Tax Law Flashcards
TAXATION OF INVESTMENT INCOME
Trustee under a private trust or as a trustees under a Retirement Benefit Scheme have an obligation to?
Invest the assets that are committed to their trust
What is investment income?
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
What are considered investment income?
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
Can business have income from investments?
Yes
What is often listed in the income statements of publicly traded companies?
An item called investment ‘income or losses’
What is done in this investment ‘income or losses’
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
What is investment according to modified version of Webster’s definition?
Act of committing money or money’s worth in order to gain profit or interest
What are the categories of investment?
Direct investment
Portfolio investment
What does portfolio investment referred to in taxation?
Passive income
What forms can portfolio investment take?
- Form of acquisition of securities such as shares or bonds
- Form of a loan
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?
Dividend Interest Rent Interest Interest Interest Interest Rent Discount Royalty
What is one of the factors that should guide the investor in his choice of investment is?
Tax implication of that particular type of investment
What is the exception to this factor?
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
What are the other factors that an investor consider when investing?
Time frame within whichnhr needs to realize a return on that investment
- the economic indices prevalent at the time of investment and other variables
Investment could be?
Short term, medium term or long term
The treatment of investment income under the CITA and PITA are quite similar ?
Yes
Where are the treatment dissimilar?
The withholding tax rules
Where does CITA and PITA apply as regards investment
Accrues to a company and an individual or persons taxable under PITA respectively
What are the investment incomes under CITA
Dividends
Interest, Royalty
Rents
What are the investments income subject to PITA
Dividends
Interest
Rent
Royalty, Discounts
Investment incomes under CITA
DIVIDENDS
What does dividends mean in relation to CITA?
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
In relation to a company that is being wound up or liquidated what is dividends?
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
Under why section of CITA talks about Dividends?
Section 80
What does Section 80 CITA provide?
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
How much withholding tax is deducted on dividend paid to a company ?
10%
What section of CITA provides for this?
Section 80 CITA
What happens when the recipient is a foreign company and which section of CITA gives rise to this?
The tax withheld will represent the final tax payable by the foreign recipient company Section 80(4)
When will dividend not be taxable by a Nigerian company from a foreign company
When the dividend is brought into Nigeria through Government Approved channels.
What is regarded as franked investment income?
A dividend received after deduction of tax
What section provide for franked investment income?
Section 80(3)
What does the section provide?
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.
What is the recipient company required to do to distribute the dividends to the shareholder?
Offset the withholding tax that it has already suffered on those dividends
Where a Nigerian company earns franked investment income, what will be the tax withheld
10%
What will the tax withheld constitute?
The final tax payable on that income
When the company is computing its taxable profits will it be excluded from the total profits of the company?
Yes it will
What happens when such income is redistributed?
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
What happens where the company makes distribution to its shareholders from its other profits?
The distribution will be subject to withholding tax
What happens to the company as a result?
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
In order to take of the franked investment income what should the company do?
The distribution that it makes to its shareholders must be from that franked investment income and not from another source of profits
EXCESS DIVIDEND RULE
What section of CITA imposes excess dividend tax?
Section 19
What does section 19 provide for ?
Where a dividend is paid out as profit on which no tax is payable
This tag is payable due to?
No total profits or
Total profits which are less than the amount of dividend which is paid
What happens to the company according to the relevant sections?
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
At what rate is the company paying the dividend charged?
30%
What case fall under excess dividend
Oando v Firs
What was the rule under excess dividend rule under the new judgment of the tax appeal tribunal?
Nigerian companies are now liable to income tax at 60%
What was the facts of the case?
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
What was Oando’s position?
Oando put forward three major arguments
- The dividends were paid out of retained earnings which had already been taxed in prior years.
- Firs should have considered and applied Section 80 CITA which exempts dividend income that has been subjected to withholding tax from further tax
- If Section 19 is considered ambiguous then it should be interpreted in Favour of the taxpayer in line with the contra fiscum rule
What was Firs position?
They appeared to agree that dividends paid from retained earnings should not be subjected to excess dividends tax. It
What was the decision of the court?
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.
The tribunal outlined four steps to be followed before subjecting a company to tax under section 19
First step?
Ascertain why no tax was payable -which could either be due to no taxable profits less than dividend paid
Second step
Regard any such dividends paid as the taxable profits of the company
Third step
The actual taxable profit for the current year should be deduced from the dividend (deemed taxable profit) to determine the excess
Last step
Apply the tax rate of 30% to the excess established under step 3
What did the tribunal hold?
Held that since the FIRS had compiled with all the four steps Oando was rightly assessed to the additional tax
What is prudent for companies seeking to pay dividends out of their retained earning ensure?
That such dividends do not exceed their taxable profits for the relevant year pending the resolution of this dispute
What should be lasting solution ?
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
DIVIDENDS DISTRIBUTED BY A UNIT TRUST
what are unit trust schemes for?
Purposes of companies’ income tag, treated as limited liability companies
Who are the trustees?
A company that derives income from making investments
Unit holders are? And ah how are their right treated as?
And their income?
Shareholders
rights are treated as shares
Income available for distribution to the unit holders is treated as dividends
What section of CITA?
Section 17
Dividends earned by a Unit trust are regarded as?
Franked investment income
Where the dividends are redistributed what happens to the dividends?
Exempted from tax
Which section of CITA?
Section 23(1)(f) CITA
In the case of an investment company what happens?
Those dividends are not exempted from tax
Why Rights does the investment company have?
Merely has a right to offset the withholding tax that it has suffered against the withholding tax that is due on those distributions
DIVIDENDS EXEMPTED FROM TAX
1?
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
2?
Dividend derived by a company from a country outside Nigeria and brought into Nigeria through Government approved channels
3?
Dividend received from small companies in the manufacturing sector, in the first five years of their operations
4?
Dividends received from investments in wholly export-oriented businesses
5?
Dividend distributed by a Unit Trust
INTEREST, ROYALTY
What does section 78 CITA provide?
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%
In practice tax withheld on royalty at the rate of?
15%
This is by virtue of
Information circular No 9502 issued by the Federal Inland Revenue Service in 1995
INTEREST EARNED BU FOREIGN COMPANIES
What happens where interest accrued to a foreign company from a Nigerian company?
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)
INTEREST EXEMPTED FROM TAX
1?
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
What happens where the loan is not payable for a period of five years
Tax will be charged and withheld at the rate of 5%
Statute?
S.11(1) CITA
2?
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
Statute?
S.11(2) CITA
3?
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
Section under FEAP
S.3
4?
Interest payable on any loan granted by a bank for purposes of manufacturing goods for export
5?
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)
6?
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
Any income that is not taxable is not subject to withholding tax true or false
True
RENTS
WHAT section of CITA talks about Rent?
Section 79
What does the section provide?
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
What does rent include?
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
Statute?
S.79(6) CITA
Will tax withheld on tents paid to a foreign company be the final tax payable by the foreign company on that rent payment?
Yes
What happens where a Nigerian company brings in rent payments received outside Nigeria?
Such rent payment will not be subject to withholding tax if brought in through an approved channel
INVESTMENT INCOMES SUBJECT TO PERSONAL INCOME TAX
Incomes chargeable to personal income tax include?
Incomes earned by individuals and income arising from a trust or estate due to a trustee
Would a corporate trustee be taxable under the CITA on incomes earned from the provision of Trustee services
Yes
In case of a body of individuals ?
They would be taxable under PITA
DIVIDEND
Is dividend a taxable income under the PITA?
Yes
Section?
Section 3(1)(d)
What does Dividend for the purpose of PIT mean for 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, including an amount equal to the nominal value of bonus shares, debentures or securities awarded to shareholders.
What is dividend for the purpose of PIT in relation to a company that is being wound up or liquidated?
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
Section?
S.3(3)(e)
Dividend is subject to withholding tax at the rate of?
10%
Section?
Section 71
Will the tax withheld on the dividend be the final tax payable by the recipient of the dividend?
It will
Tax payable by individuals and persons taxable under the PITA IS?
10%
DIVIDENDS EXEMPTED FROM TAX
1?
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
Statute
Para 24 of schedule 3 PITA
2?
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
INTEREST
Is interest is a taxable income under PITA?
Yes it is
Section?
S.3(1)(d)
Withholding tax is deductible on interest at the rate of
10%
Section?
S.70(2) PITA
Is the tax withheld on interest the final tax payable by the recipient of the interest?
It is
What does this provision relates to?
Where the lender is a taxable person under PITA
Will a company that warns interest from a taxable person under the PITA qualify for this reduction?
No
What will a taxable person under the PITA be allowed to do?
Allowed to deduct interests paid on loans acquired and employed as capital in acquiring its income
Section
Section 20(1)(a)
INTEREST EARNED BU FOREIGN PERSONS
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
Which section is this?
Section 14
INTEREST EXEMPTED FROM TAX
Which section deals with incomes that are exempted from tax
Schedule 3 PITA
There are categories of interest that are exempted from tax in the hands of recipient
One is?
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
Other categories of interest that are tax exempt?
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
Another one?
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
Another?
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
Another
Interest accruing to a person on foreign currency domiciliary accounts
Another?
Interest earned by banks on a savings account less than 50k
RENT
where can rent be earned from?
Leasing property
Leasing equipment
UNDER PITA IS RENT A TAXABLE INCOME ?
Yes
Subject to withholding tax at the rate of
10% s.69
ROYALTY, DISCOUNT
Royalty is subject to withholding tax at the rate of?
5%
Section?
Section 70(2)
Although discount is a taxable income under the act s3(1)(d) is it subject to withholding tax
It is not
INVESTMENT INCENTIVES
WHAT ARE THEy?
Special provisions that provide more favourable tax treatment than that accorded under the normal tax system
Incentives may take the form of?
Exemptions or reduced tax rates
