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Year 5 > Tax Law > Flashcards

Tax Law Flashcards

1
Q

TAXATION OF INVESTMENT INCOME

Trustee under a private trust or as a trustees under a Retirement Benefit Scheme have an obligation to?

A

Invest the assets that are committed to their trust

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2
Q

What is investment income?

A

It is that which comes from interest payments, dividends, capital gains collected upon the sale of a security or other assets, and any other profit made through an investment vehicle of any kind

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3
Q

What are considered investment income?

A

Interest earned on bank accounts
Dividends received from stock owned by mutual fund holdings
Sales of gold coins held in a safety deposit box and so on

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4
Q

Can business have income from investments?

A

Yes

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5
Q

What is often listed in the income statements of publicly traded companies?

A

An item called investment ‘income or losses’

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6
Q

What is done in this investment ‘income or losses’

A

The company reports the portion of the net income obtained through investments made with surplus cash as opposed to being earned with the company’s usual line of business

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7
Q

What is investment according to modified version of Webster’s definition?

A

Act of committing money or money’s worth in order to gain profit or interest

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8
Q

What are the categories of investment?

A

Direct investment

Portfolio investment

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9
Q

What does portfolio investment referred to in taxation?

A

Passive income

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10
Q

What forms can portfolio investment take?

A
  • Form of acquisition of securities such as shares or bonds

- Form of a loan

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11
Q 
Forms of investment 
Shares
Debunture stock
Property 
Bank Deposit
Lending
Bonds
Treasury bills 
Leases
Promissory Notes
Technology
What are the income that can be generated from each of them?
A 
Dividend 
Interest
Rent 
Interest
Interest
Interest
Interest
Rent
Discount
Royalty
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12
Q

What is one of the factors that should guide the investor in his choice of investment is?

A

Tax implication of that particular type of investment

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13
Q

What is the exception to this factor?

A

Where the investor is limited statutorily I.e Pension Fund Managers or by the terms of an existing arrangement that he might have with a third party I.e trust deed

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14
Q

What are the other factors that an investor consider when investing?

A

Time frame within whichnhr needs to realize a return on that investment
- the economic indices prevalent at the time of investment and other variables

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15
Q

Investment could be?

A

Short term, medium term or long term

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16
Q

The treatment of investment income under the CITA and PITA are quite similar ?

A

Yes

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17
Q

Where are the treatment dissimilar?

A

The withholding tax rules

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18
Q

Where does CITA and PITA apply as regards investment

A

Accrues to a company and an individual or persons taxable under PITA respectively

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19
Q

What are the investment incomes under CITA

A

Dividends
Interest, Royalty
Rents

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20
Q

What are the investments income subject to PITA

A

Dividends
Interest
Rent
Royalty, Discounts

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21
Q

Investment incomes under CITA
DIVIDENDS
What does dividends mean in relation to CITA?

A

It is in relation to a company not being in the process of being wound up or liquidated, any profits distributed to shareholders, whether or not such profits are of a capital nature
- includes an amount equal to the nominal value of bonus shares, debentures or securities awarded to shareholders

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22
Q

In relation to a company that is being wound up or liquidated what is dividends?

A

Any profits distributed whether in money or money’s worth or otherwise, other than those of a capital nature earned before or during the winding up or liquidation

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23
Q

Under why section of CITA talks about Dividends?

A

Section 80

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24
Q

What does Section 80 CITA provide?

A

Dividends become due from or payable by a Nigerian company to any other company or person, the company such dividend or making such distribution shall deduct at the rate of 10% on dividend paid to a company

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25
Q

How much withholding tax is deducted on dividend paid to a company ?

A

10%

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26
Q

What section of CITA provides for this?

A

Section 80 CITA

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27
Q

What happens when the recipient is a foreign company and which section of CITA gives rise to this?

A 
The tax withheld will represent the final tax payable by the foreign recipient company 
Section 80(4)
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28
Q

When will dividend not be taxable by a Nigerian company from a foreign company

A

When the dividend is brought into Nigeria through Government Approved channels.

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29
Q

What is regarded as franked investment income?

A

A dividend received after deduction of tax

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30
Q

What section provide for franked investment income?

A

Section 80(3)

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31
Q

What does the section provide?

A

Provides that dividend received after deduction of tax should be regarded as franked investment income to the recipient company and sha not be charged to further tax as part of the profits of the recipient company.

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32
Q

What is the recipient company required to do to distribute the dividends to the shareholder?

A

Offset the withholding tax that it has already suffered on those dividends

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33
Q

Where a Nigerian company earns franked investment income, what will be the tax withheld

A

10%

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34
Q

What will the tax withheld constitute?

A

The final tax payable on that income

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35
Q

When the company is computing its taxable profits will it be excluded from the total profits of the company?

A

Yes it will

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36
Q

What happens when such income is redistributed?

A

The company is entitled to offset the withholding tax that could have been due from redistribution against the withholding tax that it has suffered on the income

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37
Q

What happens where the company makes distribution to its shareholders from its other profits?

A

The distribution will be subject to withholding tax

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38
Q

What happens to the company as a result?

A

The company will not be entitled to offset the withholding tax that it suffered on the franked investment income that it earned in that year of assessment

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39
Q

In order to take of the franked investment income what should the company do?

A

The distribution that it makes to its shareholders must be from that franked investment income and not from another source of profits

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40
Q

EXCESS DIVIDEND RULE

What section of CITA imposes excess dividend tax?

A

Section 19

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41
Q

What does section 19 provide for ?

A

Where a dividend is paid out as profit on which no tax is payable

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42
Q

This tag is payable due to?

A

No total profits or

Total profits which are less than the amount of dividend which is paid

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43
Q

What happens to the company according to the relevant sections?

A

The company paying the dividend shall be charged to tax at the rate prescribed in s.40(1) as if the dividend is the total profits of the company for the year of assessment to which the accounts , out of which the dividend is declared

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44
Q

At what rate is the company paying the dividend charged?

A

30%

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45
Q

What case fall under excess dividend

A

Oando v Firs

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46
Q

What was the rule under excess dividend rule under the new judgment of the tax appeal tribunal?

A

Nigerian companies are now liable to income tax at 60%

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47
Q

What was the facts of the case?

A

The appellant(oando) declared and paid dividends to its shareholders in the year 2005,2006 and 2007. The FIRS, relying on section 19 CITA assessed the dividends to tag at the rate of 30% on the basis that the dividends exceed the company’s taxable profits for the respective years. Oando objected to the assessment but the FIRS subsequently issued a notice of refusal to amend the assessments upon which the company lodged the appeal

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48
Q

What was Oando’s position?

A

Oando put forward three major arguments

  1. The dividends were paid out of retained earnings which had already been taxed in prior years.
  2. Firs should have considered and applied Section 80 CITA which exempts dividend income that has been subjected to withholding tax from further tax
  3. If Section 19 is considered ambiguous then it should be interpreted in Favour of the taxpayer in line with the contra fiscum rule
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49
Q

What was Firs position?

A

They appeared to agree that dividends paid from retained earnings should not be subjected to excess dividends tax. It

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50
Q

What was the decision of the court?

A

The tribunal in interpreting section 19, held that dividends paid from retained earnings, where there is no taxable profit or taxable profit is less than the dividends, should be taxed at 30% regardless of whether the earnings had been taxed previously.

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51
Q

The tribunal outlined four steps to be followed before subjecting a company to tax under section 19
First step?

A

Ascertain why no tax was payable -which could either be due to no taxable profits less than dividend paid

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52
Q

Second step

A

Regard any such dividends paid as the taxable profits of the company

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53
Q

Third step

A

The actual taxable profit for the current year should be deduced from the dividend (deemed taxable profit) to determine the excess

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54
Q

Last step

A

Apply the tax rate of 30% to the excess established under step 3

55
Q

What did the tribunal hold?

A

Held that since the FIRS had compiled with all the four steps Oando was rightly assessed to the additional tax

56
Q

What is prudent for companies seeking to pay dividends out of their retained earning ensure?

A

That such dividends do not exceed their taxable profits for the relevant year pending the resolution of this dispute

57
Q

What should be lasting solution ?

A

The National Assembly should amend the law to make it clear that section 19 is not applicable to profits which have already been taxed and those that are specifically exempted from tax

58
Q

DIVIDENDS DISTRIBUTED BY A UNIT TRUST

what are unit trust schemes for?

A

Purposes of companies’ income tag, treated as limited liability companies

59
Q

Who are the trustees?

A

A company that derives income from making investments

60
Q

Unit holders are? And ah how are their right treated as?

And their income?

A

Shareholders
rights are treated as shares
Income available for distribution to the unit holders is treated as dividends

61
Q

What section of CITA?

A

Section 17

62
Q

Dividends earned by a Unit trust are regarded as?

A

Franked investment income

63
Q

Where the dividends are redistributed what happens to the dividends?

A

Exempted from tax

64
Q

Which section of CITA?

A

Section 23(1)(f) CITA

65
Q

In the case of an investment company what happens?

A

Those dividends are not exempted from tax

66
Q

Why Rights does the investment company have?

A

Merely has a right to offset the withholding tax that it has suffered against the withholding tax that is due on those distributions

67
Q

DIVIDENDS EXEMPTED FROM TAX

1?

A

Dividend derived by a company from another Nigerian company for the first five years, provided that the quirky participation of the recipient company is either wholly paid for in foreign currency or by assets brought or imported into Nigeria; the beneficial owner of the dividend owns at least 10% equity in the payment company; and the company paying the dividend is engaging in agricultural or oil and gas operations

68
Q

2?

A

Dividend derived by a company from a country outside Nigeria and brought into Nigeria through Government approved channels

69
Q

3?

A

Dividend received from small companies in the manufacturing sector, in the first five years of their operations

70
Q

4?

A

Dividends received from investments in wholly export-oriented businesses

71
Q

5?

A

Dividend distributed by a Unit Trust

72
Q

INTEREST, ROYALTY

What does section 78 CITA provide?

A

Where any interest (not being interest in inter-bank deposits) or royalty becomes due from one company to another company or individual liable to Personal Income tax payment, the company making such payment shall, from that payment, deduct tax at the rate of 10%

73
Q

In practice tax withheld on royalty at the rate of?

A

15%

74
Q

This is by virtue of

A

Information circular No 9502 issued by the Federal Inland Revenue Service in 1995

75
Q

INTEREST EARNED BU FOREIGN COMPANIES

What happens where interest accrued to a foreign company from a Nigerian company?

A

The interest shall be deemed to be derived from Nigeria and subject to withholding tax s.8(2)(b)) and tax withheld shall constitute the final tax payable by the foreign company s.60(4)

76
Q

INTEREST EXEMPTED FROM TAX

1?

A

Interest payable to a foreign company on a loan granted to a Nigerian company or individual for purposes of any trade, business or vocation in Nigeria which is not re-payable for a period of ten years

77
Q

What happens where the loan is not payable for a period of five years

A

Tax will be charged and withheld at the rate of 5%

78
Q

Statute?

A

S.11(1) CITA

79
Q

2?

A

Interest payable on any loan granted for purposes of an agricultural trade or business shall be exempted from tax, provided that the moratorium is not less than 18 months and the rate of interest is not more than the base lending rate at the time the loan was obtained

80
Q

Statute?

A

S.11(2) CITA

81
Q

3?

A

Interest payable on loans granted to companies engaged in the fabrication of any local plant and machinery and companies using the loan as working capital for cottage industries established under FEAP

82
Q

Section under FEAP

A

S.3

83
Q

4?

A

Interest payable on any loan granted by a bank for purposes of manufacturing goods for export

84
Q

5?

A

Interest derived by a Nigerian company from outside Nigeria, which is brought into Nigeria through Government Approved Channels;I.e CBN and other approved banks)

85
Q

6?

A

Interest that accrues on deposit accounts of a foreign company provided that the deposits are transfers wholly of foreign currencies to Nigeria through Government Approved Channels

86
Q

Any income that is not taxable is not subject to withholding tax true or false

A

True

87
Q

RENTS

WHAT section of CITA talks about Rent?

A

Section 79

88
Q

What does the section provide?

A

Provides that where any rent becomes due from or payable by one company to another company or to any person liable to Personal income Tac payment, the company paying such rent shall, at the date when the rent is paid or credited, whichever first occurs, deduct tax at the rate of 10% from such rent and pay the amount deducted to the FIRS

89
Q

What does rent include?

A

Includes payments for the use of or hire of any equipments, payment for chattel vessels, ships, or aircraft, and all such other payments for the use or hire of movable and immovable property

90
Q

Statute?

A

S.79(6) CITA

91
Q

Will tax withheld on tents paid to a foreign company be the final tax payable by the foreign company on that rent payment?

A

Yes

92
Q

What happens where a Nigerian company brings in rent payments received outside Nigeria?

A

Such rent payment will not be subject to withholding tax if brought in through an approved channel

93
Q

INVESTMENT INCOMES SUBJECT TO PERSONAL INCOME TAX

Incomes chargeable to personal income tax include?

A

Incomes earned by individuals and income arising from a trust or estate due to a trustee

94
Q

Would a corporate trustee be taxable under the CITA on incomes earned from the provision of Trustee services

A

Yes

95
Q

In case of a body of individuals ?

A

They would be taxable under PITA

96
Q

DIVIDEND

Is dividend a taxable income under the PITA?

A

Yes

97
Q

Section?

A

Section 3(1)(d)

98
Q

What does Dividend for the purpose of PIT mean for A company not being in the process of being wound up or liquidated?

A

, any profits distributed to shareholders, whether or not such profits are of a capital nature, including an amount equal to the nominal value of bonus shares, debentures or securities awarded to shareholders.

99
Q

What is dividend for the purpose of PIT in relation to a company that is being wound up or liquidated?

A

Means any profit distributed whether in money or money’s worth or otherwise , other than those of a capital nature earned before or during the winding up or liquidation

100
Q

Section?

A

S.3(3)(e)

101
Q

Dividend is subject to withholding tax at the rate of?

A

10%

102
Q

Section?

A

Section 71

103
Q

Will the tax withheld on the dividend be the final tax payable by the recipient of the dividend?

A

It will

104
Q

Tax payable by individuals and persons taxable under the PITA IS?

A

10%

105
Q

DIVIDENDS EXEMPTED FROM TAX

1?

A

Dividend paid to a person by a company incorporated in Nigeria provided that the equity participation of the person in the company paying the dividend is either wholly paid for in foreign currency or by assets brought into Nigeria between 1st January 1987 and 31st December 1992 and the person to whom the dividends are paid owns not less than 10% of the equity share capital of the company

106
Q

Statute

A

Para 24 of schedule 3 PITA

107
Q

2?

A

Dividend earned outside Nigeria and brought into Nigeria by a Nigerian resident provided that such income is brought in convertible currency and paid into a domiciliary account in a bank approved by the government

108
Q

INTEREST

Is interest is a taxable income under PITA?

A

Yes it is

109
Q

Section?

A

S.3(1)(d)

110
Q

Withholding tax is deductible on interest at the rate of

A

10%

111
Q

Section?

A

S.70(2) PITA

112
Q

Is the tax withheld on interest the final tax payable by the recipient of the interest?

A

It is

113
Q

What does this provision relates to?

A

Where the lender is a taxable person under PITA

114
Q

Will a company that warns interest from a taxable person under the PITA qualify for this reduction?

A

No

115
Q

What will a taxable person under the PITA be allowed to do?

A

Allowed to deduct interests paid on loans acquired and employed as capital in acquiring its income

116
Q

Section

A

Section 20(1)(a)

117
Q

INTEREST EARNED BU FOREIGN PERSONS

A

Interest earned by an individual or an executor, or a trustee outside Nigeria from a loan granted to a person in Nigeria(including a person who is resident or present in Nigeria at the time of the loan) shall be deemed to be derived from Nigeria if there is liability to payment in Nigeria of the interest regardless of what form the payment takes and wherever payment is made; or if the interest accrues in Nigeria to a foreign company or person regardless of what form the payment takes and wherever the payment is made

118
Q

Which section is this?

A

Section 14

119
Q

INTEREST EXEMPTED FROM TAX

Which section deals with incomes that are exempted from tax

A

Schedule 3 PITA

120
Q

There are categories of interest that are exempted from tax in the hands of recipient
One is?

A

That which relates to interest earned by foreign bodies on loans charged on the public revenue of the Federation and bonds that are issued by the Government of the Federation to secure repayment of loans raised from the International Bank for Reconstruction and Development under the authority of the Railway Loan (International) Act

121
Q

Other categories of interest that are tax exempt?

A

Interest on any money borrowed by the Government of the Federation or of a state in terms which include the exemptions interest from tax in the hands of a non resident person

122
Q

Another one?

A

Where the Minister of Finance so consents, the interest on any monies borrowed outside Nigerian by a corporation established by a law in Nigeria upon terms which include the exemption of such interest from tax in the hands of any non-resident person

123
Q

Another?

A

Interest in deposit accounts, provided the deposits are transfer wholly made up of foreign currencies to Nigeria on or after 1st January 1990 thorough Government Approved Channels and the depositor doesn’t become non-resident after making the transfer while in Nigeria

124
Q

Another

A

Interest accruing to a person on foreign currency domiciliary accounts

125
Q

Another?

A

Interest earned by banks on a savings account less than 50k

126
Q

RENT

where can rent be earned from?

A

Leasing property

Leasing equipment

127
Q

UNDER PITA IS RENT A TAXABLE INCOME ?

A

Yes

128
Q

Subject to withholding tax at the rate of

A

10% s.69

129
Q

ROYALTY, DISCOUNT

Royalty is subject to withholding tax at the rate of?

A

5%

130
Q

Section?

A

Section 70(2)

131
Q

Although discount is a taxable income under the act s3(1)(d) is it subject to withholding tax

A

It is not

132
Q

INVESTMENT INCENTIVES

WHAT ARE THEy?

A

Special provisions that provide more favourable tax treatment than that accorded under the normal tax system

133
Q

Incentives may take the form of?

A

Exemptions or reduced tax rates

Year 5 (12 decks)

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