- 30 Marks
AT – May 2024 – L3 – SA – Q1 – Tax Administration and Dispute Resolution
Provide professional tax advice for the management of Soft Farm and Agro-Allied Ltd, focusing on deductible interest, adjusted profit, and tax liabilities.
Question
Soft Farm and Agro-Allied Limited, a subsidiary of Emperor Agro Incorporated, Italy, was incorporated in Nigeria in January 2018. Soft Farm and Agro-Allied Limited produces palm kernel for domestic use and export to the European market. The Managing Director of the company has just received a letter from the head office (parent company) about an impending visit due to poor business performance (below the group’s return on investment benchmark of 25%) since the business commenced, despite financial and technical support from the parent company.
In January 2022, the parent company granted a loan of N100 million to Soft Farm and Agro-Allied Limited for business expansion.
The Board has scheduled a special meeting for next month to consider the financial report of Soft Farm and Agro-Allied Limited for the year ended December 31, 2022, and to review past financial reports and tax assessments. As the newly engaged Tax Consultant to the company, you have been invited to participate in the meeting to provide a professional opinion on tax-related issues.
The Financial Accountant has been directed by the Managing Director to provide you with financial statements for all periods under review, books of accounts, returns filed with tax authorities, and other supporting documents.
From your preliminary review of the financial report for the year ended December 31, 2022, you noted an item that requires further discussion with management. This issue relates to interest paid on a loan obtained from the parent company.
Extract from Financial Statements for the Year Ended December 31, 2022
| Item | N’000 |
|---|---|
| Gross turnover: | |
| – Domestic sales | 147,500 |
| – Export sales | 200,100 |
| – Other operating income | 3,300 |
| Total Gross Turnover | 350,900 |
| Deduct: | |
| – Staff salary | 122,600 |
| – Ground rent paid to State government | 3,200 |
| – Motor running expenses | 1,750 |
| – Audit and accountancy fees | 1,000 |
| – Repairs and maintenance | 5,800 |
| – Depreciation of assets | 38,240 |
| – Rent paid | 1,850 |
| – Power and lighting | 5,400 |
| – Legal cost | 5,000 |
| – Rates (water) | 2,100 |
| – Allowance for doubtful debts | 10,500 |
| – Donations | 4,000 |
| – Interest and other finance costs paid | 15,600 |
| – Income tax provision | 23,400 |
| – General expenses | 5,900 |
| Total Deductions | 246,340 |
| Net Profit | 104,560 |
Additional Information:
- Export Sales:
20% of export sales were made to the parent company at the prevailing international market price. - Other Operating Income:
Description N’000 Dividend received (net) 2,700 Profit from disposal of non-current asset 600 Total 3,300 - Repairs and Maintenance:
Description N’000 Repairs of plantation equipment 1,200 Repairs to premises (non-industrial building) 900 Expansion to warehouse (industrial building) 3,700 Total 5,800 - Rent Paid:
This amount is for accommodation for the newly employed General Manager, whose basic salary is N4,800,000. - Legal Cost:
Description N’000 Cost of income tax appeal 850 Cost of debt collection 1,300 Cost of acquiring new lease 1,700 Renewal of old lease 1,150 Total 5,000 - Allowance for Doubtful Debts:
Description N’000 Specific provisions 5,230 General provisions 7,870 Bad debts recovered (2,600) Total 10,500 - Donations:
Recipient N’000 Palm Oil Research Institute 1,400 National Library 600 Cocoa Research Institute of Nigeria 1,000 Women Society of the host community 1,000 Total 4,000 - Interest and Other Finance Costs Paid:
In January 2022, the company obtained a loan facility of N100 million from the parent company for business expansion at a competitive interest rate of 12% per annum. The loan duration is 10 years, with interest payable for the first three years, and principal and interest repayments due from the fourth year onward. The balance in the financial statements includes other finance costs and bank charges paid to domestic banks on various accounts. - General Expenses:
Description N’000 Wedding gift to staff 350 Fine imposed on company driver for traffic offense 150 Haulage expenses 3,200 Transport and travelling 2,200 Total 5,900 - Schedule of Prior Years’ Turnover and Assessable Profits:
Year Ended December 31 Turnover (N’000) Assessable Profit (N’000) 2018 154,400 78,750 2019 198,600 95,120 2020 310,300 142,800 2021 314,900 166,900 - Schedule of Qualifying Capital Expenditure Incurred:
Date of Acquisition Asset Type Amount (N’000) August 31, 2017 Plantation equipment 4,600 August 31, 2017 Industrial building 12,000 August 31, 2017 Non-industrial building 9,000 January 1, 2018 Motor vehicles (3) 8,400 January 1, 2018 Furniture and fittings (10) 1,500 February 14, 2021 Motor vehicles (2) 5,600 June 12, 2022 Furniture and fittings (10) 2,000 July 8, 2022 Research and development 7,000
Required:
As the Tax Consultant to the company, draft a report to the Managing Director of Soft Farm and Agro-Allied Limited, in line with the provisions of the Companies Income Tax Act Cap C21 LFN 2004 (as amended). The report should provide professional advice on the following:
- Treatment of Excess Amount of Deductible Interest Paid (6 Marks)
- Adjusted Profit of the Company for the Year Ended December 31, 2022 (7 Marks)
- Tax Liabilities for All Relevant Assessment Years (17 Marks)
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