Question Tag: Income Tax

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  • 30 Marks

ATAX – Nov 2020 – Q1 – Taxation of Companies

Analyze tax implications for Sunchi Limited's operations in Nigeria and corporate tax obligations for resident and non-resident companies.

The recent trade tariff war on goods exported between the United States and China has opened a vista for corporate players in the two countries and their allies to venture into new areas considered to be business-friendly.

Sunchi Limited, Shanghai, is a computer accessories company that was incorporated in China in 2003. The company established its subsidiary outlet, Sunchi West Africa Holdings, in Ibadan, Nigeria, on January 1, 2018. The Nigerian company adopted December 31, annually (same as the parent company) as its end of financial year.

The first set of consolidated accounts was audited by a reputable audit firm based in China. Taxes for both business operations were also paid in China.

The Nigerian tax inspectors from the Federal Inland Revenue Service demanded for annual returns and tax computations from the subsidiary company but the General Manager of the company claimed that the company had paid personal income tax of its employees and directors, value-added tax on imported equipment, and relevant custom duties. Furthermore, since the parent company is not registered in Nigeria, there is no reason why it should be liable to companies’ income tax. The issue is yet to be resolved.

The Managing Director of the subsidiary company in Nigeria, with the permission of the head office in China, appointed you as the company‘s tax consultant to help unravel the issue of payment of companies’ income tax by resident and non-resident companies operating in Nigeria. He also submitted to you the statement of profit or loss for the year ended December 31, 2018, after conversion of the transactions in head office‘s Chinese currency (Yuan) to Nigerian Naira.

(i) Miscellaneous income:
This consists of income realised from the sale of component parts to the head office. The transaction was made at open market price.

(ii) Legal expenses comprise:

Description Amount (N’000)
Debt collection 800
Preliminary expenses 2,100
Land acquisition 550
Retainership fee 750
Total 4,200

Required:
As the company‘s tax consultant, you are to prepare a report to the management of Sunchi Limited taking into consideration the following:
a. Resident and non-resident companies (4 Marks)
b. Circumstances under which profit of a non-resident company will be liable to tax in Nigeria. (10 Marks)
c. Relationship between a:

  • Nigeria branch and the parent company (3 Marks)
  • Nigeria subsidiary and the parent company (3 Marks)
    d. Overseas branch of a Nigerian company (3 Marks)
    e. Overseas subsidiary of a Nigerian company (3 Marks)
    f. Advise on, if any, the companies income tax payable by the two business operations in Nigeria. (14 Marks)

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  • 20 Marks

CR – May 2024 – L3 – SB – Q3 – Income Taxes (IAS 12)

Deferred tax impact analysis for asset purchase, fair value adjustments, and subsidiary profit

Below is the statement of financial position (extract) of Bamboo PLC, a company with several subsidiaries across various regions, including one foreign subsidiary, Pako Limited, based in the USA:

Draft Statement of Financial Position
As at October 31, 2023

Assets N’m
Deferred tax 77
Other non-current assets 2,329
Inventories and other current assets 1,150
Cash and cash equivalents 422
Total assets 3,978
Liabilities and Equity
Other non-current liabilities 1,671
Deferred tax liabilities 186
Payables and accruals 1,131
Total liabilities 2,988
Equity
Share capital 250
Share premium 120
Retained earnings 620
Total equity 990
Total liabilities and equity 3,978

During the preparation of the final draft of the financial statements, the following issues regarding deferred tax implications were raised:

  1. Property, Plant, and Equipment
    • On November 1, 2022, Bamboo PLC acquired an asset for N120 million, which qualified for a government capital grant of N20 million. The asset has a five-year useful life with straight-line depreciation. Capital allowances are restricted by the grant amount, and tax laws allow a 25% annual capital allowance rate.
  2. Fair Value Adjustments
    • Bamboo PLC acquired Iroko Limited for N100 million, with net assets fair valued at N80 million against a tax base of N70 million. The difference relates to property, plant, and equipment that Iroko Limited intends to hold long-term.
  3. Profit from Foreign Subsidiary
    • Bamboo PLC’s foreign subsidiary, Pako Limited, has $5,000 in undistributed post-acquisition profit, which would incur a N4 million tax if remitted to Nigeria. Bamboo PLC plans to retain these earnings for Pako Limited’s reinvestment.

Required:

a. Briefly explain and calculate, where applicable, the deferred tax implications for each transaction. (15 Marks)

b. Show the deferred tax effects on the draft statement of financial position for Bamboo PLC. (5 Marks)

Note: Use a 30% tax rate for calculations.

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  • 15 Marks

CR – May 2018 – L3 – SC – Q5b – Consolidated Financial Statements (IFRS 10)

Compute deferred tax provision and charge for Tola Plc. as of December 31, 2017.

The following information relates to Tola Plc. as at December 31, 2017:

Description Carrying Amount (N) Tax Base (N)
Plant and equipment 250,000 218,750
Receivables:
Trade receivables 62,500 68,750
Interest receivable 1,250 0
Payables:
Fine 12,500 0
Interest payable 2,500 0

Further information:

  1. The trade receivables balance includes balances of N68,750 less a specific doubtful debt provision of N6,250.
  2. Deferred tax balance as of January 1, 2017, was N1,500.
  3. Interest is taxed on a cash basis.
  4. Doubtful debt allowances are not tax-deductible; receivables are only deductible upon a court order.
  5. Fines are non-deductible for tax purposes.
  6. The tax rate for 2017 is 30%, with an anticipated rise to 36% in 2018.

Required:

Compute the deferred tax provision required as of December 31, 2017, and the charge to profit or loss for the period in accordance with IAS 12 – Income Taxes.
(11 Marks)

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  • 12 Marks

FR – Nov 2023 – L2 – Q5b – Accounting for Income Taxes (IAS 12)

Calculate Shakara Limited's income tax liability, deferred tax balance, and movement of deferred tax.

Shakara Limited was incorporated on January 1, 2022. During the year ended December 31, 2022, the company made a profit before taxation of N18,150,000.

The following capital expenditure were made during the year:

Expenditure N’000
Plant and machinery 7,200
Motor vehicles 1,800

The depreciation charged for the year amounted to N1,650,000, and capital allowance granted by the Federal Inland Revenue Services (FIRS) for the same period amounted to N2,250,000.

Company income tax rate is 30%, and deferred tax liability brought forward was N1,200,000.

Required:
i. Calculate the company income tax liability for the year ended December 31, 2022. (3 Marks)

ii. Calculate the deferred tax balance that should be disclosed in the statement of financial position of Shakara Limited as at December 31, 2022. (3 Marks)

iii. Prepare notes showing the movement of deferred tax charged to profit or loss for the year ended December 31, 2022. (3 Marks)

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  • 15 Marks

TAX – May 2015 – L2 – SC – Q7 – Taxation of Trusts and Estates

Determine computed income of a trust, tax liabilities, and apportionment of income among beneficiaries.

Chief Zeta created a Trust many years ago for the benefit of his four children, Alpha, Beta, Cepha, and Delphi. A lawyer was appointed as the Trustee to his Estate.

For the year ended 30 September 2014, the Trust income amounted to ₦3,120,000. Each of the beneficiaries receives an annuity of ₦150,000 every year while the expenses incurred on the administration of the Trust was ₦57,500 per annum. The trustee is on a remuneration of 2% of the Computed Income.

Chief Zeta instructed that discretionary payments of ₦22,500, ₦17,500, ₦15,000, and ₦12,500 respectively should be made to Alpha, Beta, Cepha, and Delphi respectively. In addition, nine of the ten portions of the remainder of the Computed Income should be shared equally among the four children.

Chief Zeta has requested you to supervise the administration of the above Trust.

You are requested to:

a. State the basis of assessment of Estates, Trusts or Settlements. (1 Mark)

b. Identify the persons chargeable to Income Tax under the Trust or Settlement created by Chief Zeta. (3 Marks)

c. Compute the income of the Trust. (3 Marks)

d. Determine the amount due to each beneficiary. (6 Marks)

e. Explain how the Computed Income should be apportioned and how the Income Tax burden will be shared by all the parties. (Ignore Withholding tax). (2 Marks)

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  • 30 Marks

TAX – May 2017 – L2 – SA – Q1 – Personal Income Tax

Calculation of income tax payable with additional information and brief explanations on tax-related terms.

Damilola Adewunmi is the Human Resources Manager of Mighty Steel Nigeria Limited. He is married and blessed with three children.

  1. The following details relate to Damilola Adewunmi for the year ended December 31, 2015:
Item Amount (N)
Salary 3,144,000
Commission 525,000
Rent received 1,350,000
Gain from sale of shares 300,000
Pension received from employment 450,000
Benefits-in-kind (all assessable) 225,000
Interest on Fixed Deposit (gross) 180,000
  1. Damilola contributes N22,500 monthly towards the upkeep of his aged mother. His elder brother, Adekunle, also contributes N37,500 monthly.
  2. Damilola took an insurance policy on his life and pays a premium of N15,000 monthly.
  3. The children are University undergraduates and enjoy a scholarship for only tuition from his State Government.
  4. Damilola took a loan to build an owner-occupied house on which he pays N90,000 annual interest.
  5. For an outstanding performance, he was given an end-of-year bonus in the sum of N90,000.
  6. Withholding Tax of N18,000 was deducted in respect of interest on Fixed Deposit.

Required:

a. Calculate the income tax payable for the relevant year of assessment.
b. Calculate the income tax payable for the relevant year of assessment, assuming 2015 is the year of assessment with the following additional information:

  • Contribution to National Housing Fund: N78,600
  • Contribution to National Health Insurance Scheme: N210,000
  • Contribution to Pension Scheme: N235,800

c. Explain briefly the following:

  • Itinerant worker
  • Non-resident individual
  • Earned income
  • Resident individual
  • Unearned income

d. List FIVE dividends exempted from tax.

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  • 20 Marks

TAX – May 2023 – L2 – SA – Q2 – Personal Income Tax (PIT)

Differentiate employment contract types and explain tax residency rules for individuals.

The Personal Income Tax Act Cap.P8 LFN, 2004 (as amended) defines “employment,” whilst the Labour Act Cap.L1 LFN, 2004 (as amended), defines “contract of employment.”

An individual’s liability to income tax is often determined by their residence status within a state during a particular assessment year. A taxpayer is liable to the tax authority in the territory where they are deemed resident for that assessment year.

Required:
a. Differentiate between “contract of employment” and “contract for employment.” (8 Marks)
b. Explain the rules guiding the determination of residence for SIX categories of individuals for tax purposes. (12 Marks)

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  • 30 Marks

TAX – May 2023 – L2 – SA – Q1 – Personal Income Tax (PIT)

Compute partnership income and individual partner tax liabilities.

Fadeke, Femi, Kola, and Gbenga have been in partnership as medical practitioners for eight years. The statement of profit or loss for the year ended December 31, 2021, is as follows:

  1. Capital allowances agreed with the revenue: N980,000
  2. Profits are to be shared equally among the partners.
  3. Fadeke and Femi are married with three and two children, respectively.
  4. Fadeke has a life assurance policy of N960,000 on which she pays N96,000 annually as a premium.
  5. Fadeke maintains her aged father who is over 68 years.

Required:

a. Compute the income of the partnership. (5 Marks)
b. Compute the income tax liability of each of the partners. (25 Marks)
(Total: 30 Marks)

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  • 20 Marks

TAX – Nov 2014 – L2 – Q5 – Companies Income Tax (CIT)

Compute adjusted profit, tax ratios, total profit, and income tax for Kenky Limited.

Kenky Limited, an Austrian company, operates cable undertakings in Nigeria and has significant business in several African countries. The Nigerian Revenue Authority disputed the company’s financial returns, resulting in a Best of Judgement (BoJ) Assessment. Below is an extract from Kenky Limited’s income statement for the fiscal year ending 30 September 2012:

 

Notes:

  1. The Federal Inland Revenue Service (FIRS) considers both Nigerian and Austrian operations under specialized business taxation.
  2. The Austrian authority verified the Adjusted Profit and Depreciation Ratios.
  3. A donation to Jeje, totaling ₦40,000,000, is part of the overhead expenses.

Requirements: a. Compute the Adjusted Profit for the year. (4 Marks)
b. Determine the Adjusted Profit Ratio and Depreciation Ratio. (4 Marks)
c. Compute the Total Profits and Income Tax payable in Nigeria. (4 Marks)
d. List other business activities, besides cable messages, recognized under specialized business taxation. (3 Marks)

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  • 15 Marks

TAX – Nov 2015 – L2 – Q7 – Taxation of Trusts and Estates

This question requires the computation of income tax payable by trustees and the amount due to beneficiaries from the settlement of Chief Sarki Oliver for the 2010 year of assessment.

Chief Sarki Oliver died peacefully in his sleep on 31 December 2009. He is survived by three children – Jimmy, Ngozi, and Charles. Two Trustees were appointed for the Settlement created in favor of the children to ensure that they were not badly affected by the demise of their father. Details presented by the two Trustees for the year ended 31 December 2010 are as follows:

Income N’000
Rental income (gross) 225,000
Trading income 250,000
Dividends (gross) 170,000
Interest on bank deposit 107,500
Sundry income 105,000
Total Income 857,500

Additional Information: (i) The Interest income is from Super Bank plc
(ii) Administrative and other expenses amounted to N32,000
(iii) Interest on debt repayment by the Settlement was N25,000
(iv) Fixed annuity to a beneficiary was N41,000 (Gross)
(v) Each beneficiary is entitled to 1/5 share of the net distributable income
(vi) Under the terms of the Trust Deed, the Trustees made discretionary payments to:

  • Jimmy N30,000
  • Ngozi N26,000
  • Charles N15,000
    (vii) Capital allowances – N64,000
    (viii) Trustees’ remuneration: Fixed amount of N25,000 each plus 2% of Computed Income
    (ix) The children have no other income.

In view of the recent agitation by the extended family members, you were contracted as
a consultant to compute the following:

Required:
a. Compute the income tax payable by the Trustees on the Trust income. (8 Marks)
b. Calculate the amount due to each beneficiary of the Settlement. (7 Marks)

 

 

 

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  • 6 Marks

PT – April 2022 – L2 – Q3a – Income Tax Liabilities

Explain the tax treatment for overtime allowance and bonus payments in Ghana.

a) Explain the tax treatment for Overtime Allowance Payment and Bonus Payment.
(6 marks)

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  • 5 Marks

PT – April 2022 – L2 – Q3b(i & ii) – Income Tax Liabilities

Compute the tax liability on overtime allowances for Maame Agyeiwaa for January and February 2021.

b) Maame Agyeiwaa is a junior staff member of KayDee Ltd. Her monthly basic salary is GH¢800. She was paid an overtime allowance totalling GH¢100 during the month of January 2021. In February 2021, Maame Agyeiwaa was paid overtime allowance totalling GH¢500.

Required:
i) Compute her tax liability on the overtime allowance for the month of January 2021.
(2 marks)

ii) Compute her tax liability on the overtime allowance payments for the month of February 2021.
(3 marks)

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  • 3 Marks

PT – April 2022 – L2 – Q3c – Income Tax Liabilities

Determine the tax implication of overtime allowance paid to Bawa in February 2021.

c) Bawa is a junior staff member of Blinks Ltd. Her monthly basic salary is GH¢2,000. She was paid an overtime allowance totalling GH¢500 during the month of February 2021.

Required:
What is the tax implication of the overtime allowance paid?
(3 marks)

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  • 3 Marks

PT – April 2022 – L2 – Q3d – Income Tax Liabilities

Calculate the tax liability on Eunice Danso's bonus income for 2021.

Eunice Danso works with Gyidi Ltd and earns an annual basic salary of GH¢50,000. She was paid a bonus of GH¢6,000 in 2021.

Required:
Determine the tax liability on the bonus. (3 marks)

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  • 10 Marks

PT – April 2022 – L2 – Q5a – Withholding Tax Administration

Explain four exemptions from withholding tax according to the Income Tax Act, 2015 (Act 896).

Although the scope of withholding tax covers employment, business, and investment income, not every income is subject to withholding tax in accordance with the Income Tax Act, 2015 (Act 896) as amended.

Required:
Explain FOUR (4) of these withholding tax exemptions.
(10 marks)

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  • 5 Marks

PT – April 2022 – L2 – Q5c – Income Tax Liabilities

Explain how gifts received by individuals in relation to employment, business, or investment are taxed.

Gift means a receipt without consideration or for inadequate consideration.

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  • 5 Marks

PT – Nov 2023 – L2 – Q1b – Income Tax Liabilities

Compute tax payable for resident and non-resident individuals for the 2022 year of assessment.

The information below relates to individuals who earned income in the 2022 year of assessment:
Resident individuals:
Mr. Agandi and Mr. Yonny are resident employees in Ghana. The chargeable income earned per annum by Mr. Agandi and Mr. Yonny amounts to GH¢300,000 and GH¢650,000 respectively.

Non-Resident individuals:
Mrs. Zindana and Mrs. Maleda are non-resident individuals. Mrs. Zindana and Mrs. Maleda have earned chargeable incomes to the tune of GH¢300,000 and GH¢650,000 per annum respectively.

Required:
Compute their respective taxes payable for the 2022 year of assessment.

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  • 3 Marks

PT – Nov 2019 – L2 – Q3b – Income Tax Liabilities

This question asks to calculate the tax implications of overtime payments for a senior staff member.

Amos is a Senior Staff member of Sims Company Limited. His monthly basic salary is GH¢1,490.00. He was paid an overtime totalling GH¢650.00 during the month of January, 2019.

Required:
What is the tax implication? (3 marks)

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  • 7 Marks

PT – May 2020 – L2 – Q3a – Scope and computation of income tax for partnerships

Assessable income computation for partners in a partnership business.

a) During the year ended 31 December 2018, the partnership of David, Stella, and Percy reported an adjusted profit of GH¢951,000 before charging partners’ salaries, interest on capital, and cost of traveling for leave.

David Stella Percy
Profit/loss sharing ratio 3 2 1
Salaries GH¢48,000 GH¢72,000 GH¢96,000
Interest on Capital GH¢30,000 GH¢20,000 GH¢10,000
Cost of traveling for leave GH¢20,000 GH¢30,000 GH¢25,000
Required:
Compute the assessable income for each partner.
(7 marks)

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  • 5 Marks

PT – May 2020 – L2 – Q5b – Special considerations for taxation of gifts and capital allowances.

This question asks to compute the tax payable by Mr. Nyametse John on gifts received from his pastor in 2018, considering the exchange rate for foreign currency.

Mr. Nyametse John is a member of Community Christ Church. Mr. Nyametse does not run a business, nor is he employed. In the 2018 year of assessment, he received the following from his Pastor, who just returned from the United Kingdom:

Item Value (£)
Wristwatch 100
Shoes 120
Mobile Phone 150
Exchange rate: GH¢6 – £1

Required:
Compute any tax payable for the 2018 year of assessment. (5 marks)

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