interest in his chattel for N= 700. The market value of
the one quarter retained was ascertained to be N= 500, The overall cost of the asset
sold was 600.
Compute the capital gains tax.
Solution:
Maikafu
N=
Less cost 700 x 600 = 350
700 + 500
Chargeable gain 350

10% of N350 = N35 or 1/2 (700 + 500 -1000) x 700 == N58.33
700 + 500
224
Capital gains tax liability N58.33
Replacement of Business Assets:

Where a person carrying on trade disposes of an asset and uses the proceeds to acquire
another asset of the type and class disposed of the gain on disposal of the old asset is not
chargeable to tax but treated as a reduction of the cost of the new asset. Only assets of the
following classes are eligible for this relief (which may be called roll-over relief):
Building and Land

Fixed Plant and Machinery
Ships
Aircraft
Goodwill
For the relief to apply, the old asset must be used only for the purpose of the trade
throughout the period of ownership, and the new asset must be brought into use in the
trade.
Example
Daikin Enterprises sold a molding machine for N2,800, and acquired a new one for
N=3,600. The old machine cost was N=2,000
The tax position is as follows:
N
Disposal proceeds: 2,800
Less cost 2,000
Roll-over relief 800 2,800

Chargeable gain NIL
New Machine 3,600
Less Roll-over relief 800
Deemed cost of new machine 2,800
Where the disposal proceeds of the old asset is partly used in the replacement of the new
asset, then the roll-over relief would be proportionate to the proceeds used. For example,
if the cost of the new molding machine were N= 2,000, the position would be:
N
Disposal proceeds 2,800

Less cost 2.000 800
Less Relief to new asset
2000 x 800 = 571

2800
225
Chargeable gain 229
New molding machine 2,000
Less Roll-over relief 571
Deemed cost of new machine 1,429
Where the asset is used partly for business and partly for private use, the asset would be
apportioned between the two uses on time basis and the belief will apply to the part of the
asset used for the trade.
Roll-over relief does not apply to speculative buying and selling of assets.
Exclusion of Losses:
In the computation of chargeable gains, amount of any loss which accrues to a person or
company on the disposal of any asset is not deducted from other gains accruing to such
person or company on disposal of the balance of such asset.
Payment
Payment of capital gains tax must be made on or before 60 days from the date of
assessment.
Exercise
1. On l5th June, 2001, Amana sold its property for N= 300,000 to Amman, the
consideration payable instalmentally as follows-
15th June 2001 N=150,000

15th June 2002 N=100,000
15th June 2003 N=50,000
The initial cost of the property was N= 120,000 and all the instalmentals were received
by Amana.
You are required to show the Capital gains tax for each year of assessment.
2. Mr. Yekini sold tangible moveable assets as follows:

E K B
N N N
Cost of acquisition 1700 1850 2,000
Expenses of sale 600 120 300
Disposal proceeds 2990 2,060 1,300
Year of disposal 2000 2001 2,002
You are required to compute capital gains tax payable.
226
3. Abamu limited disposed off its piece of land costing N550, 000 for N980, 000 in
1992. The company immediately bought another piece of land for N950, 000 in 1993
which was subsequently disposed for N1, 800,000 in 1998.
You are required to

(a) Determine the amount rolled over and
(b) The capital gains payable in 1998.
227
CHAPTER THIRTEEN
VALUE ADDED TAX
13.0 Introductions
Germany was the first country to introduce this form of tax in 1919, and now term
the value added tax. It was implemented as “addition type” which means the tax base was
computed as the sum of wages and capital income. In 1937, France introduced
“production tax” with features similar to exercise duty tax. In 1948, the government
emended the tax to what it termed produce income base tax; this form of tax used the
credit mechanism thereby becoming closer to the present value added tax.
In Nigeria, the tax was introduced by Decree No. 102 of 1993; the decree also established
a VAT technical committee comprising the following members;
1. chairman of FIRS
2. all directors of the FIRS
3. a controller from the Nigerian customs service
4. three representatives of the state governments, who are
members of the joint tax board
The functions of the committees are;
1. to consider all the tax matters that require professional and
technical expertise and make recommendations to the
board
2. to advise the board on VAT matters
3. to attend to such other matters as the board may
The law also established the value added tax tribunal; this tribunal tries cases
that affect VAT matters. It has the status of federal high court and its judgment is
enforced as if it were the judgment of a federal high court.
The minister of finance is empowered to make rules regulating the practice and
procedures of the VAT tribunal and until such rules are made, the practice and procedure
of the federal high court apply. The judgment of the tribunal regarding the amount of vat
payable is required to be served on the vat-able person, and not withstanding that he has
appealed against it, the amount of vat is required to be paid within one month of
notification of the amount payable in accordance with the judgment.
Any party aggrieved by the decisions of the tribunal may appeal to the court of
appeal on giving written notice to the secretary of the vat tribunal. The notice and hence
the appeal, must be made within 30 days of the judgment of the tribunal and must set out
the grounds on which the decision is being challenged. Furthermore, on receipt of the
notice of appeal the tribunal’s secretary is required to compile the record of proceedings
and judgment of the tribunal and transmit them to the chief registrar of the court of
appeal.
The revenue generated from the tax is distributed to the governments in the
following manner;
1. State governments including the FCT, Abuja 80%
2. Federal government 20%
228
13.1 Taxable Goods
The following goods are taxable under the decree no 102 of value added tax in Nigeria.
They include;
1. all goods manufactured or assembled in Nigeria
2. all goods imported into Nigeria
3. all of second had goods
4. household furniture and equipment
5. petrol and all petroleum products
6. all mineral and other bottled water and other liquors
7. cigarettes and tobacco
8. textile clothing, carpets and rugs
9. all air crafts, aircrafts bodies and their spare parts
10. perfumes and cosmetics
11. soaps and detergents
12. minerals and mining
13. office furniture and equipments
14. electric materials of any description
15. such other goods that may be determined by the board
13.2 Taxable Services
The following services are taxable under the decree no 102 of value added tax in Nigeria.
They include;
1. All services rendered by financial institutions to their
customers
2. Accountancy services
3. The provision of report, advice or similar technical services
in such areas as
4. Legal services
5. Computer services
6. Services supplied by architect
7. Services supplied by land and building surveyors, quantity
surveyors e.t.c.
8. Services supplied by consulting engineers
9. Services supplied by auctioneers, estate agents and valuers
10. Services supplied by agents, including insurance agents
11. Services supplied by brokers
12. Services supplied by security companies and enterprises
13. Courier services
14. Services supplied by secretarial agencies
15. Repairs, alteration, processing or any other services provided
in connection with designated goods by designated
dealers.
16. Air travels and company car hire
17. All goods and services for repairs and maintenance of all
types of equipments.
229
18. Restaurant services supplied by a restaurant owners or
operators
19. Accommodation and all other services provided by a hotel
owner or operator including all services offered therein.
20. Entertainment services including plays and performances,
cinema shows and music concerts.
21. Letting of video tapes or any other audio visual records or
hiring, copying and rewriting of videos and similar
services
22. Telecommunications services including installation and
maintenance services
23. Services supplied in the course of altering, processing,
bottling, packaging of manufactured goods owned by
another person.
24. Any other services as may be prescribed by the board from
time to time as taxable services.
13.3 Goods and Services Exempted From Tax

The following goods and services are exempted from the value added tax, they include
the following; it should however be noted that item 10 to 15 were exempted with effects
from 1997 budgets. While the last items from 16 were exempted with effect from January
1999.
1. All medical and pharmaceutical products
2. Basic food items
3. Books and educational materials
4. Newspapers and magazines
5. Baby products
6. Commercial vehicles and commercial vehicle spare parts
7. Fertilizer, agricultural and veterinary medicine, farming
machinery and farming transportation equipment.
8. Medical services
9. Play and performance conducted by educational institutions
as part of learning.
10. Plant and machinery imported for use in the export
processing zone
11. Plant and machinery purchased for gas utilization in the
down stream sector of the petroleum industry
12. Tractors, ploughs, agricultural equipment and
implementations purchased for agricultural projects
13. Locally produced fertilizer
14. Agricultural chemicals
15. Water treatment chemicals
16. Commercial vehicles
17. Aero plane ships and locomotives
18. Spare parts
230
Generally, this is a comprehensive tax that is very difficult for tax payers to
avoid, and as it is presently it is one of the tax sources that generate a lot of revenue
for the government.
In determining the value of the goods and services the following should be
noted;
1. That for supply paid for in money, the value of VAT shall be
the amount so paid
2. For supply for a consideration not consisting money, the
VAT shall be the market value of the supply
3. For imports into Nigeria, the VAT value shall be the cost
insurance fright value plus any customs duty, excise duty,
other imports charges or levy, and commissions, packing,
transport and insurance costs.
Vat is intended to fall on the domestic consumer and is levied by means of an ad-valorem
rate on the turnover of all or a wide range of business after deduction of the cost of goods
and services purchased externally. Thus vats essential feature is to tax the input value
contributed by every firm at every state until a product is sold for final consumer. The tax
is levied on all stages of production and distribution including the retail trade. It is
charged on the price at which goods and services are paid for by one business to another
throughout the chain of production and distribution, but at every stage except that of the
retail consumer, the purchaser is allowed to offset the tax he has paid against the tax he is
due to account for, on his own sales. The end result is that, the final domestic consumer
pays a retail sales tax at a simple, proportional rate, unaffected by the number or variety
of the transactions at the earlier stages.
Illustration
Consider a manufacturer in Nigeria that produces and sells goods. Assuming he paid the
sum of N5 as vat on the goods he uses for his production. And assume that the cost of
what he is import is N100. He added value to the cost of production to the sum of N200
therefore, selling to the whole seller at N300.00. The invoice he sends to the whole seller
will be N315, the N300 plus the 5% VAT of N15.
Next, the wholesaler invoices to the retailer at N400 plus 5% VAT, which totals
N420. Finally, the retailer to the consumer at N500 plus 5% vat which is N525.
The VAT payable by the manufacturer will be the output VAT of N15 less the input
VAT of N5 to give the N10 VAT payable. For the wholesaler, the output VAT of N20
less the input VAT of N15 to arrive at N5. Then the retailer output VAT of N25 less the
input VAT of N20 to have N5.
You realized that the evasion of the value added tax is so difficult that from the
manufacturer to the consumer the value added tax is paid. It becomes self enforcing as
the invoice to send to the next stage of the production incorporates the 5% value added.
Therefore, if government will consolidate on the collection of this tax, a lot of revenue
will be generated for the country. What it takes for the government is closer supervision
and a review of the penalty attached to those that default. At the wholesale and retail
stages, you realize some deduction not remitted or complete no charging of the VAT.
This is because the penalties do not pass the payment of a fine of N5, 000 in some cases.
This amount has to be reviewed.
231
Value Price Vat Vat On
Added After Vat Import
Producer imports
Raw materials 100 5
Producer sells
Finished Goods 200 300 10
Wholesaler sells
To retailer 100 400 5
Retailer sells
To customer 100 500 5
400 20
Illustration
For the month of April 1990 the total purchases was N44, 000 and total sales at N72, 000.
Assuming the value added tax to be taken as 5%. You are required to give the input and
output procedure.
Solution
Period ended April 1990

Total purchases N44,000 Total N72,000
VAT input total 30th VAT out total
5% on purchases 2,200 5% on sales N3,600
Due to federal inland service 1,400 N3,600
3,600
May chaque in settlement N1,400.00 May balance b/d 1,400.00
232
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Bodies to whom donations could be made

1. The boys brigade of Nigeria
2. The boys scouts of Nigeria
3. The Christian council of Nigeria
4. The cocoa research institute of Nigeria
5. The girl guides of Nigeria
6. The institute of medical laboratory technology
7. The national commission for rehabilitation
8. The national library
9. The Nigerian council for medical research
10. The national science and technology development agency
11. The Nigerian institute for international affairs
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13. The Nigerian institute for trypanosomiasis research
14. The Nigerian museum
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21. The associations or societies for the blind in Nigeria
22. Rotary international polio plus
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24. Educational cooperation society
25. Paterson zochonis Nigeria technical education trust fund
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An Introduction to the Nigerian Tax System

retrieval system or transmitted, in any form or by any means, mechanical,

photocopying, recorded or otherwise without the express written permission of the

ISBN: 978 – 068 – 741- 6

Published by Alin Kawo Printing Press NB 11 Muri Road, Kaduna

Chapter 2: Administration of Taxation in Nigeria

Chapter 3: Basis Periods

Chapter 4: Capital Allowance

Chapter 5: The Taxation of Companies

Chapter 6: Partnership Assessment

Chapter 7: Petroleum Profit Tax

Chapter 9: Education Tax

Chapter 10: Personal Income Assessment

Chapter 11: The Taxation of Non-Residents

Chapter 11: Capital Gains Tax

Chapter 13: Withholding Tax

2.0 Tax administration in Nigeria

2.1. Federal Board of Inland Revenue

2.1 Federal Board of Inland Revenue

2.1.1 Executive Chairman being a person experienced in taxation to be

The FIRS is charged with the responsibility of administration of the Decree,

2.1.1 Technical Committee of the Board

The functions of the committee are:

2.2 The Joint Tax Board

(1) Chairman of FBIR who is the chairman of this Board.

Membership of the Board comprises of:

2.3.1 Functions of the Board

2.3.2 The Technical Committee of State Board of Inland Revenue

The composition of the committee includes:

The functions of the committee

2.4 Local Government Revenue Committee

2.5 Joint State Revenue Committee

The Functions of the committee includes the following: -

The contents of a tax return are:

The Board is empowered to make additional assessment if it discovers, at

The original assessment is the first assessment raised on a taxpayer in a particular

Furthermore, there are three forms of assessment that should be noted;

If a company disputes the assessment, it may apply to the Board by notice of

It should be noted that Errors or mistakes in assessment, warrant or other

(i) Mistake therein as to the name of the company liable, or of a person in

2.6.2 Objection and Appeals

All notices or documents to be given to the Appeal Commissioners should be

2.6.3 Who are the Appeal Commissioners?

2.6.4 Procedure before Appeal Commissioners

Notwithstanding that an appeal is pending, tax shall be paid in accordance with

2.6.7 Appeal to the Federal High Court

2.6.8 When Assessment is Final and Conclusive

2.6.10 Self Assessment

A Self-assessed company is exempted from the payment of provisional tax.

2.6.11 Essential Ingredients of Self-Assessment Tax Returns

2.6.12 Self Assessment and Install Mental Payment Concession

2.7 Other matters in the Nigerian tax administration

2.7.1 Persons Chargeable With Tax:

2.7.2 Power to Appoint Agent

2.7.3 Company Wound Up

2.7.4 Annual Returns

2.7.5 Relief in Respect of Error or Mistake

1 Failure to comply with the provisions of the Decree. Fine N200

2 Failure to furnish statement of account or returns or Fine of N5, 000 imposed by

2.7.6 Back Duty

Back duty investigation therefore involves uncovering or discovering undisclosed

2.7.7 Dormant Company