CITN Study Pack - Taxation of Specialized Businesses

THE CHARTERED
In
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ity
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S
&
THE CHARTERED INSTITUTE

OF TAXATION OF NIGERIA
NEW SYLLABUS STUDENT’S STUDY GUIDE ON
TAXATION OF SPECIALIZED
BUSINESSES AND PROCESSES
EFFECTIVE DATE: APRIL 2020

VISION
To be one of the foremost professional association in

Africa and beyond
MISSION
To build an Institute which will be a citadel for the

advancement of taxation in all its ramifications
MOTTO
Integrity and Service

First edition published by
Chartered Institute of Taxation of Nigeria
© CITN, January 2020
All rights reserved. No part of this publication may be reproduced,

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You must not circulate this book in any other binding or cover and
you must impose the same condition on any acquirer.
Notice
CITN has made every effort to ensure that at the time of writing
the contents of this study text are accurate, but neither CITN nor its
directors or employees shall be under any liability whatsoever for
any inaccurate or misleading information this work could contain.
Foreword
The Nigerian tax laws have been undergoing reformations and re-
enactments, most especially as the revenue from oil continues to
dwindle and tax revenue is becoming the major source of government
revenue. The impact of these reformation on tax professionals and the
skills set needed by professional tax administrators and tax practitioners
to perform their various roles have been profound. These developments
have made it inevitable for the Institute’s syllabus and training
curriculum to be changed to align its contents with current and future
needs of the tax professionals.
In order to help the candidates sitting for the Institute’s examination,
the Council approved that a new set of learning materials (study
packs) be developed for each of the new subjects.
Therefore, renowned writers and reviewers which comprised eminent
scholars and practitioners with tremendous experiences in their areas
of specialisation, were sourced locally to develop learning materials for
the 12 subjects as follows:
Foundation
1. Principles of Taxation
2. Financial Accounting
3. Business Law
4. Economics
Professional Taxation I
5. Financial Reporting
6. Income Tax
7. Indirect Tax
8. Governance, Risk & Ethics
Professional Taxation II
9. Tax Audit and Investigation
10. International Taxation
11. Financial / Tax Analysis
12. Income Tax for Specialised Businesses
Although the study packs were specially produced to assist candidates
preparing for the Institute’s Professional Examinations, we are
persuaded that students of other professional bodies and tertiary
institutions will find them very useful.
Kolawole Ezekiel Babarinde

Chairman, Examination Committee.
Acknowledgement
The Institute is deeply indebted to the underlisted writers and reviewers
for their scholarship and erudition which led to the successful
production of these study packs. They are:
Principles of Taxation
1. Femi Enigbokan Reviewer
2. Ojuolape Fajuyitan Writer
3. Sanni Dahiru Writer
Financial Accounting
1. Taorid Ramon Reviewer
2. Benjamin Omonayajo Writer
3. Jubril Lawal Writer
Business Law
1. Olayiwola Oladele Reviewer
2. Sylvester Akinbuli Writer
3. Kola Oyekan Writer
Economics
1. Gbemi Onakoya Reviewer
2. Sampson Adebayo Writer
3. Agbor Baro Writer
Financial Reporting
1. Ojo Ajileye Reviewer
2. Samuel Okoye Writer
3. Joseph Ogunwede Writer
Income Taxation
1. Olugbenga Obatola Reviewer
2. Moniru Adebayo Writer
Indirect Taxation
1. Sunday Kajola Reviewer
2. David Sobande Writer
Governance, Risk & Ethics
1. Olutoyin Adepate Reviewer
2. Tade adegbindin Writer
Tax Audit and Investigation

1. Ojo Peter Reviewer
2. Julius Adesina Writer
3. Femi Aribisala Writer
International Taxation
1. Jonathan Adejuwon Reviewer
2. Sandra Momah Writer
Financial / Tax Analysis
1. Phillip Olowolaju Reviewer
2. Julius Adesina Writer
Income Tax for Specialised Businesses and Processes
1. Anthony Clever Reviewer
2. Folarin Akanni-Alimi Writer
3. Sandra Momah Writer
CHAPTER 1:
TAXATION OF SPECIALIZED BUSINESSES AND PROCESSES
1.0 PURPOSE
After reading this chapter, students should be able to:
(a) Know the specialised companies and the peculiar tax laws relating to the
specialized businesses; and
(b) Be able calculate applicable taxes including minimum tax payable by the
various specialised businesses.
1.1 INTRODUCTION
In addition to the normal rules on assessment and computation of tax payable by
companies, Companies Income Tax Act (CITA) CAP C21 LFN 2004 as amended
contains special provisions with regards to companies engaged in a specialised
business. These companies include:
i. Companies engaged in shipping or air transportation and companies other than
a Nigerian company carrying on the business of transmission of messages by
cable or any form of wireless apparatus.
ii. Insurance companies;
iii. Banks; and
iv. Unit Trust
1.2.0 COMPANIES ENGAGED IN SHIPPING OR AIR TRANSPORTATION,

CABLE AND WIRELESS BUSINESS
The business operation of air and sea transportation may be carried on by companies
incorporated in Nigeria called Nigerian company or other companies known as non-
Nigerian companies.
The taxation of these businesses is contained in sections 14- 17 of CITA CAP C21 LFN
2004. According to the Act, where a company other than a Nigerian company carries
on the business of transport by sea or air, and ship or aircraft owned or chartered by it,
calls at any port or airport in Nigeria, its profit or loss deemed to be derived from
Nigeria shall be the full profit or loss arising from carriage of passengers, mails,
livestock or goods, shipped or loaded into an aircraft or ship in Nigeria. This means
that, this shall not apply to passengers’ mails, livestock or goods which are brought to
Nigeria solely for transhipment or for transfer from one aircraft or in either direction
between aircraft and a ship.
1.2.1 METHOD OF ASSESSMENT

Basically, the following steps should be followed:
i. Determine the global income of the business;
ii. Determine the Nigeria income;
iii. Determine the global adjusted profit ratio (GAPR) by apply the Global
Adjusted Profit on the global income;
iv. Determine the global depreciation ratio (GDR) by apply the global
depreciation charge on the global income;
v. The APR should be applied on the Nigeria income to obtain the Nigeria
adjusted profit;
vi. The depreciation ratio when applied on the Nigeria income gives capital
allowance claimable in lieu of depreciation;
vii. Deduct capital allowance from adjusted profit (i.e. vi – vii) to arrive at the
taxable profit;
viii. Apply company tax rate to arrive at the tax liability (i.e. viii x 30%).
1.3.0 UNIT TRUST SCHEME

A unit trust scheme means any arrangement made for the purpose of providing facilities
for the preparation of the public as beneficiaries under a trust, in profits or income
arising from the acquisition, holding, management or disposal of securities or any
property whatsoever. The provision of Section 17 of CITA CAP C21 LFN 2004 as
amended, shall, in respect of the income arising to the trustees of an authorised unit
trust, have effect:
(a) As if the trustees were an investment company;
(b) As if the rights of the unit holders were shares in the company; and
(c) As if any income accruing to the trustees available to be paid to the unit holders
were dividends on such shares.
1.3.1 DEFINITION OF TERMS
(i) Authorized Unit Trust: means in respect of a year of assessment, a unit

trust scheme that is authorized by the commission under section 576 of
the CAMA 1990 to carry on the business of dealing in unit trust scheme.
(ii) Unit Holder: means any investor, beneficiary or person who acquired
units in a unit trust scheme and is entitled to a share of the investments
subject to the trusts of a unit trust scheme.
(iii) Trustee: under a unit trust scheme means the person whom the property
for the time being subject to any trust created in pursuance of the scheme
is or may be invested in accordance with terms of the trust.
The profits of an authorized unit trust scheme, on which tax may be imposed shall be
the income accruing to the trustees from all sources of the investment of the unit trust
and deducting therefrom sums disbursed as management expenses, including
remuneration of the managers.
1.3.2 FORMAT
Thus, the taxable profit is arrived at as follows:
N N
Investment Income X
Other taxable income X XX
Deduct: Management expenses X
Trustee’s remuneration X
Other allowable expenses X (X)
Assessable/Adjusted profit XX
Less Capital allowance (absorbed) (X)
Taxable profit XX
1.4.0 TAXATION OF INSURANCE COMPANIES

Taxation of insurance companies is covered by Section 16 CITA Cap C21 LFN 2004
as amended. This section deals with the taxation of both Nigerian and Non-Nigerian
companies engaged in insurance business. It also distinguishes between life business
and non-life business. With effect from 1995, where a company carries on both Life
and non-life insurance business, the income from each source would be taxed
separately. Like any other company, dividend received by insurance companies is
treated as Franked investment income, it is therefore exempted from tax.
Furthermore, where an insurance company carries on a composite business i.e. life class
and a general class insurance business, the funds and books of account of one class shall
be kept separate from the other as though one class does not relate to the other class and
the annual tax returns of the two classes of insurance business be made separately.
For each class of insurance business, where there are more than one type of insurance
(products) in the same class, they form one type of business and the loss of one shall
be allowed against the income from another type of insurance business but the loss
shall be available to be carried forward against profit from the same class of insurance
business, and to such loss can be carried forward or maximum of 4 years.
However, with effect from January 2020, the above restriction is now removed and
insurance companies can now carry forward their loss indefinitely.
1.4.1 NON-NIGERIAN COMPANY

(a) Non-Life Business
Where a non-Nigerian company is engaged in non-life insurance business in Nigeria,
the assessable profit would be determined just like that of the Nigerian company.
However, only premium received in Nigeria will be taken into consideration and only
expenses incurred in Nigeria will be allowed as deduction including a fair proportion
of head office expenses.
For a non-Nigerian insurance company to be liable to tax in Nigeria, it must have a

permanent establishment in Nigeria. A “Permanent establishment” in relation to an
insurance company means a branch, management or a fixed place of business in
Nigeria, but does not include an agency in Nigeria unless the agent has, and habitually
exercises a general authority to negotiate and conclude contracts on behalf of such
company.
Consequently, the profit on which tax may be imposed shall be ascertained as follows:
N N
Gross Premium X
Less Premium to re-insurance and return to insured (X)
Other income X
X
Less: Reserves for unexpired risk C/F (X)
Add: Reserves for unexpired risk b/f X X
XX
Deduct:
Agency expenses X
Fair proportion of Head Office Expenses X (X)
Taxable Income XX
(b) Life-Business
When a non-Nigerian company engages in life assurance business by carrying on
business through a permanent establishment in Nigeria, the profit on which tax may
be imposed shall be ascertained as follows:
N N
Investment Income X
Less: Management Expenses X
Commission X (X)
Taxable Income XX
In a situation where the profit of the company accrues in part outside Nigeria, the profit
on which tax shall be imposed shall be in proportion of the total investment income of
the company as premium receivable in Nigeria bear to the total premium receivable less
agency expenses in Nigeria and proportion of Head Office expenses.
N
Investment income (Receivable in Nigeria)
Premium received in Nigeria X Total Investment
Total premium received worldwide 1 X
Less:
Agency expenses X
Fair proportion of Head office expenses X (X)
Taxable Income XX
1.4.2 NIGERIAN COMPANY

(a) Non-Life Business
The assessable profit and tax liability of a Nigeria company carrying on non-life
insurance business is determined as follows:
N N N
Gross premium xx
Less: premium to reinsurance (x)
Net premium xx
Add: Interest income x
Other income x x
Gross income xx
Less: Provision for unexpired risk c/f x
Restricted to:
45% of premium for general, and
25% of premium for cargo marine (x) (x)
xx
Less: allowable expenses:
Claims x
Less: Claims from reinsurance (x) x
Commission x
Other allowable management expenses x
xx
Restricted to 25% of total premium (x) (xx)
Assessable profit xx
Less capital allowance (x)
Total profit xx
Tax payable shall be the higher of:
Tax paid as per total profit i.e. 30% of total profit; or
Tax paid on 15% of gross income
(b) Reinsurance Business

The assessable profit and tax liability of a company carrying on reinsurance business is
determined as follows:
N N N
Gross premium xx
Less: premium to reinsurance (x)
Net premium xx
Add: Interest income x
Other income x x
Gross income xx
Less: Provision for unexpired risk c/f x
Restricted to:
45% of premium for general, and
25% of premium for cargo marine (x) (x)
xx
Less: allowable expenses:
Claims x
Less Claims from reinsurance (x) x
Commission x
Other allowable management expenses x
xx
Restricted to 25% of total premium (x) (xx)
Less transfer to general reserve:

(i) General reserve < minimum authorised capital
50% of gross profit x
or
(ii) General reserve >= minimum authorised capital
25% of gross profit x (x)
Total profit xx
(c) Life Business

The assessable profit and tax liability of a Nigerian company carrying on life insurance
business is determined as follows:
N N N
Investment income x
Other income x
Actuarial revaluation surplus distributed x
Gross income xx
Deduct:
i. General reserves x
Add life fund a/c x
xx
Less: Net liabilities on policies (x) x
ii. Special reserves

The higher of:
1% of gross premium x
10% of net profit x x
iii. Other allowable management expenses x (x)

Total profit xx
Note: The amount transferred annually to special reserve shall depend on whether the
total reserve is equal to or higher than the minimum statutory paid up capital.
1.4.3 INVESTMENT INCOME FOR LIFE

Investment income for a life business includes income from investments such as
dividend, interest, rent, royalty, lease premium and other income. It will also include
any surplus arising from actuarial valuation of the reserves for unexpired risk.
Investment income does not include the premium received by the company from the
assured. It is important to stress that the fundamental difference between non-life and a
life business for tax purpose is in the treatment of premium received and claims payable.
In non-life business, premium received and investment income are treated as income
liable to tax while in life business only investment income is treated as liable to tax.
Also, claims payable are allowable expenses for non-life business but they are not
allowed in life business.
1.4.4 Additional information to be filed by insurance business

An insurance company that engages the services of an insurance agent, a loss adjuster
and an insurance broker shall include in its annual tax returns, a schedule showing the
names and addresses of insurance agent, a loss adjuster and an insurance broker, the
date their services were employed and terminated and payments made to them.
2.5.0 TAXATION OF BANKS
2.5.1 INTRODUCTION
Banks are subject to tax in the same way and manner with which other
incorporated companies are subject to tax liable to tax. Essentially, banks and
other financial institutions are liable to tax under the Companies Income Tax
Act Cap C21 LFN 2004 as amended. Therefore, like other companies, banks
are liable to both company income tax and tertiary education tax.
Banks are also required to file both monthly and annual tax returns and failure
to file any such returns will constitute a violation of the applicable extant law
and this shall attract penalties / sanctions.
2.5.2 DETERMINATION OF ASSESSABLE PROFIT AND TAX LIABILITY

The assessable profit and tax liability of banks and other financial institutions
are determined in the same way and manner as thus other incorporated
companies under the provisions of Companies Income Tax Act Cap C21 LFN
2004 as amended. However, there are some specific provisions that are
peculiar to banks that are imperative to highlight. These provisions include:
(a) Interest on loan granted by banks to a company for manufacturing goods
for export shall be exempted from tax as provided under Table 2
Schedule 3 of CITA 2004and subject to the following conditions:
(i) The beneficiary company must export not less than 50% of its
manufactured goods sold and such goods must not be re-exported
back to Nigeria.
(ii) The beneficiary company must obtain a certificate of export issued
by the Nigeria export promotion council certifying the export of
the company.
Table 2 schedule 3 of CITA 2004

Tax
Repayment period (including
Grace period exemption
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 Nil
(b) Interest on loan granted by bank for agricultural business shall be
exempted from tax if at least 18 months moratorium is allowed and the
rate of interest is not more than the based lending rate of the bank at the
time the loan was granted.
Agriculture business or trade is defined as:

i. The establishment or management of plantation for production of
rubber, oil palm, cocoa, tea or similar product;
ii. The cultivation or production of cereal crops, tubers, fruits of all
kinds cotton, beans, groundnut, she nuts, vegetable and plantain;
and
iii. Animal husbandry, poultry, piggery, cattle rearing, fish rearing
and deep sea fish trawling.
(c) Interest on loan granted by bank to a company engaged in the fabrication
of local plant, machinery and tools shall be exempted from tax if at least
18-month moratorium is allowed and the rate of interest is not more than
the based lending rate of the bank at the time the loan was granted.
(d) Interest on loan granted by bank to companies in the cottage industry
under the family economic advancement program (FEAP) shall be
exempted from tax if at least 18 months’ moratorium is allowed and the
rate of interest is not more than the base lending rate.
(e) Interest receives by banks on Federal and State Government
Development loan stocks or bonds are exempted from tax.
(f) Interest earned on foreign placement or dividend, rent and royalty
derived by any company from outside Nigeria and brought into Nigeria
in convertible currency through a domiciliary account in a bank
approved by the government.
(g) Dividend treated as franked investment income
(h) The following expenses / provisions are not tax deductible:
i. Increase in provisions on performing loans account;
ii. Increase in provisions on other assets or account receivable;
iii. Increase in provisions on advances under finance lease;
iv. Increase in provision for diminution in the value of investment;
v. Increase in provision for off balance sheet engagement;
vi. Increase in provision for gratuity; and
v. Unrealized exchange loss.
2.6 Chapter review

This chapter essentially provides clarity on the various specialised businesses as well
as the peculiar tax law that relating to these businesses. In a addition, the chapter
deals comprehensively with the computation of tax of a selected number of
specialised companies - such as those engaged in air and sea transport, cable
(telecommunication) undertakings, unit trust, life and non-life insurance companies,
and banks and other financial institutions.
Numerous worked examples are provided to clearly explain the differences and
peculiarities inherent in the computation of tax liability for each of the specialised
businesses.
2.7 End of chapter questions
Question 1
The profit and loss account of Alwell Airways Limited Company incorporated in Italy
in 2006 shows the following in respect of the year ended 31st December 2011.
N
Income from passenger freight out of Nigeria 1,500,000
Income from passenger freight into Nigeria 5,000,000
Income from passenger on other routes 18,000,000
24,500,000
Deduct:
Administrative expenses 8,100,000
Financial expenses 1,700,000
Depreciation 2,940,000
Other disallowable expenses 900,000 (13,640,000)
10,860,000
The Federal Inland Revenue Service is satisfied that the tax authority of Italy computes
and assesses the profit of companies operating aircraft on substantially similar basis as
Nigeria.
You are required to:

Calculate the profit of Alwell Airways Limited, which would be subject to Nigerian
tax.
Question 2
The global income statement of JEMMY Airways Limited, a foreign airline which
operates in Nigeria for the year ended 31st December, 2015 shows the following:
N’ 000 N’ 000
Transportation Income
Income from passengers, cargo and mails
Outside Nigeria sales 3,100,000
Nigeria sales 100,000 3,200,000
Less: Transportation Expenses:
Salaries and other expenses 2,300,000
Depreciation 320,000
Other disallowable expenses 180,000 (2,800,000)
Net Transportation Income 400,000
Other Income:
Income from properties (Net) 25,000
Income from maintenance (Net) 50,000
Income from duty-free ship (Net) 50,000
Income from catering (Net) 75,000 200,000
Net Income 600,000
You are required to determine the Tax Payable in Nigeria.
Question 3
Donaldson Trumpy Limited is a foreign company operating a fleet of passenger and cargo
aircraft between Nigeria, Middle and Far East. The operating result for the year ended 31st July
2018 are as follows:
N’ 000 N’ 000
Income from cargo freight Nigeria/Moscow 630,800
Income from passenger freight Nigeria/Beijin 850,000
Income from passenger freight Abu Dhabi to Nigeria 1,113,200
Income from cargo loaded into aircraft on other routes 700,000
3,294,000
Less: Operating expenses 1,720,000
Administrative expenses 320,000
Other expenses – General Provision 80,000 (2,120,000)
Operating Profit 1,174,000
The following additional information is provided:

a. Operating expenses include N’ 000
i. Purchase of two engines 130,000
ii. Use of airport facilities 36,000
iii. Hotel bills for 1st class passengers 42,000
iv. Accommodation of airline crew 10,000
v. Gifts airport staff for gratification 12,000
vi. Depreciation 320,000
b. Capital allowances were agreed with the relevant authority as 150% of depreciation
charged in the account.
You are required to compute

i. The total profit of Donaldson Trumpy Limited for the purpose of Nigeria Income tax.
ii. The liability to Income Tax in respect of chargeable income and state the relevant year
of assessment.
Question 4
HE REIGNS LIMITED is a foreign company operating a cable service between Nigeria,
London and other parts of the world. The following information is provided by the accountant
as the company’s operating results for the year ended 31st December 2016.
N N
Income from cable services:
From Nigeria to Amsterdam 10,090,280
From New York to Nigeria 13,600,000
From Nigeria to Denmark 17,810,120
Other income from other areas 11,200,000 52,700,400
Less Administrative overheads
Salaries and perquisites 17,520,000
Other expenses 11,280,000
Depreciation 5,120,000 33,920,000
18,780,400
The following additional information is provided:
i. Other expenses include: N
Donation to Boko Haram victims in Yobe
through the Nigerian Red Cross Society 2,500,000
Donation to Peace Democratic Movement 3,500,000
Licence fees paid to NCC 1,500,000
ii. Capital allowance as agreed with the FIRS is 7,680,000
You are required to compute:

i. Total profits of He Reigns Ltd that will be subject to Nigerian tax for the 2017 year
of assessment.
ii. Income tax liability for the same year of assessment
Question 5
KUFORIJI Telecommunication Limited is based in London but has a representative office in
Nigeria. During the year ended 31st December, 2016, the record of its transactions were as
follows:
(a) Number of minutes of Telecommunication transactions:-
London to other parts of the world = 310,000 minutes
London to Nigeria = 680,000 minutes
Nigeria to London = 775,000 minutes
Nigeria to South Africa = 1,000,000 minutes
London to South Africa through Nigeria = 1,445,000 minutes
7,000,000 minutes
(b) The average charge for message applicable during the year under review is £0.50 per
minute. The applicable rate of exchange is N20.75 to a £.
(c) The global expenses incurred include: N
i. Salaries and wages 7,391,250
ii. Depreciation 10,893,750
iii. Administrative expenses 8,765,000
iv. Rent 2,000,000
v. Refurbishment 13,000,000
vi. Other non-allowable expenses 17,560,000
59,610,000
You are required to compute the tax payable in Nigeria by Kuforiji Telecommunication Ltd.
Question 6
ASWANI Group Limited received an approval from the Securities and Exchange Commission
to float a Unit Trust Scheme in April, 2009. The unit trust scheme was subsequently registered
and commenced business on 1st January, 2010 in the name of Aswani Unit Trust Scheme.
The following records were disclosed for the year ended 31st December, 2010.
N N
Investment Income 31,829,500
Less: Management Expenses 10,250,000
Remuneration of manager 3,182,950
Other expenses 7,341,550 24,024,500
Net Profit 7,805,000
The following additional information was provided:

a) Management expenses include N
(i) Loss on investment disposed 1,750,000
(ii) Preliminary expenses 1,455,000
(iii) Donation to ICAN Building fund 1,250,000
(iv) Subscription to association of Unit Trust Managers 500,000
(v) Fine for late filling of returns 480,000
b) Capital allowance on assets was 9,384,750
c) Other expenses include:
(i) Special reserve for future investment 500,000
(ii) New computer system 368,500
You are required to compute the tax liability of the unit Trust Scheme for the
first year of assessment.
Question 7:
Peal Court Insurance Co. Plc is a company engaged in composite insurance business. The draft
IFRS audited account of the company for the year ended December 31, 2018, disclosed the
following information:
(a) Statement of profit or loss
For year ended December 31, 2018
Life Non-life Reinsurance

Total
business business business
N’000 N’000 N’000 N’000
Gross premium written 11,000 50,000 29,000 90,000
Gross premium income 11,000 50,000 29,000 90,000
Re-insurance premium 0 (29,000) 0 (29,000)
Net premium income 11,000 21,000 29,000 61,000

Fees and commission income 1,250 3,150 2,100 6,500
Net underwriting income 12,250 24,150 31,100 66,500
Claims expenses (6,250) (12,000) (10,500) (28,750)
Re-insurance claims 3,000 7,500 0 10,500
Change in contract liabilities 350 (1,150) 0 (1,500)
Net claims expenses (2,900) (5,650) (10,500) (19,050)
Underwriting expenses:
Acquisition expenses (150) (700) (495) (1,345)
Maintenance expenses (775) (2,165) (900) (3,840)
Total underwriting expenses (925) (2,865) (1,395) (5,185)
Underwriting profit/(loss) 8,425 15,635 19,205 43,265

Investment income 2,900 6,300 6,850 16,050
Other operating income 900 1,900 1,200 4,000
Total investment income 3,800 8,200 8,050 20,050
Impairment charges (225) (665) (540) (1,430)

Net fair value gain / loss on
investment properties 110 340 170 620
Net operating income 3,685 7,875 7,680 19,240
Expenses:
Administrative expenses (1,950) (9,000) (4,750) (15,700)
Other operating expenses (440) (550) (710) (1,700)
Total expenses (2,390) (9,550) (5,460) (17,900)
Result of operating activities 9,720 13,960 21,425 44,605

Interest expenses (1,800) (3,750) (2,400) (7,950)
Profit or (loss) before taxation 7,920 10,210 19,025 36,655
(b) Statement of financial position

For the year ended December 31, 2018

Total
N N N N
Assets:
Cash and cash equivalent 450,000 830,000 610,000 1,890,000
Financial assets 800,000 1,400,000 1,150,000 3,350,000
Trade receivable 14,000 26,000 22,000 62,000
Other receivables 700 2,300 375 3,375
Investment in subsidiary 0 1,750 0 1,750
Intangible assets 11,000 7,450 13,000 31,450
Property, plant and
equipment 600,000 1,775,000 1,200,000 3,575,000
Statutory deposits 150,000 250,000 200,000 600,000
Total assets 2,025,700 4,292,500 3,195,375 9,513,575
Liabilities:
Insurance contracts
liabilities 650,000 2,640,000 760,000 4,050,000
Investment contract
liabilities 400,000 590,000 510,000 1,500,000
Trade payable 5,600 9,400 8,000 23,000
Other payables 300 600 65 965
Employee benefit liabilities 260 340 275 875
Total liabilities 1,056,160 1,740,340 1,278,340 5,574,840
Equity
Issued and paid-up share capital 600,000
Share premium 900,000
General reserve 1,300,000
Contingency reserve 200,000
Retained earnings 938,735
Shareholders’ funds 3,938,735
Total liabilities and reserves 9,513,575
Additional Information:
(i) The company distributed N1,750,000 surplus arising from actuarial
revaluation of Life fund.
(ii) Administrative expenses include depreciation:
Reinsurance
Life business Non-life business
business
N’000 N’000 N’000
480 600 525
(iii) Gross premium written from non- life business and reinsurance business
include N7,500,000 and N6,800,000 from general insurance.
(iv) Net liability on life policies as at December 31, 2018, was N648,785.
(v) Capital allowances agreed with the relevant tax authority are as follows:
Reinsurance
Life business Non-life business
business
N’000 N’000 N’000
125 400 325
(vi) Investment income includes:

N’000 N’000 N’000
Dividend (gross) 600 1,500 2,750
Interest on fixed deposit 1,650 3,800 3,450
Debenture interest 650 1,000 650
2,900 6,300 6,850
(vii) The provision for unexpired risk includes:

N’000 N’000 N’000
Balance b/f 450 1,500 610
Balance c/f 650 2,640 760
(viii) The balance of the life fund account as at December 31,2018, was
N550,000.
(ix) The minimum authorized capital of the company is the same as the paid up
capital.
Required: Compute the company’s tax liability for the relevant year of assessment.
Question 8
HIS MAGESTY REIGNS Insurance Company Limited is carrying on both life and
other insurance businesses received gross premium income of N7,250,000 in its accounting
year ended 31st, December, 1999. The total amount of N1,200,000 investment income was
also received within the accounting year, while about N5,000,000 was incurred as total
expenses.
From the analysis of the amount listed below, together with capital allowances given,
you are required to compute the tax liability of the company and state the year of assessment.
N
1. Premium Income received on life assurance 1,725,000
Premium income received on Burglary, Theft and Accidents 1,225,000
Premium Income received on Industrial Hazards 2,150,000
7,250,000
2. The management of the company calculated about N600,000 as reserve for unexpired
risks as at the 31st, December 1998 and about N750,000 was also calculated as at 31st,
December, 1999 on non-life assurance.
3. N400,000 was yet to be collected as premium on life and N200,000 on non-life policy
holders for the financial year ended 31st December, 1999.
4. As at 31st December, 1999 Actuary valuation of life fund was:
N
Administrative expenses for life department 25,000
Salaries for life department staff 100,000
Other allowable expenses for life department 5,000
5. Investment Income: N
Dividend received (Net of 5% withholding tax) 637,500
Gross interest received on debenture stock 87,500
Interest on fixed deposit in banks 475,000
1,200,000
Interest on fixed deposits of N43,000 for the accounting year ended 31st December,
1999 was accrued.
6. Total expenses relating to non-life businesses
N
Claims 3,550,000
Commissions 1,420,000
Administrative Expenses 4,150,000
10,000,000
7. Loss on sale of fixed assets included in administrative expenses was N20,000
8. Capital allowances N
Capital allowances b/f 72,500
Initial allowances for the year 225,000
Annual allowances for the year 602,500
Balancing allowance 10,500
Question 9:
AMAZING GRACE Assurance Nigeria Limited commenced business operations on 1st
January, 2002 and at the end of the year had the following results.
AMAZING GRACE ASSURANCE COMPANY LIMITED
Profit and Loss Account for the year ended 31st December, 2002.
Life Fire Accident Total
Business Business Business
N’000 N’000 N’000 N’000
Gross premium Income 3,400 1,450 1,500 6,350
Re-insurance 250 470 410 1,130
3,150 980 1,090 5,220
Investment Income (see 1 below) 1,540 250 310 2,100
Commission receivable - 28 15 43
4,690 1,258 1,415 7,363
Less: Expenditure
Policy holders’ claims 800 140 210 1,150
Reserve for unexpired risks 750 350 150 1,250
Commission Payable 28 110 98 236
Other payable expenses
(See note 2 below) 1,212 130 230 1,572
2,790 730 688 4,208
Profit before taxation 1,900 528 727 3,155
4,690 1,258 1,415 7,363
You are required to ascertain the company’s tax liability for the year of assessment after
taking into consideration the following information:
i. Investment income is made up as follows:
N’000 N’000 N’000 N’000
Dividend Income net of withholding tax 2,480 - - 2,480
Interest on fixed deposits in Banks - 500 620 1,120
Interest income on debenture
Loan (Gross) 600 - - 600
3,080 500 620 4,200
ii. Operating Expenses
N’000 N’000 N’000 N’000
Depreciation 1,040 220 204 1,464
Administrative 344 40 256 640
Other 520 - - 520
1,904 260 460 2,624
iii. Assets acquired by the company during the year are as follows
N
Motor vehicles 324,000
Office Premises 2,626,000
Furniture 1,580,000
Equipment and Computer 2,830,000
Question 10
Countrywide Bank Ltd has been incorporated for many years and makes up its accounts to
September 30 of every year.
The following information was extracted from the audited financial statements of the
bank for the year ended September 30, 2016 and 2017 respectively.
2016 2017
N’000 N’000
Paid up capital 160,000 175,000
Statutory reserve 70,000 82,500
General reserve 22,500 27,500
Debenture stock - 72,500
For the year ended September 30, 2017, the summarised statement of the company’s profit and
loss account is as follows:
N’000 N’000
Income from banking operations 390,000
Less Expenses:
Depreciation 10,000
Interest paid on other banks 7,500
Stamp duty on landed property 1,250
Interest paid to depositors 2,500
Provision for possible losses in
respect of loans and advances 7,500
General provisions for losses 500
Other operating expenses (all allowable) 120,000
Profit on sale of fixed assets 187.5
Net profit 240,937.5
390,187.5 390,187.5

i) Capital allowances claimed was N3,500,000
ii) Income from banking operations included interest received on agricultural loans
amounting to N9,500,000 A break of the interest is as follows:
Period of loan Moratorium Amount of Interest
N
Over 7 years Not less than 2 years 3,800,000
5 – 7 years Not less than 1½ years 2,850,000
2 – 4 years Not less than 1 year 1,900,000
Below 2 years NIL 950,000
9,500,000
You are required to compute the tax liability of the bank for the relevant year of
assessment.
Question 11
1) The net profit of Sparkling Bank Ltd for the year ended 31st December, 2014 as
reflected in the account for the year is N254,350,000 including N150,000 profit on sale
of fixed asset and after charging:
N
Director’s Remuneration 3,500,000
Legal charges for the purchase of leasehold right in building 722,320
Donation to:
Ahoada community development fund 130,000
Port-Harcourt House Club Project 95,000
Recreation Club 251,700
Institute of management fund 250,000
Mt.Zion church building fund 5,000
The capital allowance and balancing allowance were agreed at N33,480,880 and
N209,410 respectively.
The balance sheet (extract) of the company as at 31st December, 2014 were:
N
Paid up share capital 270,000,000
Statutory reserve 181,880,000
General Reserve 131,520,000
Long term loan NIL
You are required to calculate the income tax liability of the bank taking income tax rate
to be 30%.
Question 12
Highclass Bank Ltd has been in business for the past 25 years. The following results were
shown in the company’s books:
N’000
st
Adjusted profit (year ended 31 December, 2015) 11,000
Capital allowances for the year 3,000
Issued share capital 22,400
Statutory reserve 3,600
General reserve 3,200
Long term loan 3,800
You were also informed that the following relates to the account for the year ended 31st
December, 2015:
N’000
i) Turnover 1,000,000
ii) Gross Profit 50,000
iii) Net assets 33,000
iv) Unutilised capital allowance brought forward from 2015 year of assessment was
N7,450,000
You are required to compute the company’s tax liability for the 2016 year of assessment
assuming 30% tax rate.
Question 13 The profit

st
and Loss Account of BIG Bank of Nigeria Ltd as at 31 December, 2018 is as stated below:
Profit and Loss Account for the year ended 31st December, 2018.
N’000 N’000
Income: Interest 104,000
Forex income 24,000
Commission 6,000
Other income 12,000
146,000
Deduct: Interest paid 40,000
Operating expenses 60,000 100,000
Operating profit before tax 46,000
Taxation (26,000)
Profit after taxation 20,000
Appropriation section:
Statutory reserve 2,600
General reserve 4,000
Proposed dividend 3,400 (10,000)
Retained profit for the year 10,000
Unappropriated profit b/f 50,000
Balance c/f of profit 60,000
Other information are as follows:

1. 1(a) Capital allowances b/f from the immediate preceding year of assessment was
N2,000,000.
1(b) Capital allowances for the year are:
N
Initial 8,000,000
Annual 28,000,000
Balancing charge 10,000,000
2. Included in the interest received is interest on agricultural loan which is as follows:
Repayment period Grace Period Interest earned
N
8yrs 2yrs 8,000,000
6yrs 1.5yrs 12,000,000
2yrs Nil 20,000,000
3. Operating expenses include the following:
Provision for doubtful debt of N28,000,000 out of which N20,000,000 is specific.
4. Other income included profit on sale of a fixed asset of N8,00,000
You are required to compute the tax liability of the bank for the 2019 year of assessment.
2.8 Solution to end of chapter questions
Solution to question 1
ALWELL AIRWAYS LIMITED
Computation of Taxable Profit in Nigeria for 2012 Year of Assessment
N
Assessable profit 60% x 1,500,000 (wk. ii) 900,000
Less capital allowance 12% x 1,500,000 ( wk. iii) 180,000
Taxable profit 720,000
Workings N
i. Determination of Nigerian Income
Income from Passenger freight out of Nigeria 1,500,000
N
ii. Computation of global adjusted profit
Net profit as per a/c 10,860,000
Add back:
Other disallowed expenses 900,000 3,480,000
Global adjusted profit 14,700,000
iii. Global adjusted profit ratio (GAP)

Global adjusted profit x 100
Global Profit
14,700,000 x 100
24,500,000
=60%
iv. Depreciation ratio = 2,940,000 x 100 = 12%

24,500,000
Solution to Question 2
JEMMY AIRWAYS LIMITED
COMPUTATION OF TAX PAYABLE IN NIGERIA FOR 2016 YEAR OF
ASSESSMENT
N
Assessable Income (wk iv) 28,130,000
Less Capital allowance (wk v) (10,000,000)
Taxable profit/income 18,130,000
Tax liability at 35% 6,345,500
Workings
N’ 000 N’ 000
i. Nigerian Income
Income from passengers, cargo and mail – Nigeria
Sales 100,000
N’ 000 N’ 000
ii. Global Transportation adjusted income
Net profit/income as per account 400,000
Add Back:
Other disallowable expenses 180,000 500,000
Adjusted adjusted Income / profit 900,000
iii. Adjusted profit ratio

900,000 x 100
3,200,000
=28.13%
iv. Depreciation ratio

320,000 x 100
3,200,000
=10%
v. Assessable Income = 28.13% x 100,000,000

= N28,130,000
vi. Capital allowance = 10% x 100,000,000

= N10,000,000
Note:
Other incomes are exempted on the computation because they have suffered withholding tax
at their respective sources. That is, they are franked investment income which have suffered
withholding tax before they were received.
i. DONALDSON TRUMPY
COMPUTATION OF TOTAL PROFIT FOR 2019 YEAR OF ASSESSMENT
N’ 000 N’ 000
Assessable profit (1,480,800,000 x 52.1%) 771,496
Less capital allowance (150% x 320,000,000) (480,000)
Total profit 291,496
ii. DONALDSON TRUMPY
COMPUTATION OF COMPANY INCOME TAX FOR 2019 YEAR OF ASSESSMENT
N’ 000 N’ 000
Company income tax @ 30% 87,448.80
Workings
i. Nigerian Income N’ 000 N’ 000
Income from cargo freight Nigeria/Moscow 630,800
Income from passenger freight Nigeria/Beijing 850,000
Nigerian income 1,480,800
ii. Computation of Adjusted Profit

N’ 000 N’ 000
Net profit as per account 1,174,000
Add back:
General Provision 80,000
Purchase of two engines 130,000
Gift to airport staff 12,000 542,000
1,716,000
Adjusted profit ratio

1,716,000,000 x 100
3,294,000,000
=52.1%
Note:
Gifts to airport staff is not an allowable expense while the purchase of two engines was
disallowed because it is a capital expenditure
HE REIGNS LIMITED
i. Computation of Total Profit for 2017 tax year
N
Assessable profit (27,900,400 x 51.99%) 14,505,418
Less Capital allowance (7,680,000)
Taxable/Total Profit 6,825,418
ii. Income Tax liability = 6,825,418 x 30% = 2,047,625.40

Education Tax = 14,505,418 x 2% = 290,108.36
Note
Since the FIRS and the company had agreed the capital allowance claimable, there is no need
to compute the Depreciation Ratio.
Also, license fee paid to NCC is tax deductible
Workings
N
a) Global Income = 52,700,400
b) Nigerian Income (10,090,280 + 17,810,120) = 27,900,400
c) Computation of Global Adjusted Profit
Net profit as per account 18,780,400
Add: Depreciation 5,120,000
Donation to Peace Democratic Movement 3,500,000 8,620,000
27,400,400
d) Computation of adjusted Profit Ratio
= Global Adjusted Profit x 100
Global Income
= 27,400,400 x 100
52,700,400 = 51.99%
KUFORIJI TELECOMMUNICATIONS LIMITED
Computation of Tax Liability for 2017 Tax Year
N
Adjusted profit (18,415,625 x 75%) 13,811,718
Less capital allowance (18,415,625 x 15%) 2,762,343
Taxable profit 11,049,375
Tax liability @ 30% 3,314,812
Workings
N
1. Global Income (7,000,000 x 0.50 x 20.75) = 72,625,000
2. Nigeria Income (1,775,000 x 0.50 x 20.75) = 18,415,625
3. Computation of Global Adjusted Profit N N
Global income (wk 1) 72,625,000
vii. Less: Salaries and wages 7,391,250
Administrative expenses 8,765,000
Rent 2,000,000
(18,156,250)
Adjusted Profit 54,468,750
4. Computation of Adjusted Profit Ratio (APR)

Adjusted Profit x 100 = 54,468,750 x 100
Global Income 72,625,000
= 75%
5. Computation of Depreciation Relief Ratio (DRR)

Depreciation x 100 = 10,893,750 x 100
Global Income 72,625,000
= 15%
ASWANI UNIT TRUST SCHEME

Computation of Tax Liability for 2000 Tax Year
N N
Investment Income 31,829,500
Deduct: Remuneration of manager 3,182,950
Management expenses (wk 1) 6,565,000
Other expenses (wk 2) 2,999,050 12,747,000
Assessable/Adjusted Profit 19,082,500
Capital Allowance 9,384,750
Absorbed (9,384,750) (9,384,750)
Taxable Profit 9,697,750
Tax liability (9,697,750 x 30%) = 2,909,325
Tertiary Education tax (19,082,500 x 2%) = 381,650
Workings
1. Calculation of Management Expenses
Expenses as per a/c 10,250,000
Less: Loss on investment 1,750,000
Preliminary expenses 1,455,000
Fine for late filing of returns 480,000 (3,685,000)
Allowable expenses 6,565,000
2. Calculation of other expenses
Expenses as per a/c 7,341,550
Less: Special reserve for future inv. 2,500,000
New computer system 1,842,500 (4,342,500)
Allowable expenses 2,999,050
Solution to question 7:
Pearl Court Insurance Co. Plc

Computation of tax liability For 2019 tax year
(a) Life business:
N’000 N’000 N’000

Investment income:
Interest on fixed deposit 1,650
Debenture interest 650 2,300
Other income:
Fees and commission income 1,250
Other operating income 900
Actuarial revaluation surplus
distributed 1,750
Gross income 6,200
Deduct:
(i) General reserves 1,300
Add life fund a/c 550
1,850
Less Net liabilities on policies (649) 1,201
(ii) Special reserve

The higher of:
1% of gross premium –
N22,000 x 1% 110
10% of net profit –
N15,840 x 10% 792 792
(iii) Other allowable

Management expenses:
Administrative expenses:
(3,900 – 960) 1470
Interest expense 1,800
Other operating expenses 440 3,710 (5,703)
Assessable profit 497
Less Capital allowance (125)
Total profit 372

Tax @ 30% on total profit computed 111.6
Tax paid on 20% of gross income (N6,200 x 20%) 1,240
Tax payable is N1,240
(b) Non-life business

N’000 N’000 N’000
Gross premium 50,000
Less premium to reinsurance (29,000)
Net premium 21,000
Add: Interest income:
Fees and commission income 3,800
Other operating income 1,000
Other income 1,900 6,700
Gross income 27,700
Less Provision for unexpired risk c/f 2,640

Restricted to 45% of total premium
- for general (N100,000 x 45%) 22,500
 Provision for unexpired risk c/f (2,640)
25,060
Less Allowable expenses:
Administrative expenses
- (N18,000 – N1,200) 8,400
Other operating expenses 550 8,950
Claims expenses 12,000

Re-insurance claims (7,500) 4,500
17,200
N100,000 x 25% (12,500) (12,500)
Assessable profit 12,560

Total profit 12,160

Tax paid as per total profit computed
N12,160 x 30% 3,648
N27,700 x 15% 4,155
Therefore, tax payable is N4,155
(c) Reinsurance business:

N’000 N’000 N’000
Gross premium 29,000
Less premium to reinsurance (0)
Net premium 29,000
Add: Interest income: 3,450
Debenture interest 650
Other operating income 1,200 5,300
Gross income 34,300
Less provision for unexpired risk c/f 760

Restricted to 45% of total premium for
general (N29,000 x 45%) 13,050
Therefore, provision for unexpired risk c/f (760)
33,540
Less allowable expenses:
Administrative expenses
– (N4,750 – N525) 4,225
Other operating expenses 710 4,935
Claims expenses 10,500
Re-insurance claims (0) 10,500
17,835
N29,000 x 25% 7,250 (7,250)
Less transfer to general reserve

(i) General reserve < minimum authorised
capital (50% of gross profit)
Or
(ii) General reserve > minimum authorised
capital (25% of gross profit)
N19,205 x 25% (4,801.25)
Assessable profit 21,488.75
Total profit 21,163.75
Tax payable shall be the higher of

Tax paid as per total profit computed
(N21,163.75 x 30%) 6,349.13
(N32,300 x 15%) 5,145
Therefore, tax payable is N6,349.13

(d) Zenith Insurance Co. Plc
Summary of tax liability For 2019 tax year
Life Non-life Reinsurance Total
N’000 N’000 N’000 N’000
Tax payable 1,240 4,155 6,349.15 11,744.15
Education tax 9.94 251.2 429.78 690.92
Total tax payable 1,249.94 4,406.2 6,778.93 12,435.07
HIS MAGESTY REIGNS INSURANCE LIMITED
COMPUTATION OF TAX PAYABLE FOR 2000 YEAR OF ASSESSMENT
N N
Assessable profit:
Life business (working 1) 389,500
Non-Life business (wk 2) 1035,000
1,424,500
Less capital allowance:
Balance b/f 72,500
Initial allowance 225,000
Annual allowance 602,500
Balancing allowance 10,500 (910,500)
514,000
Tax liability at 30% of 514,000 154,200
Workings
1. Computation of Assessable profit – life Business
N N
Gross interest on debenture stock 87,500
Interest on Fixed deposit (475,000 – 43,000) 432,000
519,000
Deduct:
Administrative expenses 25,000
Salaries 100,000
Other allowable expenses 5,000 (130,000)
389,000
2. Computation of Assessable profit- non life business
N N
Premium income on Burglary, Theft etc. 1,225,000
Premium income on Industrial Hazards 4,300,000 5,525,000
Add Outstanding premium 200,000
5,725,000
Add provision for unexpired risk b/f 600,000
Less provision for unexpired risk c/f (750,000) (150,000)
5,525,000
Less: Claims 1,775,000
Commissions 710,000
Administrative expenses 2,055,000 (4,540,000)
1,035,000
Note:
Loss on sale of fixed asset is not an allowable expenses therefore N20,000was disallowed.
STEVEGRACE ASSURANCE COMPANY LIMITED

COMPUTATION OF TAX LIABILITY FOR 2002 YEAR OF ASSESSMENT
N N
Assessable profit/ (Loss):
Life business (wk 1) (840,000)
Non-life business (wk 2) 2,493,000 2,094,000
Less Capital Allowance:
Capital Allowance (wk 3) 2,934,000
Restricted to 2/3 of 2,094,000 (1,396,000) (1,396,000)
Capital Allowance c/f 1,548,000
Total Profit 698,000
Tax liability at 30% of 698,000 209,400
Education Tax 2% of 2,094,000 41,88
Workings
i. Computation of Adjusted Profit – Life Business
Investment Income N N
Investment Income on debenture loan 600,000
Less Expenditure allowable
Commission Payable 56,000
Other Operating Expenses:
Administrative 344,000
Others 1,040,000 (1,440,000)
Loss (840,000)
ii. Computation of Adjusted Profit – Non – Life Business
Fire Accident Total
N’000 N’000 N’000
Gross Premium 2,900 3,000 5,900
Less Re-Insurance (940) (820) 1,760
1,960 2,180 4,140
Investment Income
Interest on Fixed deposit in bank 500 620 1,120
Commission Receivable 56 30 86
2,516 2,830 5,346
Less Expenditure Allowable
Policy Holders’ Claim 280 420 700
Commission Payable 220 196 416
Other Operating Expenses
Administrative 40 256 296
Reserve for unexpired risk 700 600 1,000
Adjusted Profit 1,276 1,658 2,934
iii. Computation of Capital Allowance For 2002 Year of Assessment

Motor Furniture Equipment Office Total
Vehicles & Comp. Premises Capital
Rates 50/25 25/20 25/20 15/10 Allowance
2000 YOA N N N N N
Cost 324,000 1,580,000 2,830,000 2,626,000
I.A (162,000) (395,000) (707,500) (393,900) 1,658,400
A.A (40,000) (237,000) (424,500) (223,210) 925,210
121,500 946,000 1,698,000 2,008,890 2,583,610
Notes
:
I. Dividend received net of withholding tax is treated as frank investment income and
therefore exempted from further tax.
II. The company just commenced business hence commencement rule was applied in
computing the tax liability for 2002 tax year.
Section 14 (11) of CITA 2007 provides that an insurance company that engages the services
of an insurance agent, a loss adjuster and an insurance broker shall include in its annual tax
returns a schedule showing the names and addresses of insurance agent, a loss adjuster and an
insurance broker, the date their services were employed and terminated as well as when
payments were made to them.
COUNTRYWIDE BANK LTD
Computation of Income Tax Liability for 2017 Year of Assessment
N’000 N’000
Net profit reported 240,937.5
Add:
Depreciation 10,000
Stamp duty on landed property 1,250
General provision 500 11,750
229,187.5
Deduct: Profit on fixed asset 187.50
Agric loan interest (wk 1) 6,555 (6,742.5)
Adjusted profit 222,445
Deduct: Capital allowance 17,500
N’000
Tax liability @ 30% 61,483.5
Education Tax 2% x 222,445,000 4,448.9
Total Tax Liability 65,932.4
Working 1:
Period of loan Grace Period Amount % Amount
(Moratorium) of Interest exempted exempted
N N
Over 7 years Not less than 2 years 3,800,000 100% 3,800,000
5 – 7 years Not less than 1½ years 2,850,000 70% 1,995,000
2 – 4 years Not less than 1 year 1,900,000 40% 760,000
Below 2 years Nil 950,000 - -
6,555,000
SPARKLING BANK LTD
N N
Net profit 254,350,000
Add Disallowed expenses:
Legal charges 722,320
Donations:
Ahoda community 130,000
Port-Harcourt House Club 95,000
Recreation club 250,170
Institute of Mgt. Fund 250,000
Mt.Zion Church Building 5,000 27,424,020
281,774,020
Deduct: Profit on sale of fixed assets 150,000
Adjusted profit 281,624,020
Less: Capital allowance 33,480,880
Balancing allowance 209,410 33,690,290
Total profit 247,933,730
Computation of Normal profit:

40% x 270,000,000 = 108,000,000
20% x 181,880,000 = 36,376,000
20% x 131,520,000 = 26,304,000
170,680,000
Tax Liability
i) Normal tax: 30% x 247,933,730 74,380,119
ii) Special Levy 10% x 77,253,730 7,725,373
82,105,492
Notes:
Special Levy: Total profit 247,933,730
Normal profit (170,680,000)
77,253,730
2) This review question dealt with payment of normal tax and special levy by bank, just
to have a taste of the old method.
HIGHCLASS BANK LTD
N N
Adjusted Profit 11,000,000
Capital allowance for the year 3,000,000
Capital allowance b/f 7,450,000
10,450,000
Restricted to 66 2/3% (7,333,334)
3,116,666 7,333,334
Tax liability @ 30% (.3 x 3,666,666)= N1,100,000
Calculation of minimum tax

a) The highest of:
i) 0.5% x (G.P) N50,000,000 250,000 250,000
ii) 0.5% x (N.A) N16,500,000 165,000
iii) 0.25% (T.O) N500,00 2,500
iv) 0.25% (I.S.C) N11,200,000 56,000
b) Add 0.125% x N (1,000,000,000-500,000) 1,249,375
Tax Payable 1,499,375
Since the minimum tax payable is higher than the actual tax computed, the bank will
pay the minimum tax of N1,499,375
BIG BANK LTD
Computation of Tax Liability for 2019 Year of Assessment
N N
Profit before taxation 46,000,000
Add: Depreciation 80,000,000
General provision (28m-20m) 8,000,000 88,000,000
134,000,000
Deduct: Profit on sale of fixed asset 8,000,000
Non-taxable profit (wk 1) 16,400,000 24,400,000
Adjusted profit 109,600,000
Add: Balancing charge 10,000,000
119,600,000
Less: Capital allowance b/f 2,000,000
Initial allowance 8,000,000
Annual allowance 28,000,000 (38,000,000)
Tax liability @ 30% = N24,480,000

Tertiary Education tax: N109,600,000 @2% = 2,192,000
N26,672,000
Working 1:
Period of loan Grace Period Amount % age Amount
Of Interest exemption exempted
N N
8yrs 2yrs 8,000,000 100% 8,000,000
6yrs 1.5yrs 12,000,000 70% 8,400,000
2yrs Nil 20,000,000 - --- ----
16,400,000
CHAPTER 2: OIL AND GAS TAXATION
2.0 PURPOSE
o After studying this chapter, readers should be able to:
o have a good understanding of the development of Nigeria’s petroleum sector
and its evolution over time;
o understand the meaning of petroleum activities viz-a-viz the upstream and
downstream operations / activities;

o know all the agencies involved in the regulation of the petroleum operations and
activities in Nigeria;
o be acquainted with definitions of important terms used in the petroleum
industry;
o be acquainted with the administrative procedure of Petroleum Profit Tax;
o understand the relevant costs classification obtainable in the computation of the
Petroleum Profit Tax;
o understand the procedure for the computation of the petroleum profit tax;
o understand the makeup and the procedure for calculation of capital allowance;
o understand the purpose and basis for determining terms ‘Posted Price’ and
‘Adjusted Posted Price’ when computing the value for chargeable oil for tax
purpose;
o understand the main Tax offsets items i.e. MOU and ITC and their treatment in
the process of computing the Petroleum Profit Tax;
o understand the circumstances giving rise to additional tax and how it is
computed;
o be conversant with the tax assessment and appeal procedure;
o know the procedure for collection and payment of the Petroleum Profit Tax; and
o understand the process of computing tax on sale of Gas.
2.1 INTRODUCTION
In 1908 a German company called “The Nigerian Bitumen Company”, started the
search for crude oil in Nigeria. The company was license for exploration of Petroleum
at Araromi in the present-day Ondo State. However due to the outbreak of the First
World War in 1914, the company halted it’s adventure, left the country and never
returned after the war.
In 1937, Shell D’Arcy was also granted exploration licenses which cover the entire
Nation. However due to the outbreak of the Second World War in 1941, the company
also suspended operation but later resumed operation in 1946. In 1956, Shell
Petroleum Development Nigeria Limited (company formed from the amalgamation of
Shell D’Arcy and BP) discovered oil in commercial quantity in Oloibiri in the present
Bayelsa State. Actual production began in 1958 and oil discovered in other areas of
both Rivers and Bayelsa States whilst other companies such as Mobil, Texaco
Overseas, Agip and Gulf were later granted licences.
Nigeria currently has an estimated oil reserve of 37 billion barrels (and gas reserve
estimated at over 192 trillion standard cubic feet) and produces about two million
barrels of crude oil per day. The country is ranked among the top twenty largest
producers in the world. 60% of government's total revenue and more than 90% of its
foreign exchange receipts comes from oil and gas sector.
2.2 PETROLEUM ACTIVITIES
(1) Upstream Activities: These activities involve the acquisition of licences,
exploration, development and production of crude oil and gas; treatment of oil
and processing of gas as well as transportation and delivery to export
terminals, refineries or other processing plants. Upstream activities are taxed
under the Petroleum Profits Tax, Act Cap P13 LFN 2004 as amended.
(2) Downstream Activities: These are activities that take place from receipt of
crude oil into crude oil tanks or gas into petro chemical tanks to the
transportation of refined products to the final user or of processed products to
secondary industries. Examples includes transporting, refining, liquefaction of
natural gas, distributing and marketing of refined petroleum products, gas and
derivatives. Downstream operations are subject to tax under the Companies
Income Tax Act Cap C21 LFN 2004 as amended.
2.3 THE REGULATORY AGENCIES IN THE OIL AND GAS SECTORS
(1) Nigerian National Petroleum Corporation (NNPC): NNPC was established
in 1977 to have the sole authority over the petroleum activities in Nigeria.
NNPC is involved in exploration, production, transportation, processing of oil,
refining, marketing of crude oil and derivatives through its subsidiaries. NNPC
subsidiaries includes:
a. National Petroleum Investment Management Services (NAPIMS):
NAPIMS is the investment arm of NNPC which administers NNPC
share of joint venture operations.
b. The Petroleum Products Marketing Companies (PPMC): PPMC
have the responsibility of selling refined petroleum and finished
products which include gasoline, diesel, engine oil, grease and other
derivatives.
c. Nigerian Petroleum Development Company (NPDC): NPDC is the
arm of NNPC that is engaged in exploration, drilling and development,
production and abandonment i.e. EIA, testing, decommissioning etc. in
conjunction with its partners i.e. SPDC, others.

d. The Nigerian Petrochemical Companies in Kaduna and Warri.
e. The Refineries (2 in Port Harcourt) one each in Warri and Kaduna.
(2) Department of Petroleum Resources (DPR): DPR is the arm of the Ministry
of Petroleum Resources that is charged with the responsibility of regulation
and supervision of all operations under licence and leases in the oil and gas
industries which includes exploration, production and marketing of crude oil
and refined petroleum products.
(3) FIRS: FIRS is responsible for the administration of Petroleum Profit Tax Act
Cap P13 LFN 2004. Its duties and powers are stated under section 3 of the
Act.
(4) The Central Bank of Nigeria: The proceeds from sale of crude oil paid in
foreign currency are paid into Federal Government designated bank overseas
and transferred into the Federation Account in the Central Bank of Nigeria.
CBN thereafter notify the FIRS through payment advice.
(5) Marginal Fields Operators: Marginal Fields are field discovered usually by
large international oil companies but which as a result of focus on larger and
more profitable fields were not developed and yet not relinquished. The
marginal field in Nigeria is estimated to hold an aggregate estimate of 2 billion
barrels in reserve.
Below are the conditions for identifying companies (mostly local companies)
most likely to be successful in operating the marginal fields as well as further
develop the Nigerian oil industry:
(a) At least 51% of the beneficial interest of the company must be owned
by Nigerian citizens;
(b) No single shareholder may own more than 25% of the shares in the
company;
(c) The company must have upstream oil and gas experience; and
(d) The companies Memorandum and Articles of Incorporation must
authorise the company to conduct oil and gas exploration and
production activities.
Challenges faced by marginal field operators
i. Inability to produce up to the commercial quantity of at least 10,000
barrels per day;
ii. Operations is capital intensive.
iii. If there is no discovery of oil, it would be difficult to write off the
production expenses without any income
iv. Most operators are unable to get equity finance. In spite of this, some
operators go into technical partnership so as to meet capital
requirement under this arrangement, the technical partner then recoups
its costs with cost oil, pays Royalty and tax oil and share what is left.
v. Tax rate of 85% is a burden. However, 65.75% tax rate applies during
the period of recouping the pre-production expenses
2.4 DEFINITIONS OF TERMS AS GIVEN IN PPTA

(1) Petroleum operations: The winning or obtaining and transportation of
petroleum or chargeable oil in Nigeria by or on behalf of a company for its
own account by any drilling, mining, extracting or other like operations or
process, not including refining at a refinery, in the course of a business carried
on by the company engaged in such operations, and all operations incidental
thereto and any sale of or any disposal of chargeable oil by or on behalf of the
company.
(2) Casing head petroleum spirit: Any liquid hydrocarbons obtained in Nigeria
from natural gas by separation or by any chemical or physical process but
before the same has been refined or otherwise treated. Casing head petroleum
spirit is further subdivided into two, i.e.:
(a) Chargeable natural gas: Natural gas actually delivered by a company
to the Nigerian National Petroleum Corporation under a Gas Sales
contract but does not include natural gas taken by or on behalf of the
Government of the Federation;
(b) Chargeable oil: Casing head petroleum spirit and crude oil won or
obtained by a company from petroleum operations.
(3) Disposal or disposed of: In relation to chargeable oil owned by a company,
disposal or disposed of connotes respectively:
(i) Delivery, without sale, of chargeable oil to; and
(ii) Chargeable oil delivered, without sale to, a refinery or to an adjacent
storage tank for refining by the company.

(4) G-Factor: This means gas production cost adjustment factor.
(5) Intangible drilling costs: These are all expenditure for labour, fuel, repairs,
maintenance, hauling, and supplies and materials (not being supplies and
materials for well cement, casing or other well fixtures) which are for or
incidental to drilling, cleaning, deepening or completing wells.
(6) Liquefied natural gas: Natural gas in its liquid state at approximately
atmospheric pressure
(7) Minister: Minister charged with responsibility for matters relating to taxes on
incomes and profits.
(8) MMcf: Means one million cubic feet
(9) Natural gas: Gas obtained in Nigeria from bore holes and wells consisting
primarily of hydrocarbons.
(10) Non-productive rents: The amount of any rent for which there is provision
for its deduction from the amount of any royalties under an oil prospecting
licence or oil mining lease, to the extent that such rent is not so deducted.
(11) Oil Mining Lease: A lease granted to a company under the Minerals Act, for
the purpose of winning petroleum, or any assignment of such lease.

(12) Oil Prospecting Licence: A licence granted to a company under the Minerals
Act, for the purpose of winning petroleum, or any assignment of such licence.
(13) Person: This includes a company and any unincorporated body of persons.
(14) Petroleum: Any mineral oil or relative hydrocarbon and natural gas existing
in its natural condition in Nigeria, but does not include liquefied natural gas,
coal, bituminous shale’s or other stratified deposits from which oil can be
extracted by destructive distillation.
(15) Company: Anybody corporate incorporated under any law in force in Nigeria
or elsewhere.
(16) Crude oil: Any oil (other than oil extracted by destructive distillation from
coal, bituminous shale, or other stratified deposits) won in Nigeria, either in its
natural state or after the extraction of water, sand or other foreign substance
therefrom but before any such oil is refined or otherwise treated.
(17) Resident in Nigeria: In relation to a company, this means a company, the
control and management of the business of which are exercised in Nigeria.
(18) Royalties: Means
(i) The amount of any rent for which there is provision for its deduction
from the amount of any royalties under an oil prospecting licence or oil
mining lease to the extent that such rent is so deducted; and

(ii) The amount of any royalties payable under any such licence or lease
less any such rent deducted from those royalties.
(19) Concession: This includes an oil exploration licence, an oil prospecting
licence, an oil mining lease, any right, title or interest in or to petroleum oil in
the ground and any option of acquiring any such right, title or interest;
(20) Lease: This includes an agreement for a lease where the term to be covered
by the lease has begun, any tenancy and any agreement for the letting or hiring
out of an asset, but does not include a mortgage, and all cognate expressions
including “leasehold interest” shall be construed accordingly.
(21) Accounting period
(i) This is a period of one year commencing on 1st January and ending on
31st December of the same year; or
(ii) Any shorter period commencing on the day the company first makes a
sale or bulk disposal of chargeable oil under a programme of
continuous production and sales, domestic, export or both, and ending
on 31 December of the same year; or
(iii) Any period of less than a year being a period commencing on 1
January of any year and ending on the date in the same year, when the
company ceases to be engaged in petroleum operations.
(22) Revenue Service: The Federal Inland Revenue Service (FIRS)

(23) Associated gas: This refers to the natural gas found in association with oil
within the reservoir.
(24) Non-associated gas: Non-associated petroleum gas, also known as free gas or
dry gas is a naturally occurring gas that is not dissolved in crude oil in a
reservoir where oil is extracted. They are found in reservoirs that contained no
oil but only natural gas.
(25) Gas Industry Incentives
(i) Investment required to separate crude oil and gas from the reservoir
into usable products shall be considered as part of the oil field
development;
(ii) Capital expenditure to deliver associated gas in usable form at
utilisation or designated custody transfer points shall be treated for tax
purposes, as part of the capital investment for oil field development;
(iii) Capital allowances, operating expenses and basis of tax assessment
shall be subject to the provisions of the Act and the tax incentives
under the revised MOU;
(iv) Gas to be transferred at 0% royalty and 0% Petroleum Profit Tax;
(v) Plant and machinery for gas utilisation are exempted from import
duties.
The above incentives are subject to the following conditions:
(a) Condensates extracted and re-injected into the crude oil stream
shall be treated as oil but those not re-injected shall be treated
under existing tax arrangement;

(b) The company shall pay the minimum amount charged by the
Minister of Petroleum Resources for any gas flared by the
company;
(c) The company shall, where practicable, keep the expenses
incurred in the utilisation of associated gas separate from those
incurred on crude oil operation and only expenses not able to
be separated shall be allowable against the crude oil income of
the company under the Act;
(d) Expenses identified as incurred exclusively in the utilisation of
associated gas shall be regarded as gas expenses and be
allowable against the gas income and profit to be taxed under
the Companies Income Tax Act;
(e) Only companies which invest in natural gas liquid extraction
facilities to supply gas in usable form to downstream projects,
including aluminum smelter and methanol, Methyl Tertiary
Butyl Ether and other associated gas utilisation projects shall
benefit from the incentives;
(f) All capital investments relating to the gas to liquids facilities
shall be treated as chargeable capital allowance and recovered
against the crude oil income;
(g) Gas transferred from the natural gas liquid facility to the gas-to-
liquids facilities shall be at zero per cent tax and zero per cent
royalty.
(26) Abandonment – Also known as Decommissioning, is a process required by license
requirements and relevant legislation/ practice whereby:
(i) oil wells are abandoned and plugged

(ii) wellhead, production and transport facilities are dismantled
(iii) producing areas are remediated and restored
The Petroleum (Drilling & Production) Regulations 1969 requires E&P companies to
implement an Abandonment programme.
The E&P Company usually sets up an Abandonment Fund. However, costs are only
recoverable based on actual funding.
2.5 ADMINISTRATION OF PETROLEUM PROFITS TAX ACT
The administration of the Petroleum Profits Tax Act is under the charge and
management of the Federal Inland Revenue Service. The Revenue Service
may do all acts 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 to the Federal Minister of Finance through its
Revenue Service.
2.6 CLASSIFICATION OF INCOME
The main sources of income of a petroleum producing company are:
(i) Sale of crude oil: Export and Local (Equity share);
(ii) Sale of gas: Export and Local (Equity share);
(iii) Income from lifting and sale of NNPC equity crude; and
(iv) Incidental income such as Ullage fees; Rentals; Management fees;
Mineral Property conveyance; Interest on fixed deposits and balancing
charge arising from assets disposals.

Computation of income:
(1) Value of chargeable oil sold: This is the posted price multiply by the
number of crude oil sold i.e. Price x number of barrels sold.
Illustration:
Okondu oil Plc sold 800,000 barrels a day to its market in Norway at a
price of $55 per barrel.
Required: Estimate the value of chargeable oil sold.
Solution
Value of oil sold =Price  No of barrels sold
=$55x 800,000 =$44,000,000
Posted price: This is the price free on board at the Nigerian port of
export as agreed between NNPC and companies operating in the
petroleum sector. The posted price is defined by the quality of the
crude oil.
The quality of the crude oil is 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 quality of the crude oil is not the same as the
standard quality, the posted price will be approximately adjusted
depending on the agreed rate of exchange.

The posted price is compared to the actual price of the crude oil.
According to FBIR, the taxpayer is assessed based on the higher of the
two prices.
Essentially, the value of oil sold can be determined by applying to
following steps:
Step 1. Identify the difference 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 step2 to the standard posted price if
the actual API gravity is higher than the standard API gravity. Deduct
therefrom, if the reverse is true.
Step 4. Multiply the actual posted price by the rate of exchange to the
local currency, to obtain the posted price in local currency.
Step 5. Compare to the actual price at which the crude oil is sold.
Where the Actual price is not stated in local currency, 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 value of oil sold.
Illustration:
Global Petroleum ltd sold 500,000 barrels of crude oil to their
customer based in London .The crude oil has an API gravity of

35.The standard API of crude is 30with a price of $50. It was agreed
that for every degree rise or fall by $0.75.
The rate of exchange is N135 to $1.
You are to determine the value of oil sold if the actual price is N6,500
per barrel.
Solution
Global Petroleum Ltd.
Value of oil sold =price x number of barrels sold.
API Price [$]
Standard 30 $50.00
Actual 35
5 x 0.75 3.75
$ 53.75
Posted Price = $53.75 x 135 = N7,256.25
Actual Price = = N6,500
The higher of the posted and Actual prices is used to determine the
value of oil sold i.e. N7,256.25 x 500,000 = N3,628,125,000

(2) Value of chargeable oil disposed: This is the value of oil delivered to a
refinery. The addition of the following constitutes the value of
chargeable oil disposal.
(i) Value of oil for Royalty purpose (No of barrels delivered to the
refinery multiplied by the posted price)
(ii) The cost of transportation of the crude oil through the pipeline
i.e. unit cost of transportation multiplied by the number of
barrels of crude oil delivered to the refinery.
(iii) Cost of maintaining the pipeline through which the crude oil is
delivered to the refinery i.e. cash costs plus non-cash costs like
depreciation on the pipeline. The cost must be related to the
crude oil 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 N40Million.The total capacity of the
pipeline is N12Million barrels. During the year under review, only
2,000,000 barrels of crude oil was transported to the refinery. The
total cost was N1, 700,000 while the depreciation charge for the year
is 10% amounted to N4Million.
Solution
Cost of maintenance = Actual volume delivered  Total cost of
maintenance
Actual Volume deliverable or Actual capacity =
2,000,000  N5,700,000 = N950, 000
12,000,000
(3) Value of natural gas sold: 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
50 16.9%
60 15.5%
70 14.3%
80 13.6%
Where the actual load factor for a gas contract differs from the stated
standard shown above, the corresponding gas factor will be
determined by extrapolation.
The following are the steps to determining the value of gas sold
Step 1: Get 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 e.g. a load factor of
66 falls between 60 and 70; 55 falls between 50 and 60 while
74falls between 70 and 80
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 represented by X%.
Step 4: Determine the value of X%.
Step 5: Multiply X% by the value of the contract to obtain the level of
abatement or discount.
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:
Caroline Oil Company entered into a gas contract with Bostani oil of
Brazil.
The value of the contract is $6million.The load factor of the gas was
recovered as 63.You are to determine the value of gas sold.
Solution:
Step 1: Compound the actual gas factor (discount).
= 60-63 = 15.5-X
60-70 15.5-14.3
0.3 = 15.5-X
15.5-14.3
0.31.2 =15.5-X
0.36 =15.5-X
X =15.5-0.36
=15.14%
Discount = 15.14%  $6,000,000
= $908,600
Contract sum = $6,000,000
Less: level of discount = 908,600
Value of gas Sold = $5,091,400
(4) Miscellaneous income: The petroleum Profit Tax Act records the
following as miscellaneous income:
(i) Interest on Fixed deposit.
(ii) Services provided to other petroleum company.

(iii) Rent classified and paid by NNPC.
(iv) Sublet of accommodation.
(v) Rent /hire of equipment.
Incomes non taxable under PPT Act: According to petroleum profit tax Act,
the following incomes are not taxable.
(i) Any profit on the disposal of a fixed asset.
(ii) Any reversal into income of a previously disallowed expense.
(iii) Income from the transportation of oil by an ocean-going oil tanker.
(iv) Income from refinery operation
How to treat income from transportation business
Any income earned from the transportation of crude oil by ocean going tanker
is not regarded as income derived from petroleum operation. Such income is
not chargeable to tax under the provisions of the Petroleum Profit Tax Act.
Such income is subjected to tax under the provisions of the company Income
Tax Act.
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. The expense of this nature is charged against income before subjecting to
tax under the Company Income Tax Act.
How to treat income from refinery business
The income from this business is subjected to tax under the company income
tax Act.
2.7 NATURE & CLASSIFICATION OF COSTS
(1) Nature of cost: The following are the expenses deductible under PPT
acts (see S.10):
(i) Outgoings on unproductive leases;
(ii) Non-productive rents;
(iii) Tangible costs directly incurred in connection with drilling and
appraisal of development well;
(iv) Exploration and drilling costs, including costs relating to the
drilling of the first two appraisal wells in a particular field;
(v) All sums by way of duty, customs and excise duties, stamp
duties, education tax;
(vi) All sums by way of customs or excise duty or other-like
charges levied in respect of machinery, equipment and other
goods used in the company’s petroleum operations; and
(vii) All sums incurred by way of interest on any inter-company
loans obtained under terms prevailing in the open market, that
is, the London Inter-Bank Offer Rate.
(2) Classification of Costs: The following are the classifications of costs
in the upstream sector of the petroleum industry:
(i) Mineral rights acquisition costs;
(ii) Exploration and drilling costs;
(iii) Development costs;
(iv) Production costs;
(v) Support equipment and facilities costs; and

(vi) General costs.
(a) Mineral Rights Acquisition Costs: Mineral rights acquisition
costs are incurred in acquiring concession rights in a lease area.
They include Oil Prospecting Licence (OPL), Oil Exploration
Licence (OEL), Oil Mining Lease (OML), Bonuses and options
to purchase or lease properties, signature bonus, legal fees,
local statutory land acquisition fees/levies, reserves value fees,
etc.
(b) Exploration and drilling costs: Exploration and appraisal
costs are incurred in the search for oil and gas deposits after
obtaining a licence, but before a decision is taken to develop a
reservoir. Exploration cost includes costs of geological and
geophysical studies, costs of carrying and retaining
undeveloped properties, dry hole contributions and bottom hole
contributions; costs of drilling and equipping exploratory wells;
and other associated costs such as re-settlement of local
communities, compensation for economic crops, surface rights
and road building.
(c) Development costs: Development costs are incurred to obtain
access to proved reserves and provide facilities for extracting,
gathering, treating, and storing the oil and gas. These costs are
incurred after a decision has been taken to develop a field or
reservoir, and include drilling, equipping, testing development

and production wells; production platforms, down hole and
wellhead equipment, pipelines, production and initial treatment
and storage facilities as well as utility and waste disposal
systems; and improved recovery systems and equipment
(d) Production Costs: Production costs are the recurrent costs
incurred in oil and gas production activities. Production
involves lifting the oil and gas to the surface, gathering,
treating, field processing and storage and they include costs of
personnel engaged in the operation of wells and related
equipment and facilities; repairs and maintenance of production
facilities; materials, supplies, fuel consumed and services
utilised in such operations; and royalties.
(e) Support equipment and facilities costs: These costs include
vehicles, repair shops, warehouses, supply points, camps, and
divisional, district or field offices, aircraft and helicopters,
safety and environmental facilities are usually accumulated and
reallocated to the classes of costs identified above on some
rational basis.
(f) General costs: General costs are usually charged to expense
and they include, the costs of carrying and retaining
undeveloped properties, and the cost of drilling those
exploratory wells that do not result in proved reserves.

2.8 PETROLEUM PROFIT TAX
Ascertainment of adjusted profits and imposition of tax for petroleum
producing company
2.9 IMPOSITION OF PPT
Section 9 of the PPTA levies tax on the profits of each accounting period of
any company engaged in petroleum operations. Essentially, the income from
petroleum operation as earlier heighted are aggregated.
2.10 BASIS OF ASSESSMENT
Incomes from petroleum operations are assessed on actual year basis (AYB).
2.11 ADJUSTED PROFIT
The adjusted profit of an accounting period shall be the profits of that period
after the deductions of allowable expenses.
2.12 ALLOWABLE DEDUCTIONS
These are all out-going and expenses wholly, exclusively and necessarily
incurred, whether within or outside Nigeria, during that period by such
company for the purpose of petroleum operations and which are deductible
computing the adjusted profit of any company for any accounting period.
These expenses include:

(i) Rents incurred by the company for that period in respect of land or
building occupied under an OPL or OML for the disturbance of surface
rights or any other like disturbance;
(ii) All non-productive rents, the liability for which was incurred by the
company during the relevant accounting period;
(iii) All royalties, the liability for which was incurred by the company
during the relevant accounting period in respect of natural gas sold and
actually delivered to the Nigeria National Petroleum Corporation, or
sold to any other buyer or customers or disposed off in any other
commercial manner;
(iv) All royalties, the liability for which was incurred by the company
during that period in respect of crude oil or casing-head petroleum
spirit won in Nigeria;
(v) All sums the liability for which was incurred by the company to the
Federal Government of Nigeria during the relevant accounting period
by way of customs and excise duty or other-like charges levied in
respect of machineries, equipment and goods used in the company’s
petroleum operations;
(vi) Sums incurred by way of interest upon any money borrowed by such
company, where the FIRS is satisfied that the interest was payable on
capital employed in carrying on its petroleum operations;
(vii) Sums incurred by way of interest on any inter-company loans obtained
under terms prevailing in the open market by companies that engage in
crude oil production operations in the Nigeria oil industry;
(viii) Any expenses incurred for repairs of premises, plant, machinery, or
fixtures employed for the purpose of carrying on petroleum operations

or for renewal, repairs or alteration of any implements, utensils or
articles so employed;
(ix) Debts directly incurred to the company and proved to the satisfaction
of the FIRS to have become bad and doubtful in the accounting period
for which the adjusted profits is being ascertained notwithstanding that
such bad or doubtful debts were due and payable prior to the
commencement of that period and on the following conditions:
(a) the debts in respect of which a deduction is claimed were either
included as a profit from the carrying on of petroleum
operations in the accounting period in which they were
incurred; or
(b) advances made in the normal course of carrying on of
petroleum operations, strictly as defined under the PPTA and
included in the definitions of profits of petroleum company as
earlier defined.
(x) any other expenditure, including tangible costs directly incurred in
connection with drilling and appraisal of development well but
excluding expenditure which is qualifying expenditure for the purpose
of the Second Schedule to the Act [Capital allowance]. And
(xi) Any expenditure directly incurred in connection with exploration
drilling and the drilling of the first two appraisal wells in a particular
field, including expenditure in respect of cement and casing of well
fixtures.
(xii) Where a deduction may be given under this section in respect of any
such expenditure, that expenditure shall not be treated as qualifying
drilling expenditure for the purpose of capital allowance;

(xiii) Any contribution to a pension, provident, or other society, scheme or
fund which may be approved, with or without retrospective effect, by
the Board subject to such general conditions or particular conditions in
the case of any such society; scheme or fund as the Board may
prescribe;
(xiv) Such other deductions as may be prescribed by any rule made under
the PPTA;
(xv) With effect from 1st January 1999 interests on inter-company loans are
allowable deductions.
2.13 NON ALLOWABLE DEDUCTIONS;
The following expenses are disallowed under the PPT Act:
(i) any disbursement or expenses not being money wholly and exclusively
paid out or expended, or any liability not being a liability wholly or
exclusively incurred, for the purposes of petroleum operations;
(ii) any capital withdrawn or any sum employed or intended to be
employed as capital;
(iii) any capital employed in improvement as distinct from repairs e.g.
overhauling or refurbishing of assets;
(iv) any sum recoverable under an insurance or contract of indemnity;
(v) rent of or cost of repair to any premises or part of any premises not
incurred for the purpose of petroleum operations;
(vi) any amounts incurred in respect of any income tax, profits tax, or other
similar tax whether charged within Nigeria or outside Nigeria;
(vii) the depreciation of any premises, buildings, structures, works of a
permanent nature, plant, machinery or fixtures;

(viii) any payment to any provident, savings, widows and orphans, or other
society, scheme or fund not approved by the Board;
(ix) any customs duty on goods (including articles or any other thing)
imported by the company:
(a) for resale or for personal consumption of employees of the
company; or
(b) where goods of the same quality to those so imported are
produced in Nigeria and are available, at the time the imported
goods were ordered by the company for sale to the public at
prices less or equivalent to the cost to the company of the
imported goods;
(x) any expenditure for the purchase of information relating to the
existence and extent of petroleum deposits; and
(xi) donations.
2.14 ASSESSABLE PROFIT/ LOSS RELIEF
The assessable profit of any company for any accounting period shall be the
amount of the adjusted profit of that period after deduction of the amount of
any loss incurred by that company during any previous accounting period ‘and
after adjusting for tertiary education tax.
2.15 TREATMENT OF LOSSES IN PETROLEUM PROFITS TAX
COMPUTATIONS
To arrive at the assessable profits, there shall be deducted from the adjusted
profits:
(a) the amount of any loss incurred by the company during the previous
accounting period; and
(b) for a new company, the amount of any loss incurred during its first
accounting period in its trade or business.
Note: Losses that cannot be fully deducted in any one period can be carried
forward to the next succeeding accounting periods until fully relieved.
Furthermore, the company has the right to defer the utilization of any loss
relief available to it. This is possible where within five months after the end of
the accounting period, the company elects in writing not to deduct the amount
of the loss or part thereof from the profits of the accounting period under
consideration. The amount so deferred will be deducted from the following
year’s accounting profits unless the company makes a similar election in that
following year.
How to compute education tax:
Education tax is computed using the following formula:
Education Tax=NP+NAE –NTI+BC-LS  2
102
NP = Net profit /loss reported.
NAE = Non-Allowable 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 if any.
LS = Losses being deducted, if any.
The education tax allowable should be 2% of assessable profit, and assessable
profit under PPTA is obtained when Balancing charges are added to and losses
deducted from adjusted profit.
2.16 CHARGEABLE PROFITS
The chargeable profits shall be the assessable profits, less capital allowances.
For this purpose, the amount of capital allowances to be deducted is to be
restricted to the lower of:
a. Capital allowance computed as below ₦ ₦
Capital allowance b/f xx
Plus:
Annual allowance for the year xx
Petroleum investment allowance xx
Investment tax credit, if applicable xx
xx xx
or;
b. 85% of the assessable profits of the accounting period xx
less 170% of the total amount of the deductions allowed
as ITC or PIA (xx)
This restriction is in order to ensure that the tax chargeable on the company is
not less than fifteen percent of the tax that would have been chargeable had no
deduction been made for capital allowances.

2.17 QUALIFYING EXPENDITURE/ CAPITAL ALLOWANCE
COMPUTATION
Qualifying expenditure means capital expenditure incurred in an accounting
period, which is:
(1) Incurred on plant, machinery or fixtures – “qualifying plant
expenditure”;
(2) Incurred on pipelines and storage tanks – “qualifying pipeline and
storage expenditure”;
(3) Incurred on the construction of buildings, structures or works of a
permanent nature – “qualifying building expenditure”;
(4) “Qualifying drilling expenditure” – incurred in:
(a) the acquisition of, or 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 buildings which are likely to
be of little or no value when the petroleum operations for which
they were constructed ceased to be carried on.
(i) ANNUAL ALLOWANCE: This is granted on straight line
basis as below:
Year of use AA%
1st Year 20%
2nd Year 20%
3rd Year 20%
4th Year 20%
5th Year 19%

(ii) PETROLEUM INVESTMENT ALLOWANCE: It is similar
to investment allowance under CITA since it is not taken into
account in arriving at the residue of an asset. It is granted only
once for any particular asset and at the appropriate rate percent
set forth in Table 1 to schedule 2 stated below:
Location of QCE Applicable Rate (%)
Qualifying expenditure in Respect of:
On-shore operations 5
Operations in territorial waters and continental shelf
areas up to and including 100 metres of water depth 10
Operations in territorial waters and continental shelf
areas in water depth between 100 metres and 200 metres 15
Operations in territorial waters and continental shelf areas
beyond 200 metres of water depth 20
(iii) BALANCING ALLOWANCES AND BALANCING
CHARGES
The calculation of balancing allowance or charge follows
normal taxation principles.
(iv) TAX OFFSETS:
1. Memorandum of understanding (MOU)

With effect from 1st January, 1986, the Federal Government of
Nigeria entered into an agreement with petroleum companies
operating joint ventures with NNPC. The agreement granting
certain incentives for the following objectives:
(a) Enhancing crude oil exports;
(b) Encouraging investments in exploration and
development activities;
(c) Encouraging investments in the area of enhanced oil
recovery projects;
(d) Encouraging investments in gas utilisation projects;
Encouraging increased lifting and sale of NNPC’s
equity crude; and
(e) Effectively reducing the tax impact on companies
engaging in petroleum operations.
The purpose of the incentive was to guarantee a $2 per barrel
profit margin (after tax and royalty) to the oil company at a
notional technical cost of $2 per barrel over the realisable price
range of $12.50 - $23 per barrel. Provision was also made in
the agreement for certain mechanism to be applied for
establishing equitable margin to the oil company for realisable
prices less than $12.50/bbl.
Conditions for granting MOU
(1) To lift crude oil which NNPC is unable to lift out of the
NNPC equity share of the joint venture production; and

(2) To carry out a work programme mutually agreed upon
between NNPC and each of the oil companies.
Note: Penalty for when an oil company is unable to lift all or
part of the notice volume is 2% of the average realisable price
for each barrel not lifted. Such penalty is not allowable i.e. not
tax deductible.
2. Investment tax credit
With effect from 1999, crude oil producing company which
executed a Production Sharing Contract (PSC) with the
Nigerian National Petroleum Corporation in 1993 shall,
throughout the duration of the Production sharing contract
claim investment tax credit allowance as an offset against tax in
accordance with the provisions of the production sharing
contract. The applicable rate is a flat rate of 50% of chargeable
profit for the duration of the PSC agreement.
2.18 ARTIFICIAL TRANSACTIONS
The following transactions shall be deemed to be artificial or fictitious,
namely:
i. transactions between persons, one of whom has control over the
other; or
ii. transaction between persons, both of whom are controlled by
some other person; which, in the opinion of the Revenue
Service, have not been made on the terms which might fairly
have been expected to have been made by independent persons
engaged in the same or similar activities dealing with one
another at arm’s length.
Transactions that are not considered to have been carried out at arm’s
length shall be deemed to be artificial or fictitious.
2.19 ACCOUNTS AND TAX COMPUTATION
For each accounting period the company shall make up accounts of its profits
or losses arising from petroleum operations in that period as well as the
following particulars:
(i) Computations of its estimated adjusted profit or loss and of its
estimated assessable profits of that period;
(ii) Capital allowances computation schedules showing:
(a) the residues of its assets at the end of that period;
(b) all qualifying petroleum expenditure incurred by it in
that period;
(c) the values of any assets disposed of in the period; and
(d) the capital allowances due to it for the period.
(iii) Computation of its estimated chargeable profits of the period;
(iv) A statement of other sums, deductible under Section 20 (items
deductible from assessable tax to arrive at chargeable tax), the
liabilities for which were incurred during that period;
(v) A statement of all amounts repaid, refunded, waived or released
during that period in respect of amounts deducted under
Section 20 in prior periods; and

(vi) A computation of its estimated tax for the period.
At the end of the accounting period, the actual tax payable will be
computed. The tax computation based on the audited accounts of the
company will be submitted to the tax office accompanied with all
required documents.
2.20 TIME LIMIT FOR SUBMISSION
A copy of the audited accounts of the company together with copies of all the
particulars listed above are to be delivered to the Revenue Service within five
months after the expiration of the company’s accounting period. Such
documents must be signed by a duly authorised officer of the company to the
effect that they are true and complete.
The Revenue Service may grant extension of the time limit if some good
reason is shown by the company to the satisfaction of the Revenue Service
why the company cannot comply with the deadline.
2.21 RETURNS OF ESTIMATED TAX
Within two months of the commencement of each accounting period, the
company should submit to the Revenue Service, a return of its estimated tax
for the accounting period.
A revised estimated tax for the period will need to be submitted as well at any
time during the accounting period that the company is aware that the original
estimate requires revision.

The estimate will be replaced with the actual at the end of the company’s
accounting period after the statutory audit of its financial statements is
concluded.
2.22 UNIT OF CURRENCY
All income tax computations made under sections 30 and 33 of PPTA shall be
made in the currency in which the transaction was effected. Accordingly, and
notwithstanding anything to the contrary in any law, any assessment made
under section 35(1) of the PPTA shall also be made in the currency in which
the computation giving rise to the assessment was made. (section 37A1 and
A2).
2.23 PERSONS CHARGEABLE
It is an offence for any person (other than a company) to engage in petroleum
operations in any form with a view to sharing the profits arising from such
operations. It is therefore certain that PPT is payable only by companies.
Where companies are engaged in petroleum operations in partnership or in a
joint venture under any scheme or arrangement, the Minister may make rules
modifying the provisions of the PPTA for the ascertainment of the tax to be
charged and assessed upon each of the companies involved. The effect of any
such rules shall not be to impose a greater burden of tax on any company
engaged in such partnership or joint venture than the proportion of its share of
the benefits therefrom.

2.24 NON-RESIDENT COMPANY
A non-resident company engaged in petroleum operations shall be assessable
and chargeable to tax as if it were resident either, directly or in the name of its
manager, or in the name of any other person who is resident in Nigeria and
employed in the management of the petroleum operations of the company.
The person in whose name a non-resident company is assessable and
chargeable to tax shall be answerable –
for all matters required to be done by virtue of the Act for the
assessment of the tax as might be required to be done by such non-
resident company if it were resident in Nigeria, and
for paying any tax assessed and charged in the name of such person.
2.25 RESIDENT COMPANY
The manager or any principal officer in Nigeria of every company engaged in
petroleum operations shall be answerable for doing all such acts as are
required to be done by virtue of the Act for the assessment and charge to tax of
such company and for payment of such tax.
2.26 COMPANY IN RECEIVERSHIP OR LIQUIDATION
A company being wound up or under a receiver may be assessed and charged
to tax, in the name of the liquidator or receiver or any agent of the liquidator
or receiver, for any accounting period whether before, during or after the date
of appointment of the liquidator or receiver. Any such liquidator, receiver or
agent shall be answerable for doing all such acts as are required to be done by
virtue of the Act, for the assessment and charge to tax of such company and
for payment of the tax.
The distribution of the assets of the company to the shareholders or debenture
holders thereof should not be made unless adequate provision has been made
for the payment in full of any tax which may be found payable by the
company.
2.27 PAYMENT DATES
The tax for any accounting period shall be payable in twelve equal monthly
installments together with a final installment. The first monthly installment is
due and payable not later than the third month of the accounting period. The
amount payable is one-twelfth of the estimated tax for the year. A “returns of
estimated tax” is expected to have been made by the company to the Revenue
Service in accordance with the provision of section 33(1) and should have
been filed not later than two months from the commencement of the
accounting period. It is the estimated tax on such returns that will be divided
into twelve for the purpose of the monthly installments payable.
Where the accounting period is less than one year, the amount payable shall be
proportional to the total number of months in the period. Subsequent monthly
installments are due and payable not later than the last day of the month in
question. The final installment is due and payable within twenty-one days after
the service of the notice of assessment of tax for the accounting period. The
amount of this final installment is the amount of tax assessed for the
accounting period less the total of the amounts paid by the twelve installments.
The payment dates in respect of each accounting period are summarised
below:
2.28 PETROLEUM PROFITS TAX PAYMENT DATES
Instalment Payment dates
1st Due and payable by 31 March of the accounting period
2nd Due and payable by 30 April of the accounting period
3rd Due and payable by 31 May of the accounting period
4th Due and payable by 30 June of the accounting period
5th Due and payable by 31 July of the accounting period
6th Due and payable by 31 August of the accounting period
7th Due and payable by 30 September of the accounting period
8th Due and payable by 31 October of the accounting period
9th Due and payable by 30 November of the accounting period
10th Due and payable by 31 December of the accounting period
11th Due and payable b 31 January of the next accounting period
12th Due and payable by 28 or 29 February of the next accounting
period
2.29 TAX SUBJECT TO OBJECTION OR APPEAL
Where any tax is a subject of an objection or appeal, that tax shall be held
over, pending the result of the objection or appeal. Nevertheless, the Revenue
Service may enforce payment of that portion of the tax (if any) which is not in
dispute.
The tax outstanding under the assessment as determined on such objection or
appeal as the case may be is payable as follows:
The amount of the tax held over is payable immediately; and
While any additional sum to the amount held over is payable within one
month from the date of service of the notification of the tax payable.
Penalty: If any installment of tax due and payable is not paid within the
appropriate time limit referred to above, a penalty of 5% of the amount of the
installment shall be added and become payable.
2.30 OFFENCES AND PENALTIES
Offences Penalties
A fine of ₦10,000. Where the
offence arose from failure to
deliver accounts or particulars or
Failure to comply with the requirements of a returns, a further sum of ₦2,000
(a)
notice served by the Revenue Service. for each and every day during
which the failure continues. In
default of payment is
imprisonment for six months.
Failure to make up accounts of the company’s
(b) profits or losses and prepare necessary As for (a) above.
particulars.
Failure to attend, without sufficient cause, in

answer to a notice or summons served by the
(c) As for (a) above.
Revenue Service or having attended, failure
to answer any question lawfully put.
Failure to submit the return of the company’s

estimated tax within two months of the
commencement of the commencement of an
(d) As for (a) above.
accounting period. Failure to submit a revision
of the estimate when necessary, is also an
offence.
Preparation of incorrect accounts of the tax

which has been under-charged and A fine of ₦1,000 and double the
(e) particulars or schedules in consequence of amount (understating profits or
such incorrect required by the Act document overstating losses).
or information.
Giving any incorrect information in relation to

(f) any matter or thing affecting a person’s liability As for (e) above.
to tax.
A fine of ₦1,000 plus treble the

Knowingly making any false statement or
amount of tax involved or to
(g) false representation or using any forged
imprisonment for six months, or to
document with a view to obtaining deduction.
both such fine and imprisonment.
Aiding, abetting, assigning, counseling,
inciting or inducing any other person to: (a)
(h) As for (g) above.
Prepare and submit false accounts and
returns or (b) refuse or neglect to pay tax.
Any member of the Revenue Service or any

assistant employed in connection with the
assessment and collection of tax who (i)
demands an amount in excess of the
authorised assessment of tax payable. (ii)
withholds for his own use or otherwise part of
A fine of ₦600 or imprisonment for
the tax collected. (iii) renders a false return
(i) three years or to both such fine
(verbal or written) of the amount collected by
and imprisonment.
him. (iv) defrauds, embezzles or otherwise
uses his position to deal wrongfully either with
the Revenue Service or any other individual.
(v) collects or attempts to collect the tax
without being authorised shall be guilty of an
offence.
A fine of 200% of the tax not

Failure to deduct withholding tax or failure to
withheld or not remitted plus
(j) remit the tax deducted to Federal Inland
interest at the prevailing
Revenue Service within 30 days.
commercial rate.
2.31 FORMS OF CONTRACTUAL AGGREMENT
1. Joint venture contract:

Joint venture is a contractual arrangement whereby two or more
parties undertake an economic activity which is subject to
contractually agreed basis of sharing control.
Companies producing crude oil in Nigeria are not allowed to
produce the oil solely on their own. Each company is required
to enter into a Joint Venture Agreement with the Nigerian
National Petroleum Corporation (NNPC) in respect of the
company’s operation in a particular oil field. A detailed joint
venture operating agreement will be entered into by the parties.
The agreement will spell out in detail the rights and obligations
of each party with respect to the particular venture.
NNPC will usually take up a majority of the venture while the
oil producing company will take up the balance. One of the
parties to the venture is given the responsibility to operate the
venture, that is, the production of crude oil from the concession
that is the subject of the venture. This is the operator. The
operator is the party that conducts the operations under a joint
venture. This may include the drilling of a well and/or the
production of oil from a tract or field under an agreed contract.
In all or most of the cases, in spite of NNPC majority
shareholding, it is the oil producing company that is appointed
as field operator of the joint venture.

Each party to the joint venture is expected to fund its equity
share in the venture. This is done when the operator makes calls
for the needed cash (cash calls). Each party also lifts crude oil,
from the crude oil produced, in proportion to its equity interest
in the joint venture. When NNPC is unable to lift all its share of
the crude produced, the field operator, will under special
arrangement with NNPC, lift the balance, sell it and pass the
proceeds of sale to NNPC.
Each joint venture agreement will make provision for an
Operating Committee to oversee the preparation and approval
of budgets and operational plans that would be prepared by the
field operator. Each party accounts for and pays its petroleum
profits tax liabilities arising from the venture.
2. Production sharing contracts:
In a PSC arrangement, the petroleum producing companies
enter into agreement with NNPC for the production of crude oil
in particular oil fields respectively. The operating expenses for
the petroleum operations would be met by each operator. This
is a major shift from the terms in joint venture contracts.
In a JVC, NNPC will fund the operational expenses of the
venture in proportion to its share in the joint venture, but in
respect of PSC’s, the petroleum producing company will fund
100% of the contract. The provision for the reimbursement of

costs to the operator in executing the contract will be contained
in the PSC. This is usually achieved through the allocation to
the operator of a proportion of the oil produced, from which the
company is expected to recover its cost of producing the oil and
of executing the contract generally. Therefore, oil recovered in
the contract area is split into:
i. Royalty oil
ii. Cost oil
iii. Tax oil
iv. Profit oil.
Business activities under PSC are subject to tax under the
Petroleum Profits Tax Act and the Deep Offshore and Inland
Basin Production Sharing Contracts Act No 9 of 1999. The
Decree requires that the tax computation is done by NNPC or
concession holder who will also lift the “tax oil”, sell same, and
pay the petroleum profits tax to the Revenue. This is slightly
contradictory to the relevant provision of PPTA. PPTA
provides for persons engaged in petroleum operations to
prepare tax returns, submit same, and pay the PPT due. The
responsibility for the payment of PPT is clearly stated in PPTA.
It is less clear in the Deep Offshore and Inland Basin
Production Sharing Contract.
The key provisions of the Deep Offshore and Inland Basin
Production Sharing Contracts Act 1999 are:

1. That the Petroleum Profit tax applicable to the contract
area shall be 50% flat rate of chargeable profits for the
duration of the Production Sharing Contracts;
2. That in respect of any qualifying capital expenditure
incurred wholly, exclusively and necessarily for the
purposes of the petroleum operations carried out under
the terms of a Production Sharing Contract in the Deep
Offshore or Inland Basin, there shall be due to the
parties:
3. In respect of Production Sharing Contracts executed
prior to 1 July, 1998, an Investment Tax Credit at a flat
rate of 50 per cent of the qualifying expenditure; and
4. In respect of Production Sharing Contracts executed
after 1 July, 1998 there shall be due to such Parties an
Investment Tax Allowance at a flat rate of 50 per cent.
5. In both cases, royalty is payable as follows:
Rate
on-shore production 20%
offshore production up to 100meters water
depth 18½%
offshore production between 100 to 200
meters’ water depth 162/3%
In areas from 201 to 500 metres water
depth 12%
In areas from 501 to 800 metres water
depth 8%
In areas from 801 to 1,000 metres water
depth 4%
In areas in excess of 1,000 metres water
depth 0%
However, the Deep Offshore and Inland Basin PSC
(Amendment) Act, 2019 amends section 5 by replacing the
royalty regime applicable to Deep Offshore and Inland Basin
fields. The amended Act introduces a combined production and
price-based royalty system which varies according to area of
operations.
The new royalty regime specifies a baseline royalty of 10% for
crude oil and condensates produced in the deep offshore
(greater than 200 meter water depth) and 7.5% for the frontier
and Inland Basin. In addition to the baseline royalty, a royalty
based on the applicable price of crude oil, condensate and
natural gas will apply, but only when the price exceeds $20 per
barrel. The graduated royalty rates are:
from $0 up to $20 per barrel 0%
above $20 and up to $60 per barrel 2.5%
above $150 per barrel 10.0%

6. Computation and payment of estimated and final
petroleum profits tax shall be made in US dollars on the
basis of the US dollar returns filed;
7. The Corporation or the Holder, as the case may be shall
pay royalty, concession rentals and petroleum profits
tax on behalf of itself and the Contractor out of the
allocated royalty oil and tax oil;
8. Separate tax receipts in the names of the Corporation or
the Holder and the Contractor for the respective
amounts of the petroleum profits tax paid on behalf of
the Corporation or the Holder and Contractor shall be
issued by the Federal Inland Revenue Service in
accordance with the terms of the Production Sharing
Contract; and
9. The chargeable tax on petroleum operations in the
contract area under the Production Sharing Contracts
shall be split between the Corporation or the Holder and
the Contractor in the same ratio as the split of profit oil
as defined in the Production Sharing Contract between
them.
10. The Deep Offshore and Inland Basin PSC
(Amendment) Act, 2019 also introduced for the first
time offences and penalty for non-compliance.
Essentially, section 16 (B) introduced a fine of N500
million for non-compliance with any obligation
imposed by the provision of the Act, or imprisonment

for a period not less than five (5) years, or both, upon
conviction by a competent court of law.
11. Furthermore, section 16 (A) mandates the Minister of
Petroleum Resources to cause the NNPC to call for a
review of the PSCs every eight (8) years.
3. Risk Service Contract
The Contractor undertakes exploration, development, and production
activities on behalf of the concession holder for a specified period. The
Contractor bears all the risk involved in E&P activities, but has no title
to the oil produced. The Contractor is reimbursed cost incurred only
from proceeds of oil sold and is paid periodical remuneration in
accordance with the formula stipulated in the contract. The Contractor
has the first option to buy back the crude oil produced, exercisable
even after the life of the contract.
2.32 REVIEW OF CASE LAWS
Some of the cases so far with respect to taxation of oil & gas operation
include:
(i) Interest on intercompany loan
Total Exploration & Production Vs the FIRS (2016).
The TAT relied on an earlier judgement on a similar issue in
the Nigeria Agip Oil Company vs FIRS case where it was ruled
that: “…we must construe the legislative intention behind the

introduction Section 10 (1) to the Act. Section 10 (1) (g) was
introduced as a later amendment. The provisions of Section
13(2) had always been part of the Act… the legislature intends
that for tax purposes, related companies should from the
enactment of Section (10) (1)(g) begin to enjoy the tax
deductions allowed non-related companies when they transact
as though unrelated”
This remains the position until a high court of competency rules
otherwise
(ii) Withholding tax on Dividend from gas business
Total Exploration & Production Vs the FIRS (2016) ruled
The Tax appeal tribunal ruled that “…a company’s gas income
is taxable under CITA…Section 60 of the PPTA does not cover
taxation of gas income. Invariably, the appellant is not
prevented from charging WHT on dividend paid by it on its gas
income”
This remains the position until a high court of competency rules
otherwise
(iii) VAT on sale/transfer of oil & gas asset
CNOOC E&P Nigeria Vs AGF &ORS

The Federal High Court, Abuja ruled that VAT was not
chargeable on production sharing contract (PSC) transaction
because the transaction is out of the scope of the VATA and
that a PSC does not constitute either goods or services as stated
in the Act.
2.33 Contemporary tax issues:
(i) Treatment of abandonment/decommissioning cost
This is a process required by license requirements and relevant
legislation/ practice whereby:
(a) oil wells are abandoned and plugged
wellhead, production and transport facilities are
dismantled.
(b) producing areas are remediated and restored.
The Petroleum (Drilling & Production) Regulations 1969
requires E&P companies to implement an Abandonment
programme
The E&P Company usually sets up an Abandonment Fund.
However, costs are only recoverable based on actual funding
(ii) Unitisation agreement
This is a form of joint undertaking whereby an oil or gas field, which
straddles different license areas, is developed as a single unit by the
interest holders in both license areas.

It typically involves a recalculation of interest (participation factors) of
the parties from both contract areas in the unit.
Unitisation arrangements are governed by an Unitisation and Unit
Operating Agreement, which documents the terms under which the
Unit development will be conducted by the designated Unit Operator.
The agreement usually provides for one or more redeterminations since
the initial calculation was based on limited geological estimates.
Revisions of participation factors usually leads to adjustment of the
members’ share of production and cost. On redetermination, a
participator may become entitled to an increased share of oil.
In practice, redetermination adjustments are accounted for on a
prospective basis rather than by way of prior period restatement.
Thus, redetermination does not create any tax exposure as the new
participation factors are treated as if they have always applied.
For example, Company A and B hold 60% and 40% interest in OML
100. Company C &D hold 70% and 30% respectively in OML 200.
Both OMLs straddle each other and the parties have decided to unitise
the fields.
If the estimated production from OMLs 100 and 200 are 160 and 40
barrels respectively, what will be the revised interest in the unitilised
field and the production accruing to each company?
(iii) Interest on intercompany loan
Based on section 10(1)(g) of the PPTA, interest on intercompany loans
obtained at an interest rate not higher than the London Inter-Bank
Offer Rate (LIBOR), is tax-deductible.
This provision was introduced in 1999, by the Finance (Miscellaneous
Taxation Provisions) Decree No. 30 of 1999 (Decree No. 30).
However, Decree No. 30 failed to delete section 13(20 of the PPTA- a
provision that has been in the PPTA since its enactment in 1959, which
disallows interest on all forms of intercompany loan
It is trite law that a latter will always supersede an old law on the same
object.
(iv) Community expenses
This is respect of cost incurred to enable the local communities
cooperate with oil & gas companies carry their petroleum operation
activities in the locality. It is usually in form of payments to heads of
the communities, provision of amenities and other social
infrastructures. Although FIRS normally challenge the deductibility of
such expense for tax purposes, it is now becoming a reality that the
communities may hinder petroleum operation activities if they are not
settled. Therefore, the expense can fit into cost incurred for the purpose
of petroleum operation.
(v) Joint filing of PPT returns
Aside from PSC arrangement where tax is filed based on the field
incorporating interest of the parties jointly, there are instances where
some JV parties made application to FIRS to allow to file a joint-tax
returns.
(vi) Dividend from gas business
Section 60 of the PPTA exempts ‘’…any…dividends paid out of any
profits which are taken into account, under the provisions of this Act,
in the calculation of the amount of any chargeable profits upon which
tax is charged, assessed and paid under the provisions of this Act’’.
One school of thought holds the view that the use of the phrase ‘to be
taxed under the companies Income Tax Act’ in section 11(2)(d) of the
PPTA suggests that gas income is not taken into account in the
calculation of the amount of chargeable profit upon which PPT is
‘’charged, assessed and paid’’. As such, the exemption conferred by
Section 60 of the PPTA should not apply to dividends declared from
gas operations.
A second school of thought is of the view that Section 2 of the PPTA
defines petroleum operations as winning and transportation of
petroleum, which is defined to include ‘any mineral oil and natural
gas’. Section 9 also states that ‘all income incidental to and arising
from petroleum operations’ is subject to PPT. This implies that gas

income is taxed under PPTA, albeit at the CIT rate. Thus, the
exemption under Section 60 applies to dividends from gas operations.
2.33 Implications for the sale of license vs sale of shares, regulatory
approval and applicability of transaction taxes
(i) Sale of license:
Paragraph 14 of the First Schedule to the PA provides that
“without prior consent of the Minister, the holder of an oil
prospecting or an oil mining lease shall not assign his license or
lease or any right, power or interest therein or thereunder”.
Assignor of the interest is expected to submit a written
application to the DPR requesting the Minister’s consent to
transfer its rights to an oil and gas asset (licence/lease). The
Minister’s consent may only be granted where the Minister is
satisfied that:
(a) The assignee is of good reputation, or is a member of a
group of companies of good reputation, or is owned by
a company or companies of good reputation
(b) The proposed assignee is, in all other respects,
acceptable to the Federal Government, and

(c) There is likely to be available to the proposed assignee
sufficient technical knowledge, experience and financial
resources to work the asset, which is being assigned
Furthermore, pursuant to Paragraphs 14 to 16 of the First
Schedule to the PA, the Minister reserves the right to impose a
Fee or Premium or both which shall range from 1 to 5% of the
total value of the transaction. There is no specific reference on
the party responsible for the payment, thus this could be agreed
between the parties.
(ii) Sale of license - Tax and regulatory implications
The proceeds from sale/transfer of oil and gas assets cannot be
regarded as petroleum income, so it is not chargeable to PPT.
This is because the profit derived from such sale is not derived
from petroleum operations (see definition of key terms above).
Also, the sale/transfer of oil and gas asset will not fall under the
provisions of CITA as it is not a trading profit.
Going by the decision of a High Court, sale/transfer of oil and
gas asset is out of the scope of the VATA as the transaction
does not constitute either goods or services as stated in the Act.
The sale//transfer is a capital transaction taxable under CGT at
10%.
The stamp duty Act (SDA) requires that the transfer agreement
be stamped and the relevant duty is 1.5% of the underlying
sales amount payable by the assignee.
(iii) Sale of shares - Tax and regulatory implications
The difference under this model is that the interest in an oil &
gas asset is transferred/acquired by disposing/purchasing the
equity share holding of the entity which the vehicle holding the
asset.
As in the sale of license, the provision of 14 to 16 of the First
Schedule to the PA is applicable. Also, the entity vehicle
would be expected to file an updated Form CAC 2A with the
Corporate Affair Commission (CAC) to reflect the change in its
shareholding and update its records at the Companies Registry.
The tax implications are as follows:
There are no PPT implications as the gains from the disposal of
shares are not from direct petroleum operations. The gains from
sale of shares are not trading profits that are taxable under
CITA, so there are no CIT implications.

There will be no VAT implications as sale of shares is
considered to be neither transfer of goods nor services.
Although transfer/disposal of shares is a capital transaction,
however, gains from such transfer/disposal of shares are
exempt from CGT. Therefore, there is no CGT implications.
There are no stamp duties implications as the instrument for
transfer of shares are exempt from stamp duties.
2.34 CHAPTER REVIEW
After reading this chapter, a student is expected to understand the historical
development of the oil and gas sector in Nigeria, appreciate the administrative
procedure of the sector and be able to explain the specific definitions contained in the
Petroleum Profit Tax Act Cap P13 LFN 2004 as amended.
Students are also expected to be conversant with the basis for the computation of
adjusted profits, assessable profit, chargeable profit, assessable tax, chargeable tax,
petroleum investment allowance, investment tax credit, memorandum of
understanding, upstream/downstream matters, gas flaring and process of taxing
natural gas.
2.35 END OF CHAPTER QUESTIONS
Question 1
Global oil and gas limited commenced crude oil production in Nigeria in 2009. The company
has provided the following financial report in respect of its operation for the accounting year
ended December 31, 2018.

N
Sales of crude oil:
– export (380,000 barrels) 5,700,000,000
– local (108,950 barrels) 1,307,400,000
Other income 256,200,000
Expenditure incurred are as follows:
Production costs 1,499,960,000
Operation costs 1,861,440,000
Intangible drilling costs 511,200,000
Non-productive rent 184,140,000
Royalty on export sales 87,580,000
Royalty on local sales 21,600,000
Custom duty on plant 78,200,000
Cost of drilling four appraisal wells 208,800,000
Transportation and travelling 56,600,000
Salaries and wages 790,400,000
Management and administrative expenses 211,800,000
Harbour dues 50,960,000
Donations 50,000,000
Pension fund contribution 105,000,000
Bad debt written off 179,000,000
Miscellaneous expenses 115,120,000
Interest paid 70,000,000
Income tax provision 332,200,000

Additional information:
1. Posted price for crude oil exported average $52 per barrel (at an exchange rate of
N306 to $1)
2. Included in other income was N76,000,000 derived from transportation of crude oil to
the refinery. Related expense which amount to N32,500,000 was included in
operation cost.
3. The company entered into natural gas contract with Agip Limited. The value of the
contract was N1,310,000,000 and the load factor of the gas was 54.
4. Depreciation of assets which amounted to N240,500,000 was included in production
costs.
5. The schedule of qualifying capital expenditure acquired during the year is as follows:
Date of Amount
Type acquisition Location N
Storage
tank 12-Mar-18 On-shore 47,000,000
Continental shelf of
Plant and 130 metres of water
equipment 15-Nov-18 depth 150,000,000
6. The unutilized portion of capital allowance brought forward from last year was agreed
as N67,400,000, while the agreed capital allowance for the year was N177,000,000.
7. Included in management and administrative expenses was N7,000,000 paid on stamp
duties for debenture issued and obtained by the company.

8. Specific bad debts written off amounted to N79,000,000.
9. The amount of donation was expended wholly, exclusively and necessarily for the
company’s petroleum operations.
10. A sum of N25,000,000 paid to another company to retrieve information relating to the
existence of petroleum in the Chard basin region of Nigeria was included in
miscellaneous expenses.
11. Interest paid included N41,000,000 which was paid to an associated company. The
loan was obtained at market rate.
As a result of the need to meet up with the return deadline on payment of petroleum profit
tax, the 13th installment has become very urgent.
The management of the company has engaged your firm of chartered accountants as tax
consultants to the company.
Required:
As the desk officer in charge of the petroleum profit tax matters in the accounting firm, the
principal partner has directed you to work on the file of Global oil and gas limited.
Specifically, you are to prepare and submit report on the following computations:
a. Assessable profit;
b. Chargeable profit;
c. Chargeable tax; and
d. Total tax payable
Question 2
The profit and loss account of valley oil limited for year ended 31st December 2010 is a
shown below.
N N N
Sale of crude oil:
Export 140,000,000
Domestic 80,000,000
220,000,000
Less:
Production costs 17,500,000
Transportation costs 18,000,000
35,500,000 184,500,000
Less:
Salaries and wages 950,000
Bank Charges and Interest 1,750,000
General Overheads 250,000
Interest on bills payable 450,000
Losses on fixed Assets 700,000
Royalty and Production rentals 4,700,000
Non-Productive rentals 840,000
Custom Duties:
Essential items 90,000
Non-essential items 85,000 175,000 55,895,000

Profit before tax 128,605,000
The following additional information is available:
[a] Intangible drilling costs expended was N7,500,000 and this was capitalized accordingly.
[b] Capital allowances as per the books are as follows:
Capital allowance unutilized b/f 17,000,000
[c] Below is the schedule of qualifying capital expenditure with dates of acquisition:
ASSETS AMOUNT DATE OF ACQUISITION
1. Plant & Machinery N45, 000,000 2008
2. Motor Vehicle N15, 000,000 2007
3. Pipeline &Storage Tanks N25, 000,000 2007
4. Building N18, 000,000 2008
During the year, Plant and equipment imported with N20, 000,000 was located offshore at
between 100meters to 200meters of continental water shelf area.
Other information applicable are:
[a] The sum of N250, 000 was depreciated but this was included in royalties and production
rentals
[b] Included in salaries and wages was the sum of N170, 000 paid to a lawyer who defended
the company in a charge of traffic offence that resulted into the death of a teenager.
[c]Erroneously included in general overhead is the sum of N280, 000 owed to the company
by Messrs Stone and Associates.

[d] Included in bank charges and interest is the sum of N400,000 which was the cost of
uninterrupted Power Supply(UPS)
REQUIRED:
Compute the Petroleum Profit Tax payable by Valley Oil Limited showing clearly the
assessable and chargeable profits for the relevant year.
Question 3:
Mobil oil Plc entered into a gas contract with ANTARAONI oil of ITALY. The value of the
contract is $11,500,000. The load factor of the gas was recovered at 75%.
You are required to determine the value of the gas sold. (10marks)
Question 4:
The profit and loss account of ORIENTAL OIL PLC for year ended 31st December 2009 is
stated below:
N N N
Crude oil sold:
Export 400,000,000
Domestic 230,000,000
630,000,000
Less:
Production costs 177,850,000
Transportation costs 55,970,000
233,820,000 396,180,000
Less:

Bank charges and interest 1,250,000
General overheads 750,000
Repairs and maintenance 850,000
Interest on term loans 650,000
Stamp duty on debenture 150,000
Donation to Action Congress party 1,750,000
Donation to People Democratic Party 2,750,000
Losses on fixed Assets 950,000
Royalties and Production rentals 55,000,000
Lawyer’s fees on traffic offence 2,135,000
Non-Productive rentals 890,000
Education tax provision 3,350,000
Customs duties:
a.Essential items 87,000
b.Non-essential items 105,000 192,000 81,547,150
Profit before tax 314,632,850
The following additional information is relevant to the account:
[a] Intangible drilling costs expended was N 10,250,000 and was capitalized by the
Accountant in the books of accounts.
[b] Capital allowances in the books are as follows:

Capital allowance unutilized b/f 25,120,000
[c] Below is the schedule of qualifying capital expenditure with dates of acquisition.
ASSETS AMOUNT DATE ACQUIRED
1.Motor Vehicle N60,000,000 2005
2.Motor Vehicle N30,000,000 2008
3. Plant and Machinery N48, 000,000 2006
4. Pipeline and Storage Tanks N28, 000,000 2007
5.Building N23,000,000 2006
6.Plant and Macinery N45,000,000 2004
7.Pipeline and Storage Tanks N85,000,000 2003
During the year,Plant and Equipment imported with N30,000,000 was located offshore at
250meters of continental water shelf area
[d] The Accountant committed these errors in the books which were not discovered when the
accounts were prepared:
1. The sum of N150, 000 depreciation on an asset was debited to general overheads
2. The figure of N240, 000 being cost of two laptops bought was debited to general
overheads
3. N2, 000,000 donated to Democratic Party of Nigeria was debited to Royalties and
productive rentals
REQUIRED: Compute the Petroleum Profit tax payable by Oriental Oil Plc showing clearly
the assessable profit, chargeable profit and tax payable for the relevant year. [20marks]
2.39 Solution to end of chapter questions
(a) Assessable Profit is: N3,000,692,160

(b) Chargeable Profit is: 2,731,442,160
(c) Chargeable Tax is:2,321,725,840
(d) Total Tax is: 2,381,739,680
Workings 1:
Global Oil & Gas Limited
Computation of Petroleum Profit Tax for 2018 Tax Year
Revenue:
Sale of crude oil –Export:
(a) Higher of Actual Sales; and 5,700,000,000
(b) Adjusted Posted Price i.e. 380,000 * 52 *306 6,046,560,000 6,046,560,000
Sale of crude oil – Local 1,307,400,000
Sale of natural gas (See workings 1) 1,095,946,000
Other income – 256,200,000 – 76,000,000 180,200,000
Total Revenue 8,630,106,000
Less: Allowable expenses (S.10 Deductions):

Production costs – 1,499,960,000-240,500,000 1,259,460,000
Operation costs – 1,861,440,000-32,500,000 1,828,940,000
Intangible drilling costs 511,200,000
Non-productive rent 184,140,000
Royalty on export sales 87,580,000
Royalty on local sales 21,600,000
Custom duty on plant 78,200,000
Cost of drilling two appraisal well-202,800,000/2 101,400,000
Transport and travelling 56,600,000
Management and administrative expenses:
211,800,000 – 7,000,000 204,800,000
Harbour dues 50,960,000
Donations 50,000,000
Pension fund contribution 105,000,000
Bad debt written off – Specific 79,000,000
Miscellaneous expenses – 115,120,000-25,000,000 90,120,000
Interest paid 70,000,000 (5,569,400,000)
3,060,706,000
Less: Tertiary Education Tax 2/102 * 3,060,706,000 (60,013,843)
Assessable profit 3,000,692,160
Less: Capital Allowance: (269,250,000)
Chargeable profit 2,731,442,160
PP tax @ 85% 2,321,725,840

Less: MOU 0
Chargeable tax 2,321,725,840
Total tax:
Chargeable tax
2,321,725,840
Tertiary Education Tax 60,013,843
Total tax 2,381,739,680
Workings 2:
Determination of Income from sale of natural gas
Income from sale of natural gas 1,310,000,000

Less: Discount – Gas factor: 1,310,000,000 * 16.34% (214,054,000)
Net income from sale of natural gas 1,095,946,000
50 = 16.9 and 60 = 15.5
:. 10 = 16.9-15.5 = 1.4

1 = 1.4 / 10 = 0.14
4 = 0.14 * 4 = 0.56
Discount factor on 54 = 16.9 – 0.56 = 16.34%
Workings 3:
Computation of Capital allowance
Lower of:
a. Capital Allowance claimable:
Balance B/F 67,400,000
For the year 177,000,000
PIA:
On-shore 5% * 47,000,000 2,350,000
Off-shore continental shelf of 130m 15% * 150,000,000 22,500,000 24,850,000
Total 269,250,000
b. 85% * 3,000,692,160 2,550,588,340

Less: 170% of PIA 170% * 24,850,000 (42,245,000)
2,508,343,340
:. Capital allowance 269,250,000
Workings 4:
Determination of Tax payable on income from Transportation of Crude Oil
Revenue from Transportation of Crude oil 76,000,000

Less: Related expenses (32,500,000)
Assessable profit / Total profit 43,500,000
CIT @ 30% 13,050,000

TET @ 2% 870,000
VALLEY OIL LIMITED
COMPUTATION OF PETROLEUM PROFIT TAX FOR 2010 YEAR OF ASSESSMENT
STEP 1: COMPUTATION OF CAPITAL ALLOWANCE FOR 2010 YEAR OF
ASSESSMENT
ASSETS YEAR OF RATE COST ANNUAL
ACQUISITION N ALLOWANCE
1.PLANT &MACH 2008 20% 45,000,000 N9,000,000
2.MOTOR VEHIC 2007 20% 15,000,000 3,000,000
3.PIPELINE STOR 2007 20% 25,000,000 5,000,000
4.BUILDING 2005 20% 18,000,000 3,600,000
5. PLANT&MACH 2010 20% 20,000,000 4,000,000
24,000,000
STEP II: COMPUTE INVESTMENT TAX CREDIT ON NEW ASSET
Investment tax credit on plant and equipment imported to be located at between 100 and 200
meters’ depth of continental water shelf area.
Cost =N20, 000,000
Rate applicable =15%
Investment tax credit N 3,000,000
170% there-on N5,100,000

STEP III: COMPUTATION OF ADJUSTED PROFIT, CHARGEABLE PROFIT AND TAX
PAYABLE
N N
Net Profit as per account 128,605,000
Add Back
Losses on fixed assets 700,000
Fee on traffic offence 170,000
General overhead 280,000
UPS Cost 400,000 5,580,000
Deduct
Intangible drilling cost 7,500,000
Education tax 2,484,020 (9,984,020)
[128,605,000+5,580,000-7,500,000+0-0×2 }
102}
Adjusted Profit / Assessable profit 124,200,980
Capital Allowance: The lower of:
(1) Balancing allowance b/f 85,000
Capital allowance b/f 17,000,000
Capital allowance for the yr. 24,600,000

Petroleum Investment Allowance 3,000,000
44,685,000
(2) 85% of N 124,200,980 = 105,870,833
Less 170% of PITC 5,100,000
100,770,833
:. Capital allowance claimable (44,685,000)
CHARGEABLE PROFIT 79,515,980
Chargeable tax @ 85% N67, 588,583
MOBIL OIL PLC, COMPUTATION OF VALUE OF GAS SOLD TO ANTARAONI OIL
OF ITALY.
STEP 1: Compute the actual gas factor (discount)
70-75 14.3- X
70-80 = 14.3-13.6
= 5 = 14.3-X
8 14.3-13.6
= 0.5 ×0.7 = 14.3 –X
= 0.35 = 14.3-X
X = 14.3-0.35
= 13.95%
STEP II COMPUTE THE DISCOUNT VALUE OF GAS SOLD
Discount = 13.95% X $11,500,000
= $1,604,250
CONTRACT = $11,500,000
Less level of discount = $1,604,250
Value of gas sold $9,895,750
ORIENTAL OIL PLC
COMPUTATION OF PETROLEUM PROFIT TAX FOR 2009 YEAR OF
ASSESSMENT.
STEP 1 COMPUTE CAPITAL ALLOWANCE FOR 2009
ASSET YEAR OF RATE COST ANNUAL
ACQUISITION N ALLOWANCE
1 MOTOR VAHICLE 2005 19% 60,000,000 11,400,000
2.MOTOR VEHICLE 2008 20% 30,000,000 6,000,000
3.PLANT &MACHINERY 2006 20% 48,000,000 9,600,000
4.PIPELINE &STORAGE
TANKS 2007 20% 28,000,000 5,600,000
5.BUILDING 2006 20% 23,000,000 4,600,000
6.PLANT &MACHINERY 2004 -- 45,000,000 NIL

7.PIPELINE STORAGE
TANK 2003 -- 85,000,000 NIL
8.PLANT &EQUIPMENT 2009 20% 30,000,000 6,000,000
43,200,000
STEP II COMPUTE INVESTMENT TAX CREDIT ON NEW ASSETS
Investment tax credit on plant and equipment imported to be located at 250mwters depth of
continental water shelf area:
Cost = N30,000,000
Rate Applicable = 20%
Investment tax credit = N60,000,000
170% there-on = N10,200,000
STEP III COMPUTATION OF ADJUSTED PROFIT, CHARGEABLE PROFIT AND TAX
PAYABLE
N N
Net Profit as per Account 314,632,850
Add back:
1.stamp duty on debenture 150,000
2.Donation to Action Congress Party 1,750,000
3.Donation to Peoples Democratic Party 2,750,000
4.Depraciation 8,880,000
5.Losses on Fixed assets 950,000
6.Lawyer’s fee on traffic offence 2,135,000
7.Education tax provision 3,350,000

8.Depreciation on asset 150,000
9.cost of laptop on overheads 240,000
10. Donation to Democratic party of Nig. 2,000,000
22,355,000 22,355,000
Deduct
1.Intangible drilling cost 10,250,000
2.Education tax: 6,406,625 (16,656,625)
[314,632,850+22,355,000-
10,250,000+0-0x 2
102]
= 6,406,625
Assessable profit 320,331,225
Less Capital Allowance:
The Lower of:
[1] Balancing Allowance b/f N540,000
Capital Allowance b/f 25,120,000
Capital Allowance for the
Year 43,200,000
Petroleum Investment
Allowance 6,000,000
74,860,000
[2] 85% of N320,331,225
= 272,281,541
Less 170% of PITC 10,200,000
262,081,541
:. Capital allowance = (74,860,000)
Chargeable profit 245,471,225
Tax Payable @ 85% N208,650,413.

CHAPTER 3:TAXATION OF MERGERS, TAKEOVERS, ACQUISITIONS AND
RESTRUCTURING
3.0 PURPOSE
After reading this chapter, students should be able to:
(a) know the concept of mergers, acquisitions and takeover;
(b) know the benefits associated with mergers, acquisitions and
takeover;
(c) understand the powers of Federal Inland Revenue Service with
respect to mergers, acquisitions and takeovers;
(d) understand the implications of a new company taking over an
existing one;
(e) understand the tax implications of an existing company absorbing
another;
(f) understand the tax implications of trade or business sold or
transferred; and
(g) know the tax implications of reconstituted companies.
3.1 INTRODUCTION
Corporate Restructuring refers to a change in an entity’s ownership, business mix,
asset mix and alliance, etc., with a view to maximizing shareholders’ wealth and
improve firm value. A company can affect corporate restructuring through mergers
and acquisitions, leveraged buy outs, buy back of shares, spin-offs, joint venture and
strategic alliance.
3.2 MERGERS AND ACQUISITIONS
Mergers and Acquisitions (M&A) are generally defined as forms of business
combinations that either result in formation of new companies or assimilation of
existing businesses by others.
Nigeria witnessed an unprecedented wave of mergers and acquisitions in its banking
sector in the post-1995 and 2009 periods as a result of regulatory mandates issued by
the Central Bank of Nigeria, aimed at strengthening the capital base of Nigerian
Banks. A similar experience took place in the Nigerian Capital Market in the last
quarter of 2013 following new capitalization requirements announced by the Security
and Exchanges Commissions for capital market operators. The insurance sector also
witnessed similar wave of regulatory triggered recapitalization based on the directive
issued by National Insurance Commission (NAICOM) in 20071.
As aged as the concept may be, mergers and acquisitions have long been recognized
as tools for corporate restructuring and addressing business problems. In practical
terms, it allows companies to amongst other things, fuse together and consolidate
resources in order to enhance their output ratio even under harsh economic conditions,
rather than wither away to unfriendly corporate environment.
During mergers and acquisitions, these companies reconstruct and re-engineer their
corporate structure. By way of amalgamation, they combine their existing organs and
metamorphose into a larger entity in law or in alternate; one acquires controlling

shares in another. This concept is referred to as merger; while the latter is called an
acquisition.
A merger is very similar to an acquisition, except that in the case of merger, existing
stockholders of both companies involved retain a shared interest in the new combined
company, while an acquisition contemplates a takeover of substantial shares by an
acquirer in another company called the target company.
3.3 DEFINITION OF MERGER AND ACQUISITION
Under the Federal Competition and Consumer Protection Act (FCCPA) 2018 which
is the principal legislation governing business combinations in Nigeria, a merger is
said to occur:
.... when one or more undertakings directly or indirectly acquire or establish direct or
indirect control over the whole or part of the business of another undertaking.
According to the Act, a merger may be achieved through a number of ways including
the purchase or lease of the shares, and interest or assets of the other undertaking in
question, the amalgamation or other combination with the other undertaking in
question, or a joint venture.
The term “acquisition” was not defined by the Act. However, the scope of the
definition of mergers in the FCCPA is all encompassing and includes acquisitions and
takeovers. Acquisition was defined in the Consolidated Securities and Exchange
Commission Rules as:
“.... the take-over by one company of sufficient shares in another company to give the
acquiring company control over that other company”

It is instructive to note that acquisition connotes a take-over. In commercial usage, the
expression “acquisition” is properly used interchangeably to mean “take-over” as
distinct from merger. Generally, "acquisition" describes a primarily amicable
transaction, where both firms cooperate, whereas a "takeover" suggests that the target
company resists or strongly opposes the purchase and it is often hostile. However,
because each acquisition, takeover, and merger are a unique case, with its own
peculiarities and reasons for undertaking the transaction, use of these terms tends to
overlap.
More importantly, one striking difference between both concepts is the fact that
companies enter into mergers mutually as opposed to acquisition by takeover of
sufficient shares, which in most instances occur against the interests of the target
company, who usually resist such takeover.
Mergers, acquisitions, take-overs respectively, are not terms of art with clearly
distinguishable legal meanings. The terminologies are often interwoven and may all
even be used to describe the same process.
3.4 TYPES OF MERGERS
There are commonly five types of mergers. The term chosen to describe the merger
depends on the economic function, purpose of the business transaction and
relationship between the merging companies. The merger types are:
(1) Horizontal Merger
(2) Vertical Merger
(3) Market Extension Merger
(4) Product extension merger
(5) Conglomerate Merger

However, in Nigeria, the recognized merger types are horizontal, vertical and
conglomerate mergers.
(1) Horizontal Merger: This can be defined as mergers involving direct
competitors. This class of merger takes place between two firms or companies
that are involved in similar type of business. This type of merger is predicated
on the assumption that it will provide economies of scale from the larger unit
when they fuse together. The merger between the then Standard Trust Bank
(STB) and United Bank for Africa (UBA) to become today’s United Bank for
Africa Plc exemplifies what a horizontal merger is. Also, a merger between
Coca-Cola and the Pepsi beverage division, for example, would be horizontal
in nature. Because the merging companies' business operations may be very
similar, there may be opportunities to join certain operations, such as
manufacturing, and reduce costs.
(2) Vertical Merger: This is defined as mergers involving firms in non-
competitive relationships. This class of merger takes place between two
companies that compliment or depend on each other for its operation, with the
two companies operating at different levels within the same industry's supply
chain. For example, a merger between a textile producing firm and a cotton
producing industry is a vertical merger. Here the former depends on the latter.
One remarkable feature about this type of merger is the fact that one squarely
depends on the product of the other for survival. Such mergers ease the burden
of production from the dependent firm. An automobile company joining with a
parts supplier would also be an example of a vertical merger. Such a deal
would allow the automobile division to obtain better pricing on parts and have
better control over the manufacturing process. The parts division, in turn,
would be guaranteed a steady stream of business.

(3) Conglomerate Merger: This is a merger between firms that are involved in
totally unrelated business activities. There are two types of conglomerate
mergers: pure and mixed. Pure conglomerate mergers involve firms with
nothing in common, while mixed conglomerate mergers involve firms that,
while operating in unrelated business activities, are trying to gain product or
market extensions through the merger.
This type of merger is more often triggered by an organisation’s desire to
diversify risk while also increasing its line of production. A leading
manufacturer of athletic shoes, merging with a soft drink firm will be an
example of a conglomerate merger. The resulting company is faced with the
same competition in each of its two markets after the merger as the individual
firms were before the merger. One example of a conglomerate merger was the
merger between the Walt Disney Company and the American Broadcasting
Company (ABC) in 1995.
3.5 REASONS FOR MERGERS AND ACQUISITIONS
Mergers and acquisitions are fast becoming ubiquitous in the everyday world of
international business and the astounding energy with which it is pursued gives
credence to its attendant advantages. It is emerging gradually as a unique area of
managerial expertise and corporate rejuvenation, in developing countries like Nigeria.
In highlighting the reason why companies merge, a distinction needs to be made
between companies that seek acquisitions to add value to their business by achieving
a better rate of growth, and those that identify takeover targets where they can capture
and exploit the value that already exists in the business, without necessarily creating
more growth. There is a distinction between mergers for commercial or strategic

reasons, and mergers for investment or management reasons. Corporate raiders
primarily are concerned with the potential financial benefits of takeovers. They look
for undervalued companies to buy cheaply and unlock the value quickly. This is
perhaps by breaking up the acquired company into smaller divisions that can be resold
upon profitable offers.
There is a plethora of reasons why companies toe the line of mergers and acquisition
and they include;
(1) Value creation: Two companies may undertake a merger to increase the
wealth of their shareholders. Generally, the consolidation of two businesses
results in synergies that increase the value of a newly created business entity.
Essentially, synergy means that the value of a merged company exceeds the
sum of the values of two individual companies. Note that there are two types
of synergies:
(2) Revenue synergies: Synergies that primarily improve the company’s revenue-
generating ability. For example, market expansion, production diversification,
and research and development (R&D) activities are only a few factors that can
create revenue synergies.
(3) Cost synergies: Synergies that reduce the company’s cost structure. Generally,
a successful merger may result in economies of scale, access to new
technologies, and even elimination of certain costs. All these events may
improve the cost structure of a company.
(4) Diversification: Mergers are frequently undertaken for diversification reasons.
For example, a company may use a merger to diversify its business operations
by entering into new markets or offering new products or services.
Additionally, it is common that the managers of a company may arrange a
merger deal to diversify risks relating to the company’s operations. An
acquiring company may decide to acquire the target company in order to
diversify its risk by adding the products of the latter to its lists of brands with a
view towards widening its market and reducing product risk.
Note that shareholders are not always content with situations when the merger
deal is primarily motivated by the objective of risk diversification. In many
cases, the shareholders can easily diversify their risks through investment
portfolios while a merger of two companies is typically a long and risky
transaction. Market-extension, product-extension, and conglomerate mergers
are typically motivated by diversification objectives.
(5) Achieving Corporate Growth: Most organisations usually attain corporate
growth over the years by increasing their performance levels and re-ploughing
back their profits into the business. This may be so where the opportunities’
profile in the traditional core business is stagnant and any marginal cash
investment may not yield the expected optimal returns. Mergers and
acquisitions enable a company to achieve corporate growth and expansion
through the acquisition and restructuring of target companies especially in
consideration of the fact that diversifying away from core areas reduce risk
and ensures profitability.
(6) Acquisition of Technical staff and Assets: Mergers and acquisitions can also
result from the decision of the acquiring company to ‘poach’ the talented staff
possessed by the target company as well as its managerial and technological
know-how. Such members of staff are usually assured that their positions are
not in any way threatened, and that they stand the chance of an elevation in
status in the enlarged company. The acquisition may as well prove extremely
beneficial in this regard as it would have saved the acquiring company the
headache of head hunting and technological espionage. This is exemplified by
the hostile takeover of National Cash Register (NCR) Corporation, then the
tenth largest computer manufacturer in the world by American Telephone &
Telegraph (AT & T) another mobile giant, to take advantage of its technical
staff and beef up the sagging fortunes of AT & T’s computer business.
(7) Increase in financial capacity: Every company faces a maximum financial
capacity to finance its operations through either debt or equity markets.
Lacking adequate financial capacity, a company may merge with another. As a
result, a consolidated entity will secure a higher financial capacity that can be
employed in further business development processes.
(8) Tax purposes: Where the target company is smaller in size but possesses cash
or useful and modern fixed assets, a predator, intent on harnessing these
advantages for its own use may acquire it. The unused tax benefits such as loss
reliefs and unrecouped capital allowances may also attract the likelihood of
merger deals in which case the acquiring company may decide to merge with
or outrightly acquire the target company to take advantages of these benefits
which can be used to avoid tax hitherto would have been paid had the
acquisition not taken place.
(9) Economic Factors: Mergers and acquisitions can also take place for purposes
of satisfying the prevailing economic environment. Where the economic
situation dictates the reasonableness of pooling of resources, especially where
the returns in the industry is tilted in favour of few industrial giants, the
smaller members of the industry may merge their interests in order to be able
to compete in the ever dynamic environment.
3.6 REGULATORY AGENCIES AND PROFESSIONAL EXPERTS INVOLVED
IN MERGERS AND ACQUISITIONS
In the course of M&A, a wide range of government agencies and professional experts
play distinct roles ranging from approval to sanctioning of the merger, to the advisory
roles played by professional experts to assist sort out technical issues and strengthen
decision making by parties.
Previously, the Investment and Securities Act (ISA) governed mergers in Nigeria and
it empowered the Securities and Exchange Commission (SEC) to regulate all merger
transactions in the country. However, the Federal Competition and Consumers
Protection Act repealed the provisions of ISA as they apply to mergers and introduced
a change in the regulatory framework, stripping the SEC of its powers and conferring
them on the Federal Competition and Consumer Protection Commission (FCCPC)
established under it. The role of the SEC in relation to mergers is now in the exercise
of its primary function as the regulator of the capital market. The regulatory purview
of the SEC is restricted to considering the fairness among shareholders in mergers and
acquisitions involving public companies.
Other agencies involved in M&A include; the Federal High Court, Corporate Affairs
Commission (CAC), Nigerian Stock Exchange (NSE). The professional experts
include; Investment Bankers, Auditors, Stockbrokers, Accountants, Solicitors etc.
3.7 UNDERSTANDING ISSUES TO CONSIDER BEFORE MERGERS AND
ACQUISITIONS
One of the most important and lengthy processes in an M&A deal is Due Diligence.
Due diligence is the process of systematically researching and verifying the accuracy
of a statement. A potential M&A deal involves several types of due diligence, and due
diligence in respect of taxes is referred to as Tax Due Diligence.
Tax Due Diligence involves the examination of the tax assets and liabilities of the
target company, to ascertain present and future tax exposures that the post-merger
entity may have to contend with. It involves a review of all taxes the target company
is required to pay, ensuring their proper calculation with no intention of under-
reporting of taxes and verifying the status of any tax-related case pending with the tax
authorities.
During M&A transactions, it is useful to raise the following tax considerations:
What is the target's level of tax compliance with respect to Companies Income Tax
(CIT), Tertiary Education Tax (TET), Capital Gains Tax (CGT), Withholding tax,
Value added tax, information technology levy and payroll related taxes?
What are the available tax assets (e.g. unrelieved capital allowances, unabsorbed tax
losses, unutilized Withholding Tax credits etc.) on the target’s books?
What is the quantum of non-allowable tax expenses and/or deductions in the target's
tax position e.g. filing fees, stamp duties etc.?
What are the prospects for the applicability of the commencement and/or cessation tax
rules post-combination given their potential for double taxation?
Legal Basis for the Tax Treatment for Business Combinations
With regards to taxes, all mergers and acquisition are treated in accordance with the
provisions of the Nigerian tax laws. Also, the Federal Inland Revenue Service
(“FIRS” or “the Service” or “the Board”) Information Circular No. 2006/04 of
February 2006 on Tax Implications of Mergers and Acquisitions which is based on
the provisions of the tax laws was issued to assist in guiding the tax treatment of
business combinations.
3.8 STATUTORY REQUIREMENT UNDER COMPANIES INCOME TAX ACT
(CITA)
The CITA in Section 29(12) CapC21, LFN, 2004 (as amended) provides that ‘‘no
merger, take-over, transfer or restructuring of the trade or business carried on by a
company shall take place without having obtained the Board’s direction under
subsection 9 of this section and clearance with respect to any tax that may be due and
payable under the Capital Gains Tax Act’’. The implication of this provision is that
the approval of the FIRS is a necessary condition for the completion of the process in
a merger or acquisition bid. Therefore, no merger or acquisition bid would be fully
consummated without the companies involved having obtained the consent of the
FIRS.
3.9 PROCEDURE FOR OBTAINING THE BOARD’S APPROVAL
From the start, the merging companies are required to submit to the Service, copies of
the scheme of merger and scheme of arrangement on the consolidation request as well
as the due diligence report covering aspect of taxes of the integrating entities, for
proper study and evaluation in order to ensure that taxes which may result from the
companies’ transactions are correctly assessed and collected. Herein lies the relevance
of the Board’s powers under section 29(9)(c)(i) to require either of the companies
directly affected by any direction which is under the consideration of the Board to
guarantee or give security to its satisfaction for payment in full of all taxes due or to
become due by the company which is selling or transferring such asset or business.
3.10 TAX ISSUES IN MERGERS AND ACQUISITIONS
A merger may result in any of the following situations:
(1) Formation of a new company
(2) Continuation of the consolidated business by one of the merging parties, in its
name or under a new name
(3) Cessation of business by the other merging parties
(4) Emergence of a New Company
3.11 RENDITION OF ANNUAL RETURNS
Where a new company emerges from a merger process, then, the new company is
expected to file its returns, in line with the provisions of Section 55(2)(b) of CITA,
CAP 21, LFN 2004 (as amended). The section provides that every new company shall
file with the Board, its audited accounts and returns within eighteen (18) months from
the date of its incorporation or not later than six (6) months after the end of its first
accounting period as defined in Section 29(3) of CITA, CAP 21, LFN 2004 (as
amended), whichever is earlier. It should however be noted that a mere change of
name does not make an existing business entity a new company. Such companies will
continue to be treated as old business on going concern basis.
Commencement rule as provided under Section 29(3) will apply to the new company.
However, where the merging parties are connected parties (Section 29(10) of CITA)
or the new business is a reconstituted company (under Part II of the Companies and
Allied Matters Act Cap.C20 LFN 2004) taking over the trade or business formerly run
by its foreign parent company (Section 29(10) of CITA), then the Service may direct
that commencement rule be set aside, in which case, the new company will file its
returns as a going concern and its assessment will be determined on preceding year
basis.
3.13 CLAIM OF ALLOWANCES
CITA did not categorically address the value at which assets may be transferred for
the purpose of capital allowances claim. However, International Accounting Standard
(IAS) 22 prescribes that in merger accounting, the assets, liabilities and reserves must
be recorded at their carrying balances, implying that merger process does not permit
the recording of assets at their fair value in the event of consolidation. The new
company will therefore not be entitled to any investment allowance claim or initial
allowance on the transferred assets; it will only be entitled to claim annual allowance
on the Tax Written Down Values (TWDV) of the transferred assets.
3.13 UNABSORBED LOSSES AND UN-UTILIZED CAPITAL ALLOWANCES
BROUGHT FORWARD
The new company may also not be permitted to inherit the unabsorbed losses and
capital allowances of the absorbed companies, except where a reconstituted company
under Part II of the Companies and Allied Matters Act Cap.C20 LFN 2004 is carrying
on the same business previously carried on by this company and it is proved that the
losses have not been allowed against any assessable profits or income of that
company for any such year; in that case the amount of unabsorbed losses shall be
deemed to be a loss incurred by the re-constituted company in its trade or business
during the year of assessment in which the business commenced.

3.14 TAXES AND DEDUCTIBILITY OF RELATED EXPENSES
(1) Stamp Duties: Duty payment will arise on the share capital of the new
company, subject to the provisions of Section 104 of the Stamp Duties Act, in
relation to capital and duty relief.
(2) Consolidated Expenses: Fees paid to statutory bodies such as SEC, NSE,
Central Bank of Nigeria (CBN), Land Authorities etc, including professionals
like Accountants, Stockbrokers, Issuing Houses, and Solicitors are regarded as
capital in nature and will therefore not be allowed as deductible expenses by
virtue of Section 27(a) of CITA.
(3) Taxation of Consolidation Fees: Fees paid to professionals for services
rendered in connection with consolidation will be subject to Value Added Tax
(VAT) and Withholding Tax (WHT) at the rates of 5% and 10% respectively.
(4) Tax Indemnification: Section 29(9)(i) of CITA provides that the Board may
require the new company to guarantee or give security for payment in full, for
any tax due or that may become due by any of the ceased companies.
(5) Status of a Surviving Company in Relation to Taxation: It is a possibility that
one of the merging companies survives with its old name or a new name to
inherit the assets, liabilities, reserves and entire operations of the merging
parties. Where this happens, the following points must be noted:
The surviving company must file its returns in line with the provisions of
section 55(2)(a) of CITA.

Commencement rules under section 29(3) of CITA will not apply to the
surviving company, as it will be regarded as an existing company.
The surviving company will not be allowed to claim investment allowance on
the assets which were transferred to it and will also not claim initial allowance
on such assets.
The surviving company may however claim annual allowance only on the Tax
Written Down Values (TWDV) of the assets transferred to it.
The surviving company may not inherit the unabsorbed losses and capital
allowances of the merging companies, except it is proved that the new
business is a reconstituted company.
All fees payable on merger bids or consolidation will be liable to VAT and
WHT just like it is applicable on the emergence of a new company. Stamp
duties will be paid on the increase in share capital.
Ceased Businesses: The merger or consolidation exercise may also result in
cessation of business for any of the merging parties. In this case, cessation rule
as applicable under section 29(4) of CITA will apply to any of the merging
companies which have now ceased business permanently, except if any of the
following circumstances occur:
where the merging companies are connected. Here, the Board may direct, in
line with its discretionary powers, under section 29(9) of CITA that the
cessation rule may not apply.
where a reconstituted company is formed to take over the trade or business
formerly run by its foreign parent company (see Section 29(10) of CITA).
(6) Capital Gains Tax on Shares or Cash Received: Section 32 of Capital Gains
Tax Act (CGTA) Cap C1 LFN 2004 provides that a person shall not be
chargeable to tax under the Act, in respect of any gains arising from the
acquisition of the shares of a company, either merged with, or taken over or
absorbed by another company, as a result of which the acquired company has
lost its identity. However, where shareholders are either wholly or partly paid
in cash for surrendering their shares in the ceased business, the gains arising
from the cash payment will be subject to CGT.
3.15 PLANNING OPTIONS DURING MERGERS, ACQUISITIONS AND
TAKEOVERS
Generally, there are two basic structures that can be used in the purchase and sale of a
business:
(1) Asset Deal: acquisition of the assets of the business from the target company;
or
(2) Share Deal: acquisition of the shares of the target company from the
company’s shareholders. In a share deal, the investor simply buys the business
or net assets of the target company.
In some cases, commercial considerations will be determinative of the structure – if,
for example, the target company holds critical licenses that cannot be transferred to
the buyer on an Asset Deal. In other cases, tax considerations will be determinative of
the structure – if, for example, the target company has substantial tax losses that could
be utilized by the buyer, a Share Deal may be preferable. In other cases still, the
relative preference of the buyer and vendor for either a Share Deal or an Asset Deal
will factor into the negotiations. Below are some of the most important considerations
that every potential purchaser and vendor should contemplate.
(1) Liability:
In a Share Deal, the buyer will acquire the target company, including all of its
inherent liabilities. This generally includes liabilities for taxes; income and
non-income tax liabilities. In an Asset Deal, the buyer does not inherit the
contingent income tax liabilities of the target company. However, non-income
taxes such as Value Added Tax, Capital Gains Tax, etc. may be applicable. In
Asset Deals, the buyer only inherits those liabilities that it specifically assumes
pursuant to the terms of the asset purchase agreement.
(2) Flexibility:
In a Share Deal, the buyer has very limited flexibility in which assets of the
target company it acquires. The buyer will acquire the shares of the target
company and will therefore indirectly take ownership of all of the target
company’s assets. In an Asset Deal, the buyer has the flexibility as to which
particular assets it wants to acquire.
(3) Tax Cost of Assets
On an Asset Deal, a value must be assigned to each asset that is being
purchased. Frequently, a purchase price is set for the business as a whole, and
the cost allocation for each asset is performed at a later time.
Generally, the buyer will want to allocate a higher amount to assets which
have a high rate of tax depreciation. This would allow the buyer to claim
greater deductions against any income earned in the business going forward.
On the other hand, a vendor will generally want to allocate a lower amount to
assets which have a high rate of tax depreciation to avoid “recapture” of

previously claimed depreciation. In an Asset Deal, careful negotiation is
required to balance these two directly competing interests.
This issue does not arise in a Share Deal. The tax cost of each asset remains
the same both before and after the purchase of the target company’s shares, as
ownership of the assets remains with the target company.
(4) Capital Gains
In a Share Deal, Capital Gains Tax (CGT) does not apply on the sale of shares,
while in an Asset Deal, CGT is applicable on the gains from the sale of the
assets.
The above is summarized in the table below.
Description Share Deal Asset Deal
Liability Acquires the entity including the Only inherits those liabilities that it
liabilities specifically assumes pursuant to the
terms of the asset purchase
agreement
Flexibility Limited flexibility in which assets Flexibility as to which particular
of the target corporation it acquires assets it wants to acquire
Tax Costs of Tax cost of each asset remains the A value must be assigned to each
Assets same both before and after the asset that is being purchased.
purchase of the target
corporation’s shares
Capital Gains No CGT on the sale of shares CGT applicable on the gains from
the sale of the assets.

3.16 TAX INCENTIVE
In the case where a new company emerges from the business combination, the new
company may apply for tax incentives such as Pioneer Status Incentive (PSI). The
Pioneer Status Incentive confers corporate income tax exemption for up to five years
on companies whose activities are covered under the Federal Government of
Nigeria’s Gazetted List of Pioneer Industries and Products. The tax holiday is initially
granted for three years and renewed for one to two years.
3.17 CHAPTER REVIEW

After reading this chapter, candidates should be able to:
(a) understand the concept of mergers, acquisitions and takeover;
(b) know the benefits associated with mergers, acquisitions and takeover;
(c) understand the issues to consider before a merger or acquisition can take place;
(d) know the statutory requirements under CITA;
(e) know the tax issues in a merger and acquisition transactions; and
(f) know the planning options available during merger, acquisition.
Question 1
(a) Explain what you understand by the terms: Mergers, Acquisitions and
Mergers
(b) Explain the tax implications of a merger between two companies where
one of the companies inherits all the assets and operations of the merging
companies.
Question 2
Describe the tax implications of selling or transferring a company to another
company in which both companies belong to the same holding company?
SOLUTION TO END OF CHAPTER QUESTIONS
1 (a) Mergers and Acquisitions

A merger is an arrangement in which the assets, liabilities and
businesses of two or more companies are vested in and carried on by one
company, which may or may not be one of the merging companies and
under a situation in which the owner of the merging companies owns the
new company.
Acquisition is the act of acquiring effective control over assets or
management of a company by another company by acquiring substantial
shares or voting rights of the target company.
(b) (i) The surviving company must file returns not more than six
months after the end of its accounting year in accordance with
Section 55(3)(a)
(ii) Commencement rule will not be applicable
(iii) No initial allowance on assets transferred
(iv) Claim of annual allowance on tax written down values of the
assets transferred
(v) The company cannot inherit the unabsorbed losses and
unutilized capital allowances of the merger unless there is
evidence that the company is reconstituted
(vi) All fees paid will be liable to VAT and WHT
(vii) Stamp duties will be paid on increase in share capital
2. 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 belong to the same group:
(a) There will be no application of either the commencement or cessation
rules;
(b) All the qualifying capital expenditure transferred are deemed to have
been made at their tax written down values;
(c) 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;
(d) Any unutilized capital allowances transferred are deemed to have been
transferred prior to sale; and
(e) Any unrelieved losses transferred are also deemed to have been relieved
prior to the transfer or sale.
Chapter 4: TAXATION OF AGRICULTURAL
BUSINESS
4.0 LEARNING OBJECTIVES
After studying this chapter, readers should be able to:
 Know the operations of Agricultural businesses.
 Understand the legal basis for the taxation of agricultural businesses
 Compute capital allowances for agricultural business and application of non-

restriction of capital allowances including enhanced capital allowance for agro-
allied plant and equipment.
 Appreciate practical income tax computations for agricultural businesses.
4.1 INTRODUCTION
Agribusiness can be defined as the sector involved in the production, processing and
distribution of agricultural goods and services, and it includes all related activities. The
business has moved positively towards meeting consumer demands by controlling
production and distribution processes.
Section 11(4) of the Companies Income Tax Act Cap C21 LFN 2004 as amended
further defines agricultural trade or business as any trade or business connected with -
the establishment or management of plantations for the production of rubber, oil palm,
cocoa, coffee, tea and similar crops; the cultivation or production of cereal crops,
tuber, fruits of all kinds, cotton, beans, groundnuts, sheanuts, beniseed, vegetables,
pineapples, bananas and plantains; animal husbandry, that is to say poultry, piggery,
cattle, rearing, fish farming and deep sea fish-trawling”.
4.2 THE ROLE OF THE AGRICULTURAL SECTOR

The role of agriculture and agro based industries in Nigeria cannot be over emphasized.
Agriculture is a source of food for consumption by man, foods for animals and raw
materials for industries. Agriculture contributes to the growth of the economy, it
provides employment opportunities and help to eradicate poverty in the economy.
Agriculture has traditionally been characterized as the “mainstay” of the Nigerian

economy with many assigned roles to perform in the course of the country’s economic
development. Among the roles conventionally ascribed to the agricultural sector in a
growing economy are those of
(i) Providing adequate food for an increasing population;

(ii) Supplying adequate raw materials to a growing industrial sector;
(iii) Constituting the major source of employment;
(iv) Constituting a major source of foreign exchange earnings; and
(v) Providing a market for the products of the industrial sector
The evaluation of the performance of the Nigerian agricultural sector should

therefore, be based on the extent to which the above-named roles have been
satisfactorily performed.
4.3 LEGAL BASIS FOR THE TAXATION OF AGRICULTURAL BUSINESS

The provisions for taxation of agricultural businesses is provided in CITA Sections 11,
31, 33, 40, Paragraphs 1(g), and 18 (7) of Schedule 2, Paragraph 41 of Schedule 5,
Paragraph 6 (12b), Personal Income Tax Act (PITA) Section 9. It should be noted that
the provisions of PITA with respect to agriculture mirrors that of CITA.
The implications of these provisions of the law are considered below.
4.4 AGRIBUSINESS INCENTIVES

The following incentives are available in the agriculture sector:
i. Interest on any loan granted by a bank on or after I January 1991 to a
company engaged in agricultural trade or business is exempt from tax,
provided the moratorium is not less than eighteen months and the rate of
interest on the loan is not more than the base lending rate at the time the loan
was granted. (Section 11 sub-section 2 of the CITA)
ii. The amount of any loss incurred by a company engaged in an agricultural

trade or business shall be deducted as far as possible from the assessable
profits of the first year of assessment after that in which loss was incurred
and so far as it cannot be so made , then from such amount of such assessable
profits of the next year of assessment, and so on (without limit as to time)
until the loss has been completely set off against the company’s subsequent
assessable profit (Section 31 sub-section 3 of the CITA)
iii. Companies engaged in agriculture are subject to tax at 20% for the year of
assessment in which a company commenced business and the next
following four years of assessment where the turnover is less than ₦1
million. (Section 40 (7) CITA)
iv. Fertilizer, locally produced agricultural and veterinary medicine, farming

machinery and farming transportation equipment are exempt from VAT
(First Schedule of the Value Added Tax Act (VATA)
v. Tractors, ploughs and agricultural equipment and implements purchased for

agricultural purposes shall be exempt from VAT (First Schedule of the VAT
Act)
vi. 95% capital allowance is enjoyed in the year a qualifying expenditure is

incurred pursuant to Paragraph 24 Second Schedule of CITA
vii. Companies in the agro-allied business do not have their capital allowance
restricted. It is granted in full i.e. 100%. (Paragraph 24 (7) of Schedule 2 of
the CITA)
viii. Companies engaged in wholly agricultural activities are entitled to carry
forward unutilized capital allowances indefinitely.
ix. The provisions on payments of minimum tax by companies (companies

which have no profits or which make a turnover of N500,000 or less) do not
apply to agricultural trade or business. (Section 33 (3)(a) CITA)
x. Certain types of agricultural products are duty free upon importation; these
include all agricultural and agro-industrial machines and equipment with HS
Headings 84, 85, 90 and 94.06 enjoy zero percent (0%) import duty2
xi. Processing of agricultural produce is a pioneer industry; consequently,

qualifying companies should be eligible for tax-free period for a period of
three years, which can be extended for a period of one year and thereafter
another one year, or for one period of two years (Section 10(2)(a)(b) of the
Industrial Development (Income Tax Relief) Act
xii. Up to 75% guarantee for all loans granted by commercial banks for
agricultural production and processing under the Agricultural Credit
Guarantee Scheme Fund (ACGSF) administered by the Central Bank of
Nigeria.
xiii. Interest Drawback Program Fund: 60% repayment of interest paid by those
who borrow from banks under the ACGSF, for the purpose of cassava
production and processing provided such borrowers repay their loans on
schedule.
4.5 CAPITAL ALLOWANCES FOR AGRICULTURAL BUSINESSES

The provision for capital allowances is contained in the Second Schedule of CITA.
Capital allowances are a form of relief granted to any company which incurred
qualifying capital expenditure on the provision of machinery or plant for the purposes
of a company’s trade, profession or business.
Capital allowances are granted in lieu of depreciation which is usually disallowed for
income tax purposes. Accounting depreciation is the systematic allocation of the
depreciable amount of an asset over its useful life. From a tax perspective, the cost of
assets is capital in nature and is therefore not deductible.
The term Capital allowances covers initial, annual, investment and balancing
allowance/(charge).
Initial allowance is a relief that is granted in the year of assessment in which the
qualifying capital expenditure was incurred. It is granted in full irrespective of when
the asset was acquired.
Annual allowance on the other hand is granted every year on the residue of
expenditure of an asset until fully written off.
Balancing allowance is the excess of Tax Written Down Value (TWDV) over and
above the sale proceeds on eventual disposal of an asset. The implication of balancing
allowance is that the total capital allowances already granted to the taxpayer is less than
the value of fixed asset used up in the production of income for the taxpayer.
Balancing charge is the excess of sales proceeds over and above the TWDV on
eventual disposal of an asset.
Investment allowance: is an additional allowance which is granted on plant and

equipment used for a business at the rate of 10% of the cost. Investment allowance is
also available to businesses located in areas that are more than 20km away from normal
facilities such as: electricity, tarred road, pipe borne water and telephone.
It is worthy to note that subject to the provisions of the Second Schedule of CITA,
where a company has incurred expenditure wholly, exclusively, necessarily and
reasonably (WREN) for the purposes of agricultural plant and equipment, there shall
he due to that company an investment allowance of ten per cent of such expenditure.
4.5.1 CAPITAL ALLOWANCE RATES AND RESTRICTIONS UNDER CITA

The following are the capital allowances rates applicable to agricultural
businesses:
Initial Allowance Annual Allowance

% %
Plant: Agric Production 95 Nil
Plantation equipment 95 Nil
Research and development 95 Nil
The following points should also be noted as it pertains to the agribusiness

industry:
i. Subject to the provisions of Schedule 2, where in its basis period for a

year of assessment a company owning any asset has incurred in respect
thereof qualifying expenditure wholly, exclusively, necessarily and
reasonably for the purposes of a trade or business carried on by it, there
shall be made to that company for the year of assessment in its basis
period for which that asset was first used for the purposes of that trade
or business an allowance (in this Schedule called art initial allowance)
at 95 per centum, set forth in Table I to this Schedule, of such
expenditure;
ii. Where a company has incurred qualifying expenditure on plant and

machinery for the replacement of old ones, a one-off 95% capital
allowance in the first year shall be allowed. The 5% book value shall be
retained until the final disposal of the asset provided that the aggregate
capital allowances granted in respect of any asset shall not exceed 95%
of the total cost of the asset;
iii. Capital allowances to be deducted from assessable profits of companies

in any year are restricted to 66(2/3)% of such assessable profits except
for companies engaged in agro-allied industry and manufacturing which are not
subject to such limitations;
4.5.2 QUALIFYING CAPITAL EXPENDITURE
Qualifying capital expenditure means, subject to the express provisions of the
Second Schedule and in respect of agri-businesses, expenditure incurred in a
basis period which is:
i. capital expenditure, that is, qualifying agricultural expenditure incurred

on plant in use in agricultural trades and businesses within the meaning
of section 11 of CITA
4.5.4 CONDITIONS FOR CLAIMING CAPITAL ALLOWANCES3

i. The Tax Payer making the claim must own the qualifying capital
expenditure. Meaning, the company must own the asset upon which the
claim is being made.
ii. The Qualifying Capital Expenditure (QCE) must be used for the purpose
of a trade or business. For example, a generator in the home of an MD
of a company cannot qualify as capital expenditure.
iii. The QCE must also be in use at the end of the period for which the tax
is being computed.
iv. If the Qualifying Capital Expenditure is more than N500,000, then an
acceptance certificate must be obtained from the Inspectorate Division
of the Federal Ministry of Industry.
4.5.5 RESTRICTIONS ON CAPITAL ALLOWANCES

For businesses other than those in the manufacturing and agricultural sector,
the maximum capital allowance that can be claimed cannot exceed sixty-six
two-third (66 2/3) of the assessable profit. Meaning that tax must be paid on at
least one-third of the assessable profit.
4.6 DOUBLE TAX TREATY (DTT) PROVISIONS ON IMMOVABLE PROPERTIES AND ITS
APPLICATION TO AGRICULTURE AND FORESTRY
Article 6 of the Nigeria Double Tax Treaty on income from immovable property
stipulates that:
1. Income derived by a resident of a Contracting State from immovable property,

including income from agriculture or forestry, situated in the other Contracting
State many be taxed in that other State.
2. The term “immovable property” shall have the meaning which it has under the
law of the Contracting State in which the property accessory to immovable
property, livestock and equipment used in agriculture and forestry, rights to
which the provisions of general law respecting landed property apply, usufruct
of immovable property and right to work, mineral deposits, sources and other
natural resources. Ships and aircraft shall not be regarded as immovable
property.  
3. The provisions of paragraph 1 shall apply to income derived from the direct
use, letting or use in any other form of immovable property.  
4. The provisions of paragraph 1 and 3 shall also apply to the income from
immovable property of an enterprise and to income from immovable property
used for the performance of independent personal services.
4.7 CHAPTER REVIEW

This chapter explained in detail the meaning, operation and legal basis of an
agribusiness. The chapter also explained the basis for the computation of of capital
allowance and income tax for an agricultural business.
Question 1
AGRO ALLIED LIMITED is an agricultural company, which commenced business on July

1, 2015. It is engaged in cattle ranching plantations and poultry business and prepares its
financial statements to June 30, of every year. Its recent financial statements showed the
following results:
Year ended June 30

2016 2017 2018
N N N
Revenue:
Plantation crops - - 24,000
Cattle ranching proceeds 190,000 638,000 636,000
Total revenue 190,000 638,000 660,000
Expenses:
Preliminary expenses 50,000 50,000 50,000
Purchase: Cockrels 28,000 4,000 -
Poultry feeds 171,000 134,900 151,620
Wages and salaries 100,000 131,000 135,000
Depreciation:
- Plant and machinery 30,000 31,500 31,500
- Office furniture and fittings 28,640 30,280 30,280
Drugs and medicines for animals 26,500 28,200 29,000
Interest on bank loan - 34,200 36,000
General expenses 83,000 83,440 103,000
Increase in closing inventory:
(animals and crops for resale) - (8,400) (10,200)
Net profit/(loss) (326,960) 118,880 103,800
190,000 638,000 660,000
Other additional information

Preliminary expenses amounted to N400,000, and it is to be written off in
equal annual amounts over a period of eight (8) years, commencing from
the year ended June 30, 2016.
Break down of the preliminary expenses is as follows:
N
(i) Stamp duties and registration expenses 30,000
(ii) Cost of initial clearing and cultivation of land for Plantation 70,000
(iii) Cost of nursery plants purchased from Ministry of Agriculture 130,000
(iv) Another nursery plants purchased from an Institute of
Agriculture 91,440
(v) Cost of labour and technical expertise on the first planting
operation on plantations 56,060
(vi) Gratifications to local chiefs and heads of families, so as to
attract labourers to the farm 22,500
400,000
The following details were extracted from the company’s register of

property, plant and equipment:
Cost Date of purchase

N
Assets:
Motor vehicles 30,500 July 2015
Agric tractor 27,000 June 2018
Equipment used in spraying plantations 60,000 January 2018
Office furniture 45,000 August 2015
Building (Administrative block) 71,000 December 2018
There was no disposal of any assets within the period.
Required: Compute the company’s tax liabilities, if any, for the relevant
years of assessment.
Question 2
ABC Limited which is into agricultural produce reported an adjusted (assessable) profit of
N14,000,000 for 2018. However, its capital allowance claim for the year is N12,000,000.
Required: Compute the Income Tax payable in the relevant tax year
AGRO ALLIED LIMITED
COMPUTATION OF TAX LIABILITIES
N N
Assessment year – 2015
(Based on 1/7/15 – 31/12/15)
Loss for the period (w iii) (109,250)
Unrelieved Loss c/f (109,250)
Capital allowances (w iv) 228,624
Capital allowances c/f 228,624
Taxable profit NIL
Tax Liability NIL

(Based on 1/7/15 – 30/6/16)
Loss for the period (w iii) (218,500)
Add:
Unrelieved loss b/f (109,250)
Total Loss (327,750)
Loss c/f restricted to actual loss (218,500)
Capital allow. - For the year (w iv) 206,512

- B/f 228,624 435,136
Capital allowance c/f 435,136
Total profit NIL
Tax Liability NIL

(Based on 1/7/01 – 30/6/16)
Loss for the period (218,500)
Add:
Total loss (437,000)
Unrelieved loss c/f restricted to: actual loss

incurred (218,500)
Capital allow. –For the year (w. iv) 24,084

- Brought forward 435,136 459,220
Total profit NIL
Tax Liability NIL

(Based on 1/7/16 – 30/6/17)
Assessable profit (w. iii) 230,660
Deduct:
Relieved in the year 218,500 (218,500)
- 12,160
Deduct:
Capital allow. - For the year (w. iv) 197,124
- Brought forward 459,220
Total capital allowance 656,344
Relief restricted to 2 / 3 of AP (8,107) (8,107)
Unrelieved capital allowance c/f 648,237
4,053
Total profit

(Based on 1/7/17 – 30/6/18)
Assessable profit (w. iii) 215,580
Deduct:
Capital allow. - For the year (w. iv) 48,475
- Brought forward 648,237
Unrelieved capital allowances c/f
Total capital allowance 696,712

Relief restricted to 2/3 of AP (143,720) (143,720)

Total profit 71,860
Tax liability @ 30% 21,558
TET @ 2% 4,311.60
Workings:
(i) Computation of adjusted profits/(loss)
Year ended June 30,
2016 2017 2018
N N N
Net profit/(loss) per accounts (326,960) 118,880 103,800
Add:
Disallowable expenses
- preliminary expenses 50,000 50,000 50,000
- Depreciation:
Plant and machinery 30,000 31,500 31,5000
Office furniture and fittings 28,460 30,280 30,280
Adjusted profit/(loss) (218,500) 230,660 215,580
(ii) Determination of basis period
YOA Basis period for Basis period for Capital

assessment allowances
2015 1/7/15 – 31/12/15 1/7/15 – 31/12/15
2016 1/7/15 – 30/6/16 1/1/16 – 30/6/16
2017 1/7/15 – 30/6/16 -
2018 1/7/16 – 30/6/17 1/7/16 – 30/6/17
2019 1/7/17 – 30/6/18 1/7/17 – 30/6/18
(iii) Computation of assessable profit/(loss)
Basis period for Assessable

YOA Working
assessment profit/(loss)
N
2015 1/7/15 – 31/12/15 N218,500 x 6/12 (109,250)
2016 1/7/15 – 30/6/16 (218,500)
2017 1/7/15 – 30/6/16 (218,500)
(218,500)
2018 1/7/16 – 30/6/17 230,660
2019 1/7/17 – 30/6/18 215,580
(iv) Computation of capital allowances
Building Motor Plantation Plantation Office Total

expenditure vehicle equipment furniture allowance
Rate – Initial (%) 15 50 30 95 25
– Annual (%) 10 25 50 - 20
N N N N N N
Assessment Year
2015
Acquisitions
- July 2015
- Motor vehicles 61,000
- July 2015
- Plantation 347,500
- August 2015
- Office furniture 0 0 90,000
0 61,000 347,500 0 90,000
Allowances
Initial allowance 0 (30,500) (104,250) (22,500) 157,250
Annual allowance (6
months) 0 (3,812) (60,812) 0 (6,750) 71,374
W.D.V c/f 0 26,688 182,438 0 60,750 228,624
Assessment Year
2016
Annual allowance 0 (8,896) (182,428) 0 (15,188) 206,512
W.D.V. c/f 0 17,792 10 0 45,562
Assessment Year
2017
Annual allowance 0 (8,896) (0) 0 (15,188) 24,084
W.D.V. c/f 0 8,896 10 0 30,374
N N N N N N
Assessment Year
2018
Additions
- Jan. 2017 –
Spraying equip. 0 0 0 120,000 0 0
- June 2017 – Agric
tractor 0 0 0 47,000 0
0 8,896 10 167,000 30,374 0
Allowances
Investment allow. 0 0 0 0 0 16,400
Initial allowance 0 0 0 (158,650) 0 156,650
Annual allowance 0 (8,886) 0 0 (15,188) 24,074
W.D.V c/f 0 10 10 8,350 15,186 197,124
Assessment Year –
2019
Addition
- Dec. 2017 - 142,000 0 0 0 0 0
Building
142,000 10 10 4,350 10,125
Allowances
Initial allowance (21,300) 0 0 0 0 21,300
Annual allowance (12,070) 0 0 0 (15,105) 27,175
W.D.V. c/f 108,630 10 10 4,350 10 48,475
Notes:
(a) Certain expenses included in preliminary expenses have been capitalised as qualifying
plantation expenditure in accordance with the provision of Para 1 (1) of schedule 2 to CITA.
The capitalised costs consist of: N
(i) Cost of initial clearing and cultivation 70,000
(ii) Cost of nursery plants (N130,000+N91,440)
for first planting 221,440
(iii) Cost of labour and technical expertise on
first planting 56,060
347,500
(b) Stamp duties and registration expenses have been disallowed, as they are incurred in
bringing the company into existence and not for the purpose of producing the profits assessable
to tax.
(c) Gratifications to local chiefs and heads of families, have been disallowed because the
expenditure was not incurred wholly and exclusively, for the purpose of producing the
company’s profit or loss.
ABC LIMITED
COMPUTATION OF INCOME TAX PAYABLE IN 2019 TAX YEAR
Assessable Profit N N
Assessable Profit 14,000,000

Capital Allowance 12,000,000
Relieved (100% of N12m) (12,000,000) (12,000,000)

Unutilized Capital Allowance c/f NIL
--------------
Taxable Profit 2,000,000
---------------
Tax Payable @20% 400,000
Chapter 5: INDUSTRIAL DEVELOPMENT (PIONEER LEGISLATION)
5.0 PURPOSE
(a) Understand the major provisions of The Industrial Development (Income
Tax Relief) Act, 1971 and how they apply to companies with pioneer status;
(b) Know the application guidelines for pioneer status incentive issued by Federal
Ministry of Industry, Trade and Investment in 2017;
(c) Know the conditions for qualifying for pioneer status incentive;
(d) Know the importance of production day to a pioneer company;
(e) Know the duration of the relief and procedure for getting additional years;
(f) Know the reports and documents to be filed by a pioneer company during the
pioneer period;
(g) Be able to prepare income tax computations by applying the relevant
provisions of Company Income Tax Act and Industrial Development (Income
Tax Relief) Act; and
(h) Know the offences and penalties as specified by the Act.
5.1 INTRODUCTION
One of the investment incentives available to industries in Nigeria is contained in the
Industrial Development (Income Tax Relief) Act, which grants tax holidays to
companies in the industries that meet the conditions for being designated “Pioneer
Industries”. The tax holiday is usually for an initial period of three years but can be
extended for an additional two years’ maximum.
The Industrial Development (Income Tax Relief) Act 1971 (IDA 1971) came into
force on 1 April 1970.
In 2016, as a result of several complaints about inefficiencies, revenue leakages, lack

of transparency and possible abuse of the Pioneer scheme, the NIPC suspended the
processing of Pioneer Status Incentive (PSI) applications and embarked on a review
of the Pioneer scheme to address the issues.
On 2 August 2017, the Federal Executive Council approved a new Pioneer Status
Incentive Policy based on a comprehensive review of the scheme recently concluded.
As part of the new regime, 27 new industries were added to the list of eligible
industries while new Application Guidelines was issued. Below are the summary of
the Policy and the Guidelines for application for PSI.
5.2 DEFINITION OF RELEVANT TERMS (SECTION 25 OF IDA)

The terms defined in Section 25 of IDA and their respective meanings are reproduced
below:
1. Accounting Period: A period for which accounts have been made up in
accordance with the requirement of paragraph (c) of Section 11 of IDA;
2. Revenue Service: The Federal Revenue Service of Inland Revenue
established under CITA;
3. Company: a company (other than a private company) limited by shares and
incorporated and registered in Nigeria and resident in Nigeria;
4. The Council: The National Council of Ministers (Federal Executive Council);
5. The Director: The director appointed pursuant to Section 1(3) of the
Industrial Inspectorate Act;
6. Gazette: The Federal Gazette and includes the Gazette of any state in the
Federation;
7. The Minister: The Minister for industries;
8. Business: The trade or business of a pioneer company deemed to have been
set up and commenced on the day following the end of its tax relief period;
9. Old trade or Business: The trade or business of a pioneer company carried on
by it during its tax relief period which either ceases within that period or is
deemed to cease at the end of that period permissible;
10. By-product: Any goods or services so described in any pioneer certificate
being goods or services necessarily or ordinarily produced in the course of
producing a pioneer product;
11. Pioneer Certificate: A certificate given under IDA certifying, among other
things, a company to be a pioneer company;
12. Pioneer Company: A company certified by any pioneer certificate to be a
pioneer company;
13. Pioneer Enterprise: In relation to a pioneer company, means the production
and sale of its relevant pioneer product or products;
14. Pioneer Industry: Any trade or business of the kind included in any list of
pioneer industries published in the Gazette;
15. Pioneer Product: Goods or service of the kind included in any list of pioneer
products published in the Gazette;
16. Principal Act: The Companies Income Tax Act;
17. Production Day: The day on which the trade or business of a pioneer
company commences for the purpose of CITA;
18. Qualifying Capital expenditure of such a nature as to rank as
Expenditure: Qualifying expenditure for capital allowances purposes of the
principal Act;
19. Product: The pioneer product or products and the permissible by relevant
pioneer product or products specified in the pioneer certificate of any
company;
20. Tax Relief Period: The period specified under subsection (1) of Section 10 of
IDA and any extension of that period made under that Section.
5.3 OVERVIEW OF PIONEER STATUS INCENTIVE

Pioneer Status Incentive is a tax holiday that grants qualifying industries and products
relief from the payment of corporate income tax for an initial period of three years,
extendable for one or two additional years.  
5.3.1 Relevant Arms of Government Involved in Formulation, Approval and

Issuance of PSI
The following arms of government play a key role in the formulation,
approval and administration of the PSI:
1. Federal Executive Council: On the authority of the President, the
FEC is responsible for amending the list of pioneer industries and
pioneer products (“Pioneer List”) from time to time.
2. Federal Ministry of Industry, Trade and Investment (“FMITI”):
The Minister of Industry, Trade and Investment, is responsible for
specifying the mode of application for PSI.
3. Nigerian Investment Promotion Commission (“NIPC”):
a. On the delegated authority of the Minister of Industry, Trade and
Investment, NIPC is responsible for processing PSI applications and
cancelling pioneer certificates if the provisions of the IDA and the
guideline document are contravened.
b. On the delegated authority of the President, NIPC is responsible for
approving and extending PSI, and issuing pioneer certificates.
4. Industrial Inspectorate Department of FMITI (“IID”): The
Industrial Inspectorate Department (IID) is responsible for certifying
the date of production/date from which the PSI will take effect.  
5. Federal Inland Revenue Service (“FIRS”): The FIRS is responsible
for implementing PSI and issuing certificates of qualifying capital
expenditure.  
5.4 PIONEER CONDITIONS

As provided in the IDA, an industry or product is designated as pioneer if:
1. The industry is not carried on in Nigeria on a scale suitable to the economic
development of Nigeria; or
2. There are favourable prospects of further development of such industries in
Nigeria; or
3. It is expedient in the public interest to encourage development or
establishment of such industry in Nigeria.
The pioneer designation is conferred by the inclusion of the industry or product on a

list approved by the Federal Executive Council. The Pioneer List as approved by the
FEC shall be made available on the websites of NIPC and FMITI. The Pioneer List
shall be reviewed at most every two years for possible additions and deletions from
the list. Any additions approved by the FEC shall become effective immediately after
approval. Any deletions approved by the FEC shall become effective three years after
approval.  
5.5 ELIGIBILITY FOR APPLICATION

A new company can apply for PSI within one year of its product or service as long as
the product or service falls within the approved list of pioneer products or services.
Also, an existing company can apply for PSI within one year of developed a new
product or service that falls within the approved list.
5.6 CONSIDERATION AND MODE OF APPLICATION FOR PSI
5.6.1 CONDITIONS FOR APPLICATION FOR PSI

The following are the consideration for PSI:
1. An applicant must make a new application in the first year of
production/service and must apply for an extension no later than one
month after the expiration of the initial tax relief period of three years
or an extension of one year.  
2. An applicant must be engaged in an activity listed as a pioneer industry
or pioneer product.  
3. A non-current tangible asset of over one hundred million naira (N100
million) shall be deemed as okay.
4. An applicant must provide evidence of all required legal and regulatory
compliance documentation.  
5. An applicant must demonstrate the tangible impact its activity (project)
will have on Nigeria’s economic diversity and growth, industrial and
sectoral development, employment, skills and technology transfer,
export development and import substitution.
6. An applicant must make full payment of fees promptly, when due.  
7. During the pioneer period, a performance report must be submitted to
NIPC annually for monitoring and evaluation purposes.
5.6.2 MODE OF APPLICATION
1. APPLICATION PROCESS FOR NEW APPLICATION

The following are the step-by-step process for the initial application for
PSI:
a. Applicant is expected to write to NIPC: Thereafter:
i. Download guidelines application form and presentation format;
ii. Request date to present project to NIPC; and
iii. Provide project profile indicating pioneer industry/product,
share capital and non- current tangible assets.
b. Present project: This will involve:

i. Agreeing presentation date with the NIPC;
ii. Present project: Following notification of a company’s interest
to make a new PSI application, the company will be required
to make a project presentation to NIPC, covering all the topics
listed below:  
1. Company overview: This will include: company history;
organisational, board, management and shareholding structure.
2. Project overview: This will include: sector overview; sector
opportunity; description of project; description of production or
service delivery  process; key competitors; SWOT analysis;
objectives for seeking PSI.
3. Project impact: This will include: economic diversity and
growth; industrial and sectoral development; employment;
skills and technology transfer; export development; import
substitution; environmental, social and governance policies and
plans.
4. Financial analysis: This will include: project cost; financing
sources; 5-year projected profit and loss, cash flow and balance
sheet; 5-year projected tax savings and utilisation.
iii. NIPC provides feedback and request payment of application
and due diligence fee within a week.
c. Make fee payment: At this point, applicant will be required to
make payment of application and due diligence fee to NIPC. The
following are the specific fees payable by applicant:
i. Application fee: N200,000: This is a non-refundable fee and it
is payable via REMITA prior to submission of Part I of pioneer
status incentive application form.
ii. Due diligence fee: N500,000: This is payable via REMITA
together with the application fee for new applications prior to
submission of Part I of pioneer status incentive application
form. Fee covers flights, accommodation and subsistence for
three NIPC staff to visit an applicants’ project. The applicant is
responsible for transporting all NIPC staff between the airport
or bus station, the project location, and their accommodation.
iii. Service charge deposit: N2,500,000: This is also payable via
REMITA upon notification to applicant of an approval in
principle.
iv. Annual service charge: 1% of actual pioneer profits: This is
payable to NIPC annually via REMITA, no later than 30 June.
It is important to note that both due diligence fee and service charge
deposit are deductible from the total service charge, over the pioneer
period. However, if no profit is made during the pioneer period, all fees
are non-refundable.
Also, please note that the NIPC shall make a monitoring and
evaluation visit to the applicants’ project. The PSI extension applicant
is only responsible for transporting three NIPC staff between the
airport or bus station, the project location and their accommodation.
No fee is payable to NIPC for the monitoring and evaluation visit.
d. Submit application: The application form for new PSI applications

is in two parts:
Part I: This is to be submitted to NIPC in soft or hard copy with
supporting documents, following project presentation and upon
payment of fees. The submission should include the following,
amongst others:
Formal covering letter to the Executive Secretary of NIPC; company
information; company contact information; company external
representative; project overview project cost; financing sources;
shareholders, directors and management; production and financial
performance; number of employees and emolument; training cost;
skills and technology transfer; raw materials and components; export
earnings and destinations; infrastructure developed; environmental,
social and governance policies and plans; utilisation of tax savings; 5-
year business plan; declaration signed by Chief Executive
Officer/Managing Director.  
Part II: This is to be submitted to IID in soft or hard copy with

supporting documents, following receipt of an approval in principle.
The submission should include the following, amongst others:
Formal covering letter to Director of IID; production record; 7-months’
sales revenue record; 7-months’ cash flow record; machinery and
equipment; energy and water requirements; environmental impact
assessment; declaration signed by Chief Executive Officer/Managing
Director.  
It is important to note that detailed information of all supporting

documents required are to be listed in the relevant application form.
Therefore, submission of incomplete information and/or
documentation will affect the application process timeline.
e. Due Diligence Visit:
1. For new PSI applications, two visits will be made to the company’s
project and these includes:
i. Verification visit: Following evaluation and internal due
diligence on a company’s application, 2 to 3 NIPC staff shall
visit the company’s project to verify the information provided
in its application. If required, NIPC may request for the
company to furnish it with additional information during the
verification visit.
ii. Inspection visit: Following evaluation of a company’s
application for production day certification, 2 to 3 IID staff
shall visit the company’s project to inspect and gather
information for the computation of its production day.
2. For PSI extension applications, one visit will be made to the
company’s project:
i. Monitoring and evaluation visit: Following evaluation and
internal due diligence on a company’s application for
extension, 2 to 3 NIPC staff shall visit the company’s project to
verify the information provided in its application. If required,
NIPC may request for the company to furnish it with additional
information during the monitoring and evaluation visit.
f. NIPC Makes Decision on application and notify company of

decision and request payment of service charge deposit within one
week.
g. Pay service charge deposit: Company make payment of service
charge deposit and send payment confirmation to NIPC.
h. Approval in Principle: NIPC issues Approval in Principle and
sends duplicate by email to applicant. The applicant can also elect
to receive by courier or collection in person.
NIPC will also send copies of Approval in Principle to FIRS, IID and
State Ministries.
i. Apply for Production Day Certificate: Applicant is required to:

i. Complete part 11 of application form;
ii. Submit application form to IID in soft or hard copy
j. Production Day Determination: IID in determining the production
day, shall do the following:
i. review application for completeness;
ii. requests inspection visit;
iii. visit project; and
iv. determines production day
k. Production Day Certificate: IID shall issues Production Day
Certificate and sends duplicate by email to applicant. The applicant
can also elect to receive by courier or collection in person. IID
shall notify the NIPC.
l. Pioneer Status Incentive Certificate: NIPC shall issues PSI
Certificate and sends duplicate by email to applicant. The applicant
can also elect to receive by courier or collection in person. The
NIPC will also send a copy of the PSI certificate to FIRS and IID
2. APPLICATION PROCESS FOR EXTENSION APPLICATION

The following are the step-by-step process for application for
extension of PSI:
a. Applicant is expected to write to NIPC. Thereafter, the applicant is
to:
i. Download guidelines, extension form and presentation format;
and
ii. Request date to present project to NIPC;
b. Present project: This would involve:
i. Agree presentation date;
ii. Present project: A company making an application for PSI
extension will be required to make a presentation on the topics
listed in the initial application as well as highlighting any
material changes since the company was initially granted PSI.;
iii. Immediately after such presentation, NIPC will provide
feedback on the project to the company, ahead of payment of
fees and submission of the relevant application form and
supporting documents.
c. Make fee payment: Applicant shall make payment of application
and due diligence fee to NIPC. The following are the specific fees
payable by the applicant:
i. Application fee: N100,000.
ii. Annual service charge: 1% of actual pioneer profits.
d. Submit Application: The application form for PSI extension
applications is in one part and is to be submitted to NIPC in soft or
hard copy with supporting documents, following project
presentation on extension and upon payment of fees. The
submission should include the following, amongst others:
A formal covering letter addressed to the Executive Secretary of
NIPC; certificate of qualifying capital expenditure issued by FIRS;
company information; company contact information (if different);
company external representative (if different); project overview (if
different); total direct investment; production and financial
performance; number of employees and emolument; training cost;
skills and technology transfer; raw materials and components;
export earnings and destinations; environmental, social and
governance policies and plans; utilisation of tax savings; 5-year
business plan; declaration signed by Chief Executive
Officer/Managing Director.
It is important to note that detailed information of all supporting

documents required are listed in the relevant application form.
Therefore, submission of incomplete information and/or
documentation will affect the application process timeline.
e. Due Diligence: The NIPC shall do the following:

i. review application;
ii. request date for monitoring and evaluation visit; and
iii. visit project
f. Decision: NIPC makes decision on application.
g. Pioneer Status Incentive Certificate: The NIPC will PSI Extension
Certificate and sends duplicate by email to the applicant. However,
the applicant can elect to receive the PSI Certificate by courier or
collect in person from NIPC. NIPC will also sends a copy to FIRS
and IID.
5.6.3 CERTIFICATES 
1. For new PSI applications, two certificates will be issued to a company
with a qualifying project and they include:
a. Production day certificate: Upon determination of a project’s
production day, IID will issue a production day certificate to
the company.
b. Pioneer certificate: Upon receipt of a copy of the production
day certificate from IID, NIPC will issue a pioneer certificate to
the company.
2. For PSI extension applications, two certificates will be issued to a
company with a qualifying project and they are:
a. Certificate of qualifying capital expenditure: this is issued to
companies by the FIRS prior to applying for PSI extension
within a month before the expiration of the initial PSI period.
b. Pioneer extension certificate: Upon reaching a decision to
extend a company’s PSI, NIPC will issue a pioneer extension
certificate to the company.
5.6.4 OBLIGATIONS OF PSI BENEFICIARIES

The following are the obligations of a beneficiary of Pioneer Status Incentive
(PSI):
1. Submission of Annual Performance Report: This report is to be
submitted no later than 30 June of the following calendar year. The
report shall provide actual audited financial information and the
following:
i. Formal covering letter to the Executive Secretary of NIPC;  
ii. Company and project information (if different);  
iii. Production and financial performance;  
iv. Number of employees and emolument;  
v. Training cost;  
vi. Skills and technology transfer;  
vii. Raw materials and components;  
viii. Export earnings and destinations;  
ix. Infrastructure developed;  
x. Environmental, social and governance projects;  
xi. Utilisation of tax savings;  
xii. Declaration signed by Chief Executive Officer/Managing Director;
and  
xiii. Evidence of payment of fees.  
Implications of Non-submission of Annual Performance Report

1. Cancellation of PSI certificate;
2. Removal of the company’s name from the list of beneficiaries (posted
on NIPC website); and
3. Notification to FIRS for collection of tax for the unexpired period as
well as the period for which the report was not submitted.
Notwithstanding the above, the NIPC shall reserve the right to proceed with
the cancellation of a beneficiary’s PSI certificate following two reminders sent
to the company’s registered address and/or correspondence email address
provided in its application form or most recent annual performance report.
2. Payment of Fees:
Applicants for PSI are required to pay all fees due within the stipulated
timeframe. The applicable NIPC service fee schedule shall be made
available on the websites of FMITI and NIPC.
Failure to make fee payment shall result in the same implication as
non-submission of annual report discussed above.
All fees are to be paid into NIPC’s account only (payment details shall
be provided on NIPC’s service fee schedule).  
Pursuant to sections 8-25 of the Corrupt Practices and other Related

Offences Act, 2000, any proven act of corruption, gratification or
inducement in violation of the said Act would be inimical to and
jeopardise the prospect of being granted or retaining a PSI approval
and certificate, in addition to being referred to the relevant agency of
the FGN for investigation and possible prosecution. The is in line with
the FGN strict zero tolerance policy for corruption.  
3. Impact Assessment:
The NIPC shall carry out periodic PSI impact assessment surveys.
Therefore, beneficiary companies i.e. PSI companies are required to
furnish the NIPC with any relevant information requested.  
The NIPC shall publish the PSI impact assessment report on its
website with data presented in an aggregated format.  
4. Compliance with IDA and Application Guidelines for PSI:  

Beneficiaries of PSI are required to comply with the provisions of the
IDA and conditions set out in the PSI application Guidelines.
5.7 CONDITION FOR EXTENSION OF A PIONEER PERIOD

The conditions for the extension of a pioneer status are:
1. The application must be in writing addressed to the Nigerian
Investment Promotion Commission (NIPC);
2. The application must reach the NIPC no later than one month after the
expiration of the initial tax relief period;
3. The particulars of all capital expenditure incurred by the company by
that date must be stated;
4. The NIPC must be satisfied as to the rate of expansion, standard of
efficiency and the level of development of the company;
5. The NIPC must also be satisfied as to the use of local raw materials
and the training and development of Nigerian personnel;
6. The relative importance of the industry in the economy of the nation;
7. The fulfilment of any other condition as lay down by the Minister of
Finance.
5.8 PRODUCTION DAY

Subsection (1) of Section 6 of IDA requires that not later than one month after
the material date, a pioneer company shall make an application in writing to
the Industrial Inspectorate Director to certify the date of its Production Day.
The company shall propose a date to be so certified and give reasons for
proposing that date.
Once the Production day is approved, a production day certificate will be

issued. Thus a production day certificate is that certificate issued by the
Industrial Inspectorate Division of the Federal Ministry of Industry, Trade and
Investment specifying the day on which the pioneer status of a company
commenced.
The production day is therefore the date in which the pioneer period is deemed
to commence. It is the day when production commenced in commercial
quantity.
5.8.1 Important of The Production Day Certificate

1. It is the day when the tax-free period starts to run.
2. The qualifying capital expenditure of the company must not fall
below the statutory minimum on that day.
3. It must be certified by the Inspectorate Division of the Federal
Ministry of Industry, Trade and Investment as the date when
the company starts production in commercial quantity.
5.9 MATERIAL DATE

Material date on the other hand means:
a. in relation to a pioneer company engaged in the provision of services,
the date on which the company is ready to provide such services on a
commercial scale; and
b. in relation to a pioneer company engaged in a manufacturing,
processing,
mining, agricultural or any other pioneer industry, the date on which
the company begins to produce a pioneer product in marketable
quantities.
5.10 CERTIFICATE OF QUALIFYING CAPITAL EXPENDITURE

The certificate of qualifying capital expenditure or certificate of capital
acceptance is issued by the Inspectorate Division of the Federal Ministry of
Industry Trade and Investment. Not later than one month after the production
day of a pioneer company is finally determined and certified, the pioneer
company shall make an application in writing to the Inspectorate Division of
the Federal Ministry of Industry, Trade and Investment to certify the amount
of qualifying capital expenditure incurred by the company before the
production day giving all particulars of all such expenditure.
The certificate by the Inspectorate Division of the Federal Ministry of Industry

Trade and Investment is important as such expenditures qualify for capital
allowances, and in fact seen as having been incurred on the day immediately
following the pioneer period, that is in the new business.
However, under the current provision, Certificate of qualifying capital

expenditure is to be issued to companies by the FIRS prior to applying for PSI
extension within a month after the expiration of the initial PSI period.
5.11 PIONEER CERTIFICATE

The Nigerian Investment Promotion Commission (NIPC) issues a pioneer
certificate. The certificate evidences the granting of a pioneer status and must
contain the following particulars:
1. Name of the pioneer company.
2. The production day.
3. The nature of the company’s business.
Where an extension of pioneer status is required, not less than 30 days after
the end of the initial pioneer period, the application for an extension must be
filed with the NIPC together with the pioneer certificate, as the certificate
must be replaced if the application is eventually granted.
5.12 CANCELLATION OF PIONEER CERTIFICATE

A pioneer status may be cancelled where the following circumstances occur:
1. Where the production day is extended for more than one year than that
stated in the original application.
2. Where the values of the qualifying capital expenditure differ from the
value stated in the original application.
3. Where the taxpayer has applied for a cancellation in writing.
4. Where any specific condition laid down by the minister is not fulfilled
or if the provisions of the IDA and the guideline document are
contravened.
5.13 EFFECTIVE DATE OF CANCELLATION

If the period for which the company has been in business under the pioneer
status is less than one year, the effective date of cancellation shall be the
production day. For example, if the date of granting of the pioneer status is
1/1/99, the effective date of cancellation in this case shall be 1/1/99. If the
company has been in business for a period that is more than one year from the
date of acquiring the pioneer status, the effective date of cancellation shall be
the date of the last anniversary. For example, if the date of pioneer status is
1/1/99 and date of cancellation is 25/7/01. In this case, the effective date of
cancellation shall be 1/1/2001.
5.14 NON- PIONEER PRODUCT DURING PIONEER PERIOD

If during the pioneer period, a pioneer company also deals in products other
the pioneer product any profit derived from such a transaction cannot be
exempted from taxation despite the fact that the transaction is taking place
during the pioneer period. In essence, the tax exemption period is applicable
only to pioneer products for which the pioneer certificate was originally
granted.
5.15 INCOME TAX RELIEF

A PSI company shall be on a tax holiday for the period stated on the pioneer
certificate. The tax relief period is usually for a period of three years in the
first instance, commencing on the date of the production day of the company,
unless cancelled or restricted in any manner by the council.
If certain requirements are met, the council may, at the end of the three years
extend the tax relief period for one-year period of two years.
A pioneer company wishing to obtain such extension shall apply in writing no

later than one month after the expiration of the initial three years’ tax relief
period or of any extension thereof. Such application shall contain details of all
capital expenditure incurred by the company by the requisite date. The
requisite date is the date of expiry of a pioneer certificate.
5.16 TAXATION IMPLICATIONS AND ACCOUNTS:
1. A trade or business carried on by a PSI company shall be deemed to
have permanently ceased at the end of its tax relief period.
2. In respect of that trade or business, the PSI company shall be deemed
to have set up and commenced a new trade or business on the day next
following the end of its tax relief period.
3. The PSI company shall make up accounts of its old trade or business
for the following:
i. a period not exceeding one year commencing on its production
day;
ii. successive periods of one year thereafter; and
iii. a period not exceeding one year ending at the date when its tax
relief period ends.
4. The closing figures in respect of the pioneer company’s assets and
liabilities as shown in the last accounts in respect of its tax relief period
shall be used as the opening figures for the accounts of the company’s
new trade or business which is that deemed to commence immediately
after the company’s tax relief period.
5. Capital expenditure incurred by the pioneer company in respect of
assets acquired during the tax relief period shall for capital allowances
purposes be deemed to have been incurred on the day next following
the end of its tax relief period.
5.17 LOSSES
Where the FIRS is satisfied that a PSI company has incurred a loss in any
accounting period within the tax relief period, it shall issue a certificate to the
company accordingly. (IDA Section 10(6)).
In determining whether such a loss has been made, the FIRS may in its
absolute discretion exclude such sum as may be in excess of an amount
appearing to it to be just and reasonable in respect of –
i. remuneration to directors of the company;
ii. interest, service, agency or other similar charges made by a person who
is a shareholder of the company or by a person controlled by such
shareholder (IDA Section 13(3)).
A net loss incurred by a pioneer company shall be deemed to have been

incurred by the company on the day on which its new trade or business
commences, that is, on the day following the expiry of the tax relief period
(IDA Section 14(3)).
For each accounting period, the Revenue Service shall issue to the pioneer
company a statement showing the amount of the income or loss for that
period.
Net loss means the aggregate of losses incurred during the tax relief period
after deduction of profits, if any, made at any time during that period.
Any dispute between the FIRS and the PSI company with regards to the
statement of income or loss issued by the FIRS shall be subject to objection
and appeal in like manner as if such statement were an assessment under
CITA.
5.18 TAXABLE PROFITS

Any profit earned by a PSI company from any operations or activities
whatsoever, other than its pioneer activities shall be deemed to be derived
from Nigeria and shall be liable to tax under Company Income Tax Act.
5.19 SERVICE CHARGE

A service charge of 1% of pioneer profits is payable to NIPC annually via
REMITA, no later than 30 June.
5.20 EXEMPT PROFITS AND DIVIDENDS THEREFROM
5.20.1 Exempt profits

Any profits shown on the statement issued by the FIRS in respect of
the income of a pioneer company for each of the accounting periods of
its tax relief period shall not form part of the Assessable profits or
Total profits of the PSI company for any year of assessment and shall
be exempt from tax under CITA – (IDA Section 16).
5.20.2 Dividend distribution

Any amount of profits that is exempt from tax as above should be
credited by the PSI company to an account to be kept for the purpose
of dividend distribution by the company. Any dividend that is declared
by the PSI company out of such profits shall be exempt from tax in the
hands of the shareholders and shall for the purposes of CITA and PITA
be deemed to be paid out of profits on which tax is not paid or payable.
5.20.3 Prohibitions (Section 18)

During its tax relief period, a pioneer company shall not:
1. Make any distribution to its shareholders, by way of dividend
or bonus, in excess of the amount by which the account
maintained for the exempt profits is in credit at the date of such
distribution.
2. Grant any loan without first obtaining the consent of the
Minister. The consent of the Minister shall only be given if he
is satisfied that the PSI company is obtaining adequate security
and a reasonable interest for any such loan.
5.21 OFFENCES AND PENALTIES

5.21.1 Offences
The offences specified in IDA are:
1. Making or presenting any declaration or statement which is
false in any material particular; and
2. Production of any invoice or undertaking, which is false in any
material particular or has not been given by the person by
whom it is purported to have been given or which has been
altered or tampered with.
The defence available to any person charged is to be able to prove that

he has taken all reasonable steps to ascertain the truth of the statement
made or contained in any document so presented or produced or to
satisfy himself of the genuineness of the invoice or undertaking.
5.21.2 Penalties
Any person who is guilty of any of the above offences, shall be liable
on conviction to a fine not exceeding N1,000 or to imprisonment for
five years or to both such fine and imprisonment.
Where the offence is committed by a body corporate, or firm or other

association of individuals:
a. every director, manager, secretary or other similar officer of the
body corporate;
b. every partner or officer of the firm;
c. every person concerned in the affairs of the association; or
d. every person who was purporting to act in any such capacity as
aforesaid shall severally be guilty of that offence and liable to
be prosecuted and punished for the offence in like manner as if
he had himself committed the offence. The defence available to
any of such persons is to be able to prove that the act or
omission constituting the offence took place without his
knowledge, consent or connivance. The above shall not relieve
any person from liability to payment of any sum for which he is
or may be liable under any undertaking given by him under any
provision of the IDA.
5.22 NIGERIA LNG LIMITED

The Nigeria LNG (Fiscal Incentives, Guarantees & Assurances) Act No. 39 of
1990 (amended by Act 113 of 1993) was promulgated to encourage productive
disposal of associated gas and development of gas wells. The Decree applies
to Nigeria LNG Limited alone. The incentives granted to the company are:
1. The company is declared a pioneer company and its products pioneer

products.
2. Ten years’ tax relief period.
3. All interests’ payable are allowable deductions for tax purposes
without any condition.
4. Interests on foreign loans are exempt from taxation in Nigeria.
5. The books and records of the company shall be kept in United States
dollars and the accounts therefrom shall be drawn in the same
currency.
6. Dividends are exempt from tax (like dividends payable by any other
pioneer company from profits made during the tax holiday).
7. Import duties exemption on necessary imports.
8. No capital allowances restriction after its tax relief period.
In 2003, pioneer status was granted to certain companies operating in the

telecommunication industry.
5.23 LIST OF PIONEER INDUSRIES/ PRODUCTS

S/N INDUSTRIES PRODUCTS
1. Cultivation, Processing and Preservation Preserved canned foodstuff and fruits, tea, coffee,
of food crops and fruits. refined sugar, tomato puree/juice etc.
2. Integrated dairy production Butter, cheese, fluid milk and powder, ice cream
(by products, livestock, minor edible products).
3. a) Deep sea trawling and processing Preserved sea foods, fish and shrimps, fishmeal
b) Coastal fishing and shrimping
4. Mining lead, zinc, and iron and steel from Iron and steel products
iron ore
5. Manufacture of iron and steel from Iron Iron and steel products
ore
6. The smelting and refining of non-ferrous Refined non-ferrous base metal and their alloys
base metal and the manufacture of their
alloys
7. Mining and processing of barytes, Barytes, bentonites and associated minerals
bentonites and associated minerals
8. Manufacture of glass and glassware Sheet glass, pharmaceuticals and laboratory
glasswares
9. Manufacture of lime from local limestone Lime
10. Quarrying and processing of marbles Marbles and processed marbles

11. Manufacture of ceramic products Refractory and heat insulating constructional
products, laboratory ware
12. Manufacture of basic and intermediate i) Basic and intermediate organic chemical;
Industrial chemicals from predominantly ii) Basic and intermediate in-
Nigerian raw materials organic chemicals;
iii) Fertilizers;
iv) Petro-chemical;
v) Caustic soda and chlorine
vi) Pesticide and insecticide
13. Formulation and manufacture of Pharmaceuticals, health vitamins
pharmaceuticals
14. Manufacture of yeast, alcohol and related Yeast, industrial alcohol and related products
products
15. Manufacture of paper pulp Paper pulp
16. Manufacture of yarn and man-made fibres Yarn and synthetic fibres
17. Manufacture of machinery involving the Office and industrial machinery, equipment and
local manufacture of substantial apparatus (whether or not electrical)
proportion of components thereof
18 Manufacture of products made wholly or Pipes and tubes structure metal products
mainly of mental
19. Manufacture of nets from local raw Fishing nets, mosquito nets and related products
materials
20. Manufacture of gas cylinders Gas cylinders
21. The processing of local wheat flour Flour and Offal
materials
22. Rubber plantation and processing Rubber
23. Gum/Arabic plantation and processing Gum Arabic
24. Manufacture of fertilizers Ammonia, Superphosphate and nitrogenous fertilizers
Urea
25. Vehicle Manufacture Motor Vehicles and Motor-cycles, Tri-cycles and
Automotive components
26. Oil palm plantation and processing Palm Oil, palm kennel and Offals
27. Manufacture of automotive and other Automotive and other components.
components
28. Book printing Books
29 Large Scale Mechanized Farming Wheat, Maize, Rice and Sorghum
30. Cattle ranching and piggery of not less Cattle and pigs of not less than 500 herds
than 500 herds
31. Manufacture of Gypsum Gypsum
32. Re-refining or re-cycling of waste oil Low power oil
33. Manufacture of electrical appliances/ Generators, transformers, meter, control, pressing
equipment/components and parts irons, switchgears, test equipment, ballets/
starters/ lighters, discreet components,
resistor/capacitors/coils/semi-conductors/
conductors.
34. Ship building, repairs and maintenance of Ships, boats and barges.
ocean going vessels
35. Manufacture of computer and computer Computer hard and soft ware chips
chips
36. Manufacture of cameras, photographic Cameras, photographic equipment or any
equipment and other materials component thereof
37. Diving and underwater engineers Underwater engineering services.
38. Local fabrications of machinery, Machinery
equipment
39. Manufacture of tools Machines and hand tools
40. Installation of facilities for aircraft Aircraft maintenance and manufacture
manufacture and maintenance of aircraft
41. Installation of scientific instruments and Scientific instruments, radio, audio play-
communication equipment back/recorders, loudspeaker units, amplifying
systems, microphones, video playbacks/
recorders, PBX, telephone handset, tele-printers,
trans-receivers, autophones/aerials.
42. Manufacture of gas and distribution Gas and gas distribution
43. Manufacture of Solar energy powered Solar panels, refrigerators, water pumps,
equipment and gadgets calculators, etc
44. Large-scale inland fishing farms Fish and shrimps
45. Bitumen mining and processing Bitumen
46. Salt production Salt
47. Manufacture of fire fighting equipment Fire fighting equipment and detection systems
and detection systems
48. Manufacture of cables Electrical, telephone and other cables
49. Manufacture of medical equipment X-ray, oxygen equipment, etc
50. Mineral oil prospecting and production Petroleum
51. Manufacture of lubricants Grease, hydraulic/engine oil, gear oil, etc
52. Manufacture of flat sheets Flat sheets
53. Manufacture of oven, cookers, cold Oven, cookers, cold rooms, refrigerators, fridges,
rooms, refrigerators, fridges, freezers, air freezers, air conditioner
conditioner
54. Manufacture of agricultural machinery Ploughs, harvesters, threshers, planters etc
and equipment
55. Manufacture of materials handling and Cranes, forklifts etc
equipment
56. Establishment of foundries Moulds, casting, etc
57. Manufacture of alum Alum
58. Manufacture of enzymes Enzymes
59. Manufacture of concentrates Food/fruits concentrates
60. Manufacture of welding electrodes Welding electrodes
61. Manufacture of nails Nails, related items
62. Manufacture of iron rods Rods from billets
63. Manufacture of hops Brewing hops
64. Information and communication Manufacture/production of ICT equipment,
technology (ICT) hardware and software
65. Tourism Development of holiday resorts, hotels, sporting
and recreational facilities
66. Real Estate Development Rental income from residential and commercial
premises;
Capital gains from any real estate disposed of
within a specified period
67. Utility services Independent power generation utilizing gas, coal
and renewable energy sources.
All aspects of transportation such as rail, road and
waterways.
Indigenous telecommunications companies other
than GSM operations.
LIST OF NEW INDUSTRIES ADDED TO PIONEER LIST
1. Mining and processing of coal;  
2. Processing and preservation of meat/poultry and production of  meat/poultry products;  
3. Manufacture of starches and starch products;  
4. Processing of cocoa;  
5. Manufacture of animal feeds;  
6. Tanning and dressing of Leather;  
7. Manufacture of leather footwear, luggage and handbags;  
8. Manufacture of household and personal hygiene paper products;  
9. Manufacture of paints, vanishes and printing ink;  
10. Manufacture of plastic products (builders’ plastic ware) and moulds;  
11. Manufacture of batteries and accumulators;  
12. Manufacture of steam generators  
13. Manufacture of railway locomotives, wagons and rolling stock;  
14. Manufacture of metal-forming machinery and machine tools;  
15. Manufacture of machinery for metallurgy;  
16. Manufacture of machinery for food and beverage processing;  
17. Manufacture of machinery for textile, apparel and leather production;  
18. Manufacture of machinery for paper and paperboard production;  
19. Manufacture of plastics and rubber machinery;  
20. Waste treatment, disposal and material recovery;  
21. E-commerce services;  
22. Software development and publishing;  
23. Motion picture, video and television programme production, distribution, exhibition and
photography;  
24. Music production, publishing and distribution;  
25. Real estate investment vehicles under the Investments and Securities Act;  
26. Mortgage backed securities under the Investments and Securities Act; and  
27. Business process outsourcing
5.24 CHAPTER REVIEW
In this chapter, the various provisions of the Industrial Development (Income

Tax Relief) Act (IDA) and the guidelines issued by the Federal Ministry of
Trade and Investment in 2017, with regards to pioneer industries and pioneer
companies have been adequately discussed. The conditions for applying for a
pioneer status incentive, list of PSI industries and benefits available to PSI
companies have also been discussed.
Question 1
Clever-man Manufacturing Company Limited was incorporated on 14th November 2017. The company
commenced business of manufacturing paints and industrial chemicals on 1st March 2018 and applied
for pioneer tax holiday immediately. The NIPC approved the company’s pioneer application and issued
pioneer certificate with production day as 1st June 2018.
The operating results of the company for 2019 to 2023 are as follows:
Year Ended 31st May
2019 2020 2021 2022 2023
Turnover: N’000 N’000 N’000 N’000 N’000

Sale of Paints(Industrial) 1,500,000 2,200,000 2,800,000 3,500,000 4,000,000
Sale of Paint (Domestic) 500,000 700,000 800,000 850,000 1,000,000
Sale of Chemicals 20,000 28,000 32,000 40,000 50,000
Other Income 6,000 8,000 10,000 15,000 18,000
2,026,000 2,936,000 3,642,000 4,405,000 5,068,000
Cost of Sales:
Paint (Industrial) 1,100,000 1,800,000 2,300,000 2,900,000 3,400,000
Paint (Domestic) 220,000 480,000 500,000 520,000 650,000
Chemicals 3,000 3,600 5,000 6,800 8,000
1,323,000 2,283,600 2,805,000 3,426,800 4,058,000
Gross Profit 703,000 652,400 837,000 978,200 1,010,000
Operating Expenses:
Payroll costs 110,000 112,500 130,000 150,000 190,800
Insurance costs 12,000 15,000 15,000 18,000 20,000
Repairs& Maintenance 25,000 15,500 32,000 28,000 36,200
Rent & Leases 35,000 38,800 42,000 68,000 68,000
Marketing costs 100,000 130,200 150,000 180,000 200,000
Supplies 22,000 35,000 41,000 68,000 58,000
Admin Costs 150,000 135,000 155,000 170,000 200,000
Depreciation:
Factory Plants 68,000 72,000 80,000 120,000 160,000
Other Assets 25,800 30,200 45,600 55,000 60,800
General Expenses 8,200 10,000 18,000 22,000 30,200
Bad debt 62,000 25,000 42,000 80,000 75,000
618,000 619,200 750,600 959,000 1,099,000
Net Profit/(Loss) 85,000 33,200 86,400 19,200 (89,000)
Additional Information:
1. The Pioneer certificate issued to the company is only in respect of manufacturing of Paint and
was only for three years as the extension sought by company was not approved.
2. Annual payroll costs excludes the below overtime and other incentives paid to factory staff:
2019 2020 2021 2022 2023
N’000 N’000 N’000 N’000 N’000
6,000 8,600 12,850 14,000 15,800
3. Repairs & Maintenance costs includes annual costs of servicing the personal generators of the
MD. The costs are given as 2019 N1,500,000; 2020 N2,500,000; 2021 N4,000,000; 2022
N3,600,000 and 2023 N6,000,000.
4. Marketing costs includes cash paid as PR annually to executives of some of the company’s
major customers as a show of appreciation for patronizing the company’s products. PR paid
are: 2019 N18,000,000; 2020 N22,500,000; 2021 N35,000,000; 2022 N46,000,000 and 2023
N50,000,000.
5. General Expenses includes fines and other penalties paid to Local Government officials and
other Governmental Agencies. The fines paid are: 2019 N1,300,000; 2020 N1,500,000; 2021
N2,000,000; 2022 N3,800,000 and 2023 N5,600,000.
6. Bad debt include general provision for bad and doubtful debt as follows: 2019 N14,800,000;
2020 N16,000,000; 2021 N9,550,000; 2022 N26,500,000 and 2023 N25,200,000.
7. Included in other income are:
2019 2020 2021 2022 2023
N’000 N’000 N’000 N’000 N’000

Gains from sale of shares 850 1,200 1,600 2,000 2,500
Forex gain provision (unrealized) 1,300 2,000 2,550 1,820 2,000
Sundry miscellaneous income 3,850 4,800 5,850 11,180 13,500
8. The asset register of the company showed the following assets:
The company has the following figures on its asset register.

Cost Number Date of Purchase
Assets N’000
Factory Building 850,000 1 27th December 2017
Factory Plant & Machineries 680,000 35 2nd February 2018
Trailers 450,000 20 28th February 2018
Motor Vehicles 200,000 15 30th September 2019
Administrative Building 300,000 2 8th April 2020
Office Equipment 78,000 28 1st June 2020
Generator 128,000 12 15th October 2021
Motor vehicles 52,000 3 4th May 2022
Furniture and Fitting 30,000 42 30th August 2022
9. Note: For purpose of Chemical business, ignore capital allowance and operating expenses.
Required: Compute the income tax liability of Clever-man Manufacturing Limited for the relevant tax
years.
5.26 SOLUTION TO END OF CHAPTER QUESTIONS

Clever-man Manufacturing Company Limited
Computation of Income Tax Liability for 2021 to 2024 Tax Years
2021 Tax Year

N’000 N’000
Assessable profit for P/E 31/12/2021 118,540
Less:
Capital Allowance
For the Year 1,133,500
Relief (118,540) (118,540)
Unrelieved Capital allowance C/F 1,014,960
Taxable profit NIL

CIT @ 30% NIL
TET @ 2% of Assessable profit 2,371
2022 Tax Year
Assessable profit for Y/E 31/5/2022 237,080
Less:
Capital Allowance:
For the Year 355,306
Total 1,370,266
Relief (237,080) (237,080)
Taxable Profit NIL
CIT @ 30% NIL

2023 Tax Year
Less:
Capital Allowance:
Total 1,474,492
Relief (237,080) (237,080)
Taxable Profit NIL
CIT @ 30% NIL

2024 Tax Year

Less:
Capital Allowance:
Total 1,571,218
Relief (172,100) (172,100)
Taxable Profit NIL
CIT @ 30% NIL

Workings
1. Determination of Basis Period for Assessment, Assessable Profit, Basis Period for Capital
Allowance and QCE Allocation
YOA Basis Period for Assessable Basis period for Capital QCE Allocation
Assessment Profit Allowance
N’000
2021 1/6/2021 – 31/12/2021 1/6/2021 – 31/12/2021 Factory Building
6/12 x 237,080 118,540 Factory P&M
Trailers, MV,
Admin Building
Office Equipment
Generator
2022 1/6/2021 – 31/5/2022 237,080 1/1/2022 – 31/5/2022 MV,
2023 1/6/2021 – 31/5/2022 237,080 NIL
2024 1/6/2022 – 31/5/2023 172,100 1/6/2022 – 31/5/2023 F&F
2. Determination of Adjusted/Assessable Profit

2019 2020 2021 2022 2023
N,000 N,000 N,000 N,000 N,000
Net Profit/Loss 85,000 33,200 86,400 19,200 (89,000)
Add Disallowable expenses:
Repairs & Maintenance:
Cost of servicing MD’s Gen. 1,500 2,500 1,400 3,600 6,000
Marketing cost:
PR 18,000 22,500 35,000 46,000 50,000
Depreciation:
Factory Plant 68,000 72,000 80,000 120,000 160,000
Other Plant 25,800 30,200 45,600 55,000 60,800
General Expenses:
Fines and Other Penalties 1,300 1,500 2,000 3,800 5,600
Bad Debt:
General Provision 14,800 16,000 9,550 26,500 25,200
COS for Non-Pioneer Product:
Chemicals 3,000 3,600 5,000 6,800 8,000
Less: Non-taxable Income:

Other Income:
Gains from sale of Shares (850) (1,200) (1,600) (2,000) (2,500)
Forex gain provision (1,300) (2,000) (2,550) (1,820) (2,000)
Income from sale chemicals (20,000) (28,000) (32,000) (40,000) (50,000)
Adjusted / Assessable Profit 195,250 150,300 228,800 237,080 172,100
3. Determination of Pioneer Periods and Pioneer Profit / Loss

YOA Pioneer Basis Period Pioneer Profit/(Loss)
N
2019 1/6/2018 – 31/5/2019 195,250
2020 1/6/2019 – 31/5/2020 150,300
2021 1/6/2020 – 31/5/2021 228,800
Pioneer Profit 574,350
4. Determination of Profit and Tax from Non-Pioneer Activities

2019 2020 2021 2022 2023
N’000 N’000 N’000 N’000 N’000
Income:
Income from sale chemicals 20,000 28,000 32,000 40,000 50,000
Less:
COS Chemicals (3,000) (3,600) (5,000) (6,800) (8,000)
Taxable Profit 17,000 24,400 27,000 33,200 42,000
CIT @ 30% 5,100 7,320 8,100 9,960 12,600
TET @ 2% 340 488 540 664 840
5. Computation of Capital Allowance

Office Total
Factory Factory Motor Admin. Equipme Generato Motor Furniture Capital
YOA Description CA Rates Building P&M Vehicles Building nt r Vehicle & Fittings Allowance
I.A 15% 50% 50% 15% 50% 50% 50% 25%
A.A 10% 25% 25% 10% 25% 25% 25% 20%
Inv. A NIL 10% NIL NIL NIL 10% NIL NIL
Useful Life 10 4 4 10 4 4 4 5
N'000 N'000 N'000 N'000 N'000 N'000 N'000 N'000 N'000 N'000
2021 Cost 850,000 650,000 650,000 300,000 78,000 128,000 - -
Less:
I.A 127,500 325,000 325,000 45,000 39,000 64,000 - - 925,500
A.A 36,125 40,625 40,625 12,750 4,875 8,000 - - 143,000
Inv. A - - - - - - - 65,000
T.W.D.V 686,375 284,375 284,375 242,250 34,125 56,000 - - 1,133,500
2022 Addition-Cost - - - - - - 52,000 -

I.A - - - - - - 26,000 - 26,000
A.A 76,264 94,792 94,792 26,917 11,375 18,667 6,500 - 329,306
T.W.D.V 610,111 189,583 189,583 215,333 22,750 37,333 19,500 - 355,306
2023 Addition-Cost - - - - - - - 30,000

I.A - - - - - - - 7,500 7,500
A.A 76,264 94,792 94,792 26,917 11,375 18,667 6,500 4,500 333,806
T.W.D.V 533,847 94,792 94,792 188,417 11,375 18,667 13,000 18,000 341,306
2024 Less:
A.A 76,264 94,792 94,792 26,917 11,375 18,667 6,500 4,500 333,806
T.W.D.V 457,583 - - 161,500 - - 6,500 13,500 333,806
CHAPTER 6 EXPORT/FREE TRADE ZONE BUSINESS

6.0 PURPOSE
(a) Understand the meaning and examples of an export processing
zone / free trade zone;
(b) Understand the legal framework for operating in an export/free
trade zone;
(c) Know the administration and procedure for registering a
company in an export/free trade zone;
(d) Know the reporting requirement for approved enterprises; and
(e) Know the specific incentives and tax implications of operating
in an export/free trade zone.
6.1 DEFINITION OF AN EXPORT/FREE TRADE ZONE
The International Labour Organization (ILO) characterizes export processing
zones as 'industrial zones with special incentives set up to attract foreign
investors, in which imported materials undergo some degree of processing
before being exported again'. Such special incentives include duty-free
importing and streamlined customs procedures. Export/Free Trade Zones are
usually set up around seaports, international airports and other areas with many
geographical advantages for trade.
According to a 2005 United Nations study, free trade zones are established with
the objective of having a positive effect on the economy. The study enumerated
the following as objectives of governments in setting up of free trade zones:
• Generation of foreign exchange earnings. By promoting non-traditional
exports, greater export earnings may have a positive impact on the exchange
rate. The result is either greater imports at a given exchange rate, or imports
at lower cost for domestic buyers.
• Providing jobs and creating income. In developing countries workers move
from the agricultural sector to better paid jobs in manufacturing. Shifting
workers into industrial production has a low opportunity cost to the
economy: the economy does not lose much agricultural output and gains
additional output of non-traditional export goods.
• Attracting foreign direct investment (FDI) with a larger capital stock for the
host country.
• Generating technological transfer, knowledge spillover and demonstration
effects. This will result in local companies engaging in production of non-
traditional products. Local suppliers benefit because they are forced to
manufacture at world-class production and quality standards, which requires
extensive training of labour, staff and management.
6.2 EXAMPLES OF FREE ZONES IN NIGERIA

In Nigeria, there are currently about 34 FTZs in 17 of Nigeria's 36 States and Federal
Capital Territory. About 17 of the 34 FTZs are currently active, 9 of which are located
in Lagos State.
The table below is a list of the active free trade zones and their locations in Nigeria.
S/N NAME LOCATION
1 Calabar Free Trade Zone Cross River
2 Kano Free Trade Zone Kano
3 Tinapa Resort & Leisure FTZ. Cross River
4 Snake Island Int. Free Zone Lagos
5 Lekki Free Zone Lagos
6 Maigatari Border Free Trade Zone Jigawa
7 Ladol Free Zone Lagos
8 Ogun-Guandong Free Trade Zone Ogun
9 Airline Services Export Processing Zone Lagos
10 Sebore Farms EPZ Adamawa
11 National Aviation Handling Company (NAHCO) Lagos
Free Trade Zone
12 Dangote Industries Free Zone Lagos
13 Lagos Free Trade Zone Lagos
14 North West Quadrant Lekki Free Trade Zone (Alaro Lagos
City)
15 Nigeria International Commerce City (Eko Atlantic Lagos
City)
16 Aluminium Smelter Company FTZ Akwa Ibom
17 Onne Oil and Gas Free Trade Zone Bayelsa
6.3 LEGAL FRAMEWORK FOR THE OPERATION OF FREE ZONES IN NIGERIA

There are two types of Free Zones in Nigeria, namely the specialized Free Zones and
general Free Zones.
The Oil and Gas Export Free Zone Act governs the operations of oil and gas FTZs. The
Nigerian Export Processing Zones Act governs all other FTZs. These Acts are considered
further below:
i. Nigerian Export Processing Zones Act (No. 63 of 1992, now Cap. N107, LFN 2004)
This Act governs the processes and procedures in all general Free Zones in Nigeria. The
management and regulation of Free trade zones are under the purview of the NEPZA. The
President sets up these zones upon recommendation of the board of the Nigerian Export
Processing Zones Authority (NEPZA).
A free trade zone established under the Act may be operated and managed by a public,
private or a combination of public and private entity under the supervision of and with the
approval of Nigeria Export Processing Zones Authority.
The Nigerian Export Processing Zones Act makes provisions for certain approved activities
and also gives the NEPZA the authority to prescribe such activities from time to time. The
approved activities as provided by the Act include:
a.) Manufacturing of goods for export

b.) Warehousing freight forwarding and customs clearance
c.) Handling of duty-free goods (transhipment, sorting, marketing, packaging, etc.)
d.) Banking, stock exchange and other financial services; insurance and reinsurance
e.) Import of goods for special services, exhibitions and publicity
f.) International Commercial Arbitration Services
g.) Activities relating to integrated zones
h.) Other activities deemed appropriate by Nigeria Export Processing Zones Authority
(NEPZA).
ii. The Oil and Gas Export Free Zone Act (No. 8 of 1996, now Cap. O5, LFN 2004)
The Oil and Gas Export Free Zone Act is the enabling law designating the Onne/Ikpokiri
area of Rivers State as an export free Zone. The Oil and Gas Export Free Zone Act also
confers power on the Oil and Gas Export Free Zone Authority (OGEFZA) to oversee the
activities in the Free Zone. The Oil and Gas Export Free Zone Act provides for the
establishment of the OGEFZA, its membership, functions and powers for the effective
management of the Oil and Gas Export Free Zone.
6.4 ADMINISTRATION OF THE FREE TRADE ZONE IN NIGERIA

As earlier mentioned, there are two types of Free Zones in Nigeria: specialized and
general. For effective management of the general and specialized Free Zones, the law
has established two bodies: The Nigerian Export Processing Zones Authority (NEPZA)
and The Oil and Gas Export Free Zone Authority (OGEFZA).
6.5 THE NIGERIAN EXPORT PROCESSING ZONES AUTHORITY
The Nigerian Export Processing Zones Authority (“the Authority”) is Nigeria's
Investment Promotion Agency for investment into the Free Zone areas in Nigeria. The
Nigeria Export Processing Zones’ Act 63, of 1992, vests the licensing, monitoring and
regulation of Free Zones Scheme in Nigeria on the Nigeria Export Processing Zones
Authority (NEPZA).
Several factors are responsible for the adoption of Free Zones Scheme in Nigeria,
amongst which are the diversification of the revenue base of the economy, employment
generation and to encourage export through local production.
The enabling Act also confers on the Authority the power to approve and grant all
licenses and permits, enforce obedience and compliance to rules and regulations. In
effect, the Act is an omnibus law, which permits the Authority and its Board the power
to define the policy directions and provide a One-Stop-Shop business transaction
without bureaucracy.
6.5.1 FUNCTIONS OF THE NIGERIAN EXPORT PROCESSING ZONE

AUTHORITY
The functions and responsibilities of the Nigerian Export Processing Zone
Authority include:
a. The administration of the Authority and management of all the Export
Processing Zones
b. The approval of development plans of the Authority and the Zones
annual budgets in respect to infrastructures, administrative buildings,
promotion of Zones, the provision and maintenance of services and
facilities
c. The establishment of customs, police, immigration and similar posts in
the Zones
d. The supervision and co-ordination of the functions of various public
sector and private sector organizations operating within the Zones and
resolving any dispute that may arise amongst them;
e. The resolution of trade disputes between employers and employees in
the Zone in consultation with the Federal Ministry of Employment,
Labour and Productivity
f. The adaptation of investment promotion strategies in the Zones,
including the opening of Investment Promotion Offices abroad
g. The recommendation to the Federal Military Government of additional
incentive measures for the Zones
h. The establishment and supervision of Zonal Administrators for the
purpose of managing the Zones and the grant of all requisite permits and
licenses to approved enterprises.
6.6 THE OIL AND GAS EXPORT FREE ZONE AUTHORITY
The Oil and Gas Export Free Zone Authority is the body vested with the
responsibility of overseeing the activities of the Oil and Gas Export Free Zone.
The Authority shall have power to take over and perform such other functions
performed by the Nigeria Export Processing Zones Authority as they relate to
the export of oil and gas from any of the Nigeria Export Processing Zones
established by the Nigeria Export Processing Zone Decree 1992.
6.6.1 FUNCTIONS OF THE OIL AND GAS EXPORT FREE ZONE
AUTHORITY
The functions of the Oil and Gas Export Free Zone Authority include
the following:
a. The administration of the Authority and management of the
Export Free Zone
b. The grant of all requisite permits and licenses to conduct
approved enterprises within the Export Free Zone
c. The approval of development plans of the Authority and the
Export Free Zone, the annual budgets in respect of
infrastructures, administrative buildings, promotion of the
Export Free Zone, the provision and maintenance of services and
facilities
d. The establishment of customs, police, immigration and similar
posts in the Export Free Zone
e. The supervision and co-ordination of the functions of various
public and private sector organizations operating within the
Export Free Zone and resolving any dispute which may arise
amongst them
f. The resolution of trade disputes between employers and
employees in the Export Free Zone in consultation with the
Federal Ministry of Labour and Productivity.
6.7 PROCEDURES FOR REGISTERING COMPANIES IN THE FREE

ZONE
6.7.1 Conditions for license eligibility to operate in a Free Zone:
a. The activities, which the applicant proposes to engage shall be
in consonance with the free zone, approved activities
b. The proposed activities to be carried out shall or will add value
to and be consistent with, the development programme for the
Free Zone
c. The applicant shall comply with the provisions of the Act and
applicable Rules and Regulations that may be put in place by the
Authority/Zone management from time to time
d. The technical, financial and managerial capabilities of the
applicant
e. The applicant’s experience and track record
f. The level of foreign direct investment proposed by the applicant
g. For free zone developers, evidence of title to a suitable landing
area free of encumbrances for the intended purpose.
Upon a License being granted to an approved entity by the
Authority/Zone Management, the Authority shall cause all relevant
details concerning such enterprise to be entered in the Free Zone
Register and for a Certificate of Registration, duly executed by or on
behalf of the Authority/Zone Management, to be issued.
The Nigerian Export Processing Zone Regulations provide that any
approved Free Zone enterprise’s investment in an approved activity
within an EPZ must be of a value of at least $500,000, and the operation
of the activity must not cause damage to human life and property,
damage the environment, or constitute a threat to public peace and order
or national security.
6.8 REPORTING REQUIREMENTS OF AN APPROVED ENTERPRISE
Pursuant to the provisions of Part 5 Section 15 of the Nigerian Export
Processing Zone Act 2004, the following are the reporting requirements of an
approved enterprise in the Free Zone:
a. Every Free Zone Enterprise shall keep accounting records sufficient to
show and explain the transactions of such Free Zone Enterprise and be
such as to disclose with reasonable accuracy, at any time, the financial
position of the Free Zone Enterprise at that time and enable the directors
to ensure that any balance sheet and profit and loss account of the Free
Zone Enterprise prepared under these Regulations complies with the
requirements of these Regulations.
b. The accounting records shall in particular contain a record of the assets
and liabilities of the Free Zone Enterprise and entries from day to day of
all sums of money received and expended by the Free Zone Enterprise
and the matters in respect of which the receipt and expenditure takes
place.
c. The accounting records of each Free zone Enterprise shall be kept at its
registered office in the Free Zone and shall at all times be open to
inspection by the officers of the Free Zone Enterprise Registrar and by
its Owner and representatives of the Owner.
d. The first "financial year" of each Free Zone Enterprise (FZE) shall
commence on the date of its registration as disclosed in its Certificate of
Formation. The Owner may determine the length of the financial year of
its Free Zone Enterprise by declaration (a copy of which shall be
delivered to the Free Zone Registry within 7 days of being made and
details thereof promptly entered in the FZE Register) provided that no
first financial year may exceed 18 months or be for less than 6 months.
Subject to the provisions of Section 15(E) below, successive financial
years shall be of 12 months duration beginning immediately after the
end of the previous financial year.
e. The Owner of a Free Zone Enterprise may alter the financial year of its
Free Zone Enterprise by Declaration (a copy of which shall be delivered
to the Free Zone Registry and details thereof promptly entered in the
FZE Register) save that in no case may the financial year of a Free Zone
Enterprise exceed 15 months or be shorter than 6 months.
f. The directors of every Free Zone Enterprise shall prepare for each
financial year of the Free Zone Enterprise a balance sheet as at the last
day of its financial year and a profit and loss account.
g. The balance sheet shall give a true and fair view of the state of affairs of
the Free Zone Enterprise as at the end of the financial year and the profit
and loss account shall give a true and fair view of the profit and loss of
the Free Zone Enterprise for the financial year.
h. The Authority reserves the right to require that the balance sheet and
profit and loss account of each Free Zone Enterprise comply with
provisions to be set down by it from time to time.
i. Where any Free Zone Enterprise owns any other Free Zone Enterprise
or owns more than half the shares in or otherwise controls any other
company or Enterprise the first mentioned Free Zone Enterprise should
also prepare group accounts on a consolidated basis. Where any Free
Zone Enterprise neither owns less than half the shares in a company or
other Enterprise (not being a Free Zone Enterprise) nor controls such
company or Enterprise but nevertheless is in a position to exercise a
significant influence over such company or other Enterprise, then such
company or other Enterprise shall be treated as an associated company
for accounting purposes.
j. The annual accounts of each Free Zone Enterprise shall be approved by
its directors and signed by or on behalf of the directors. At least one
director shall sign the balance sheet and profit and loss account of the
Free Zone Enterprise.
k. A copy of the annual accounts of each Free Zone Enterprise shall be
delivered to the Free Zone Registry within 3 months of the end of the
financial year of the Free Zone Enterprise or such longer period as the
Authority may determine.
l. Each Free Zone Enterprise shall be required to appoint auditors from
among those approved by the Authority to make a report to the Owner
of the Free Zone Enterprise on all annual accounts of the Free Zone
Enterprise and state whether, in the auditor's opinion, such annual
accounts have been properly prepared in accordance with these
Regulations and whether a true and fair view is given:
i. In the case of the balance sheet of the Free Zone Enterprise of the state
of affairs of the Free Zone Enterprise at the end of its financial year,
ii. In the case of the profit and loss account of the Free Zone Enterprise,
of the profit and loss of the Free Zone Enterprise for the financial year
and
iii. In the case of annual accounts of the Free Zone Enterprise prepared
on a consolidated basis, of the state of affairs as at the end of the financial
year and the profit or loss for the financial year of the undertakings
included in the consolidation.
m. The Free Zone Enterprise shall deliver a copy of the auditor's report
(duly signed by the auditors) to the Free Zone Registry, together with
the annual accounts
n. Where the total net assets of a Free Zone Enterprise fall below 75% of
its share capital the director(s) shall, not later than 15 days from the
earliest day on which that fact is known to a director, duly notify the
Free Zone Registry and the Owner which shall, within 7 days of such
notification to it, take such steps as may be appropriate to remedy the
situation so as to ensure that the net assets of such Free Zone Enterprise
are restored to at least 75% of its share capital as soon as reasonably
practicable.
6.9 FISCAL BENEFITS/INCENTIVES FOR OPERATING IN A FREE
ZONE
Pursuant to Section 18(1) of the Nigerian Export Processing Zones Act, the
following incentives apply to entities operating in the free trade zone:
a. Legislative provisions pertaining to taxes, levies, duties and foreign
exchange regulations shall not apply within the Zones
b. Repatriation of foreign capital investment in the Zones at any time with
capital appreciation of the investment
c. Remittance of profits and dividends earned by foreign investor in the
Zones
d. No import or export licenses shall be required
e. Up to 25 per-cent of production may be sold into the customs territory
against a valid permit, and on payment of appropriate duties
f. Rent-free land at construction stage, thereafter rent shall be as
determined by the Authority
g. Up to 100 per-cent foreign ownership of business in the Zones allowable
h. Foreign managers and qualified personnel may be employed by
companies operating in the Zones.
6.10 EXEMPTIONS FROM TAXES
Under Section 8 of the Act, approved enterprises operating within Free Zones
shall be exempt from all Federal, State and Local Government taxes, levies and
rate. Section 18 (1) further provides that all legislative provisions pertaining to
taxes shall not apply within Free Zones.
6.10.1 SPECIFIC TAX IMPLICATIONS OF OPERATING IN A FREE
ZONE
S/N SUBJECT MATTER TAX IMPLICATION
1 Purchases made by Approved Enterprises from NO VAT
Companies operating in the Customs Territory. NO Withholding Tax
(WHT)
2 Sales made by Approved Enterprises to Companies VAT payable by
operating in the Customs Territory. Purchaser
NO WHT
3 Purchases or Sales made from Customs Territory by VAT and WHT
Unapproved Enterprises operating within the Zones. applicable
4 Imported goods conveyed through other Ports No VAT and WHT
outside the Zones but consigned to the Zones. provided the goods are
escorted from the Port of
Entry to the Free Zone by
the Nigeria Customs
Service
5 Submission of Tax Returns to FIRS by Approved Approved Enterprises to
Enterprises submit Tax Returns
through the Free Zone
Authority to FIRS
6 Business activities of Head Offices or Branch All relevant tax laws
Offices of Approved Enterprises located in Customs applicable except as
Territory dealing with Approved Enterprises. related to purchases and
sales.
7 Approved Enterprises having contract of supplies or VAT and WHT
design with companies in the customs area. applicable
6.11 CONTEMPORARY TAX ISSUES

a. Validity of exemptions from State and Local Government Taxes
Section 8 of the Nigerian Export Processing Zone Act provides that
approved enterprises operating within the Zone are exempt from all
Federal, State and Local Government taxes, levies and rates. In practice
however, free zone enterprises sometimes run into conflicts with state
and local government authorities who seek to enforce state and local
government tax rules.
b. Types of taxes covered by the exemptions
Section 18(a) of the Nigerian Export Processing Zone Act provides that
legislative provisions pertaining to taxes, levies, duties and foreign
exchange regulations shall not apply within the Zones. This would
suggest that even beyond being specifically exempt from paying
corporate income tax or value added tax, Free Zone companies are not
obliged to comply with any provisions of tax laws and not just
provisions seeking to charge them to tax.
The vague provisions of the Nigerian Export Processing Zone Act have
led to significant confusion in practice with many companies that
register as Free Zone Enterprises and operate in free zones not fully
understanding their tax obligations and frequently being challenged by
the FIRS and State tax authorities.
6.12 CHAPTER REVIEW
This chapter discusses the meaning and examples of an export processing

zone (EPZ)/free trade zone (FTZ). The legal framework for operating in an
EPZ/FTZ and the administrative and procedure for registering a company in
an EPZ/FTZ was also well elucidated. The chapter concluded by clarifying
the reporting requirement for approved enterprise, the available incentives
and tax implications of operating in an EPZ/FTZ.
Question 1:
Companies operating in a free zone are exempted from taxes. Give examples
of specific tax implications of operating within a free zone in Nigeria
Question 2:
The Nigerian Export Processing Zone Act 2004 under Part 5 Section 15 gave a list of
reporting requirement for every approved enterprises operating within a free zone.
Give five examples of these reporting requirements.
The following are the specific tax implications of operating within a Free Zone:
S/N SUBJECT MATTER TAX IMPLICATION

1 Purchases made by Approved Enterprises from NO VAT
Companies operating in the Customs Territory. NO Withholding Tax
(WHT)
2 Sales made by Approved Enterprises to Companies VAT payable by
operating in the Customs Territory. Purchaser
NO WHT
3 Purchases or Sales made from Customs Territory by VAT and WHT
Unapproved Enterprises operating within the Zones. applicable
4 Imported goods conveyed through other Ports No VAT and WHT
outside the Zones but consigned to the Zones. provided the goods are
escorted from the Port of
Entry to the Free Zone by
the Nigeria Customs
Service
5 Submission of Tax Returns to FIRS by Approved Approved Enterprises to
Enterprises submit Tax Returns
through the Free Zone
Authority to FIRS
6 Business activities of Head Offices or Branch All relevant tax laws
Offices of Approved Enterprises located in Customs applicable except as
Territory dealing with Approved Enterprises. related to purchases and
sales.
7 Approved Enterprises having contract of supplies or VAT and WHT

design with companies in the customs area. applicable
The following are the reporting requirements for approved enterprise operating within
a Free Zone as specified under Part 5 Section 15 of NEPZ Act 2004:
1. Every Free Zone Enterprise shall keep accounting records sufficient to
show and explain the transactions of such Free Zone Enterprise and be
such as to disclose with reasonable accuracy, at any time, the financial
position of the Free Zone Enterprise at that time and enable the directors
to ensure that any balance sheet and profit and loss account of the Free
Zone Enterprise prepared under these Regulations complies with the
requirements of these Regulations.
2. The accounting records shall in particular contain a record of the assets
and liabilities of the Free Zone Enterprise and entries from day to day of
all sums of money received and expended by the Free Zone Enterprise
and the matters in respect of which the receipt and expenditure takes
place.
3. The accounting records of each Free zone Enterprise shall be kept at its
registered office in the Free Zone and shall at all times be open to
inspection by the officers of the Free Zone Enterprise Registrar and by
its Owner and representatives of the Owner.
4. The first "financial year" of each Free Zone Enterprise (FZE) shall
commence on the date of its registration as disclosed in its Certificate of
Formation. The Owner may determine the length of the financial year of
its Free Zone Enterprise by declaration (a copy of which shall be
delivered to the Free Zone Registry within 7 days of being made and
details thereof promptly entered in the FZE Register) provided that no
first financial year may exceed 18 months or be for less than 6 months.
Subject to the provisions of Section 15(E) below, successive financial
years shall be of 12 months duration beginning immediately after the
end of the previous financial year.
5. The Owner of a Free Zone Enterprise may alter the financial year of its
Free Zone Enterprise by Declaration (a copy of which shall be delivered
to the Free Zone Registry and details thereof promptly entered in the
FZE Register) save that in no case may the financial year of a Free Zone
Enterprise exceed 15 months or be shorter than 6 months.
6. The directors of every Free Zone Enterprise shall prepare for each
financial year of the Free Zone Enterprise a balance sheet as at the last
day of its financial year and a profit and loss account.
7. The balance sheet shall give a true and fair view of the state of affairs of
the Free Zone Enterprise as at the end of the financial year and the profit
and loss account shall give a true and fair view of the profit and loss of
the Free Zone Enterprise for the financial year.
8. The Authority reserves the right to require that the balance sheet and
profit and loss account of each Free Zone Enterprise comply with
provisions to be set down by it from time to time.
9. Where any Free Zone Enterprise owns any other Free Zone Enterprise
or owns more than half the shares in or otherwise controls any other
company or Enterprise the first mentioned Free Zone Enterprise should
also prepare group accounts on a consolidated basis. Where any Free
Zone Enterprise neither owns less than half the shares in a company or
other Enterprise (not being a Free Zone Enterprise) nor controls such
company or Enterprise but nevertheless is in a position to exercise a
significant influence over such company or other Enterprise, then such
company or other Enterprise shall be treated as an associated company
for accounting purposes.
10. The annual accounts of each Free Zone Enterprise shall be approved by
its directors and signed by or on behalf of the directors. At least one
director shall sign the balance sheet and profit and loss account of the
Free Zone Enterprise.
11. A copy of the annual accounts of each Free Zone Enterprise shall be
delivered to the Free Zone Registry within 3 months of the end of the
financial year of the Free Zone Enterprise or such longer period as the
Authority may determine.
12. Each Free Zone Enterprise shall be required to appoint auditors from
among those approved by the Authority to make a report to the Owner
of the Free Zone Enterprise on all annual accounts of the Free Zone
Enterprise and state whether, in the auditor's opinion, such annual
accounts have been properly prepared in accordance with these
Regulations and whether a true and fair view is given:
i. In the case of the balance sheet of the Free Zone Enterprise of the state
of affairs of the Free Zone Enterprise at the end of its financial year,
ii. In the case of the profit and loss account of the Free Zone Enterprise,
of the profit and loss of the Free Zone Enterprise for the financial year
and
iii. In the case of annual accounts of the Free Zone Enterprise prepared
on a consolidated basis, of the state of affairs as at the end of the financial
year and the profit or loss for the financial year of the undertakings
included in the consolidation.
13. The Free Zone Enterprise shall deliver a copy of the auditor's report
(duly signed by the auditors) to the Free Zone Registry, together with
the annual accounts
14. Where the total net assets of a Free Zone Enterprise fall below 75% of
its share capital the director(s) shall, not later than 15 days from the
earliest day on which that fact is known to a director, duly notify the
Free Zone Registry and the Owner which shall, within 7 days of such
notification to it, take such steps as may be appropriate to remedy the
situation so as to ensure that the net assets of such Free Zone
Enterprise are restored to at least 75% of its share capital as soon as
reasonably practicable.
CHAPTER 7:TAXATION OF MINING OF SOLID MINERALS
7.0 PURPOSE
(a) At the end of this chapter, candidates are expected to:
(b) Know the administration procedure of mining business in Nigeria;
(c) Know the incentives available for mining operation in Nigeria;
(d) Know the minerals titles;
(e) Know the environmental considerations and rights of host
communities;
(f) Know the offences and penalties;
(g) Know the basis for computation of capital allowances;
(h) Understand the process of computing total profits;
(i) Understand the treatment of losses;
(j) Understand the scope and administration of the Nigeria Extractive
Industries; and Transparency Initiative (NEITI).
7.1 ADMINISTRATION OF NIGERIAN MINERALS

The administrative structure and functions of principal stakeholders under the
Mineral Act are as below;
7.1.1 FUNCTIONS OF THE MINISTER FOR MINES & STEEL
Subject to the provision of the mining Act, the Minister shall:

(a) ensure the orderly and sustainable development of Nigeria's
mineral resources;
(b) develop a well-planned and coherent programme of exploitation

of mineral resources taking into account the economic
development, ecological and environmental factors;
(c) monitor compliance with community development agreements

by industry operators;
(d) establish the procedure for monitoring developments in the solid

minerals sector and encourage the private sector investment in
mineral resources development;
(e) ensure that in the exploitation of the mineral resources, an

equitable balance is maintained between foreign and indigenous
interest;
(f) create an enabling environment for the private investors, both

foreign and domestic by providing adequate infrastructure for
mining activities, and identify areas where government
intervention is desirable in achieving policy goals and proper
perspective in mineral resources development;
(g) accelerate the development of technical and professional

manpower required in the mineral sector;
(h) establish environmental procedures and requirements applicable

to mining operations;
(i) maintain liaison between investors and government departments

and agencies set up for the purpose of development of mineral
resources and allied projects; and collaborate with other
ministries and agencies of the Federal Government whose
functions relate to the objectives of this Act;
(j) prescribe measures for the general welfare and safety of workers
engaged in mineral resources operations;
(k) develop a geo-scientific databank, and collate detailed data

concerning the identity, quantity of Nigeria's mineral resources;
(l) assist the private sector in identifying specific mining projects;
(m) initiate, organise and participate in promotion activities in

mineral resources development, such as exhibitions,
conferences, seminars and workshops geared towards the
stimulation of investments in mineral resources;
(n) provide and disseminate up to date information on incentives in
mineral resources available to investors under this Act;
(o) register and keep records of all enterprises and companies

established and pursuing activities in mineral resources and
allied projects;
(p) cause to be created, such departments and agencies as are

necessary for the effective administration of this Act;
(q) introduce investment-friendly local contents measures for

mining projects;
(r) facilitate the development of indigenous technical and

professional manpower required in the mineral resources sector;
(s) co-operate on behalf of the Federal Government with other

governments and international agencies in respect of matters
relating to Nigeria's mineral resources;
(t) do such other things as are reasonably necessary or expedient
for the performance of his functions under this Act; and
(u) have the power to designate a mineral as a radio-active mineral

and by radioactive regulations make special provisions for the
exploration, exploitation, possession, export or otherwise
dealing in the radio-active mineral.
7.1.2 ESTABLISHMENT OF THE MINING CADASTRE OFFICE
(1) There shall be established within six (6) months of the coming
into effect of this Act a Mining Cadastre Office with the
responsibility for the administration of mineral titles and the
maintenance of the cadastral registers.
(2) The Mining Cadastre Office:
(a) shall be a body corporate with perpetual succession and

a common seal;
(b) may sue and be sued in its corporate name; and
(c) may acquire, hold and dispose of property, whether

movable or immovable.
(3) The Mining Cadastre Office shall be administered by a Director-
General who shall be assisted by such officers as shall be
required for the efficient functioning of the cadastre system.
(4) In order to fulfil its functions under this Act the Mining Cadastre
Office shall operate as the sole agency responsible for the
administration of mineral titles.
(5) The Mining Cadastre Office shall in addition to any other

functions prescribed by or under this Act perform the following:
(a) consider applications for mineral titles and permits,

issue, suspend and upon the written approval of the
Minister, revoke any mineral title;
(b) receive and dispose of applications for the transfer,

renewal, modification, relinquishment of mineral titles or
extension of areas;
(c) maintain a chronological record of all applications for

mineral title in:
(i) a priority book which is to be specifically used to

ascertain the priority and registration of
applications for exclusive rights on vacant areas;
and
(ii) a general registry book which is to be used for all

other types of applications where registration of
the priority is not required;
(d) undertake such other activities reasonably necessary for

the purpose of carrying out its duties and
responsibilities under the provisions of this Act.
7.1.3 CENTRAL AND ZONAL OFFICES OF THE MINING

CADASTRE OFFICE
A Central Mining Cadastre Office with exclusive authority and
jurisdiction over the whole of the country shall be established
in Abuja as the headquarters of the Mining Cadastre Office.
The Mining Cadastre Office shall, according to administrative
convenience, maintain an appropriate number of Zonal offices.
7.1.4 MINING CADASTRE REGISTER
The Mining Cadastre Office shall open a series of files to be

known as Mining Cadastre Office Registers for the purposes of
this Act, comprising of:
(a) a register of Reconnaissance Permits;
(b) a register of Exploration Licences;
(c) a register of Mining Leases;
(d) a register of Small-scale Mining Leases;
(e) a register of the Water Use Permits; and
(f) a register of Quarry Leases.
7.1.5 PRIORITY
(1) Where several applications are received on the same area

or for overlapping areas from two or more persons on the
same business day the application which is first received
in the proper form shall be deemed to have priority over
the others.
(2) The criteria of first come, first served, as evidenced by

registration with the issuing authority according to an
established procedure, which in the case of the Mining
Cadastre Office shall be registration in the priority
register established by this Act, shall be strictly applied
by the Mining Cadastre Office in case of competing
applications for the same exclusive area.
(3) The Mining Cadastre Office shall provide a receipt to an

applicant for mineral title evidencing:
(i) all documents and fees received from the

applicant in respect of the application; and
(ii) the date and time of the application.
7.1.6 COMPETITIVE BIDDING
(1) The Minister shall by regulations determine areas

wherein an exploration licence and a mining lease shall
be granted based on competitive bidding requirements.
(2) The Mining Cadastre Office shall consider competing

bids and shall, through an open and transparent method,
select the bid which will promote the expeditious and
beneficial development of the mineral resources of the
area having regard to:
(a) the programme of exploration and mining
operations which the applicant proposes to carry
out and the commitments as regards expenditure
which the applicant is prepared to make;
(b) the financial and technical resources of the

applicant; and
(c) the previous experience of the applicant in the

conduct of reconnaissance and mining
operations.
(3) The successful application shall be treated as an

application under section 59 or 65.
7.1.7 FEES PAYABLE TO THE MINING CADASTRE OFFICE
The Mining Cadastre Office shall collect:
(a) a fee for processing of applications for mineral titles; and
(b) an annual service fee established at a fixed rate per

square cadastral unit for administrative and
management services rendered by the Cadastre Office.
7.1.8 REVOCATION OF MINERAL TITLE FOR FAILURE

TO PAY FEES
A mineral title shall become liable to revocation where the
holder thereof has failed to pay the prescribed fees.
7.1.9 PROCESS FOR REVOCATION WHEN MINERAL

TITLEHOLDER FAILS TO PAY FEES
In the event of default of payment of the annual service fee due
to the Mining Cadastre Office, the Mining Cadastre Office shall
give a thirty-day written default notice to the defaulting party
and, if payment is not effected during that period, the Mining
Cadastre Office shall record the default and revoke the mineral
title.
7.1.10 DETERMINATION OF FEES PAYABLE

The administration and modality for payment of amount of the
fees payable under section 10 shall be determined in the
regulations issued by the Minister.
7.1.11 NOTICE TO APPLICANT

Any notice required to be sent by the Mining Cadastre Office to
an applicant for, or holder of a mineral title shall be sent by
courier service or registered mail to the last known address in
Nigeria of the mineral titleholder or given in person to an
authorized representative of the applicant or holder of the
mineral title in Nigeria or published in the Gazette. The notice
shall for all purposes be sufficient notice of the subject-matter
of the notice to the applicant for or holder of a mineral title.
7.1.12 RELATIONSHIP BETWEEN THE MINISTER AND THE

MINING CADASTRE OFFICE (MCO)
In the execution of his functions and relationship with the
Mining Cadastre Office, the Minister shall, at all times ensure
the independence of the Mining Cadastre Office in regard to the
discharge of its functions and operations under this Act.
7.1.13 ESTABLISHMENT OF DEPARTMENTS
(1) For the purposes of carrying out his functions under this
Act, the Minister shall establish in the Ministry:
(a) a Mines Inspectorate Department;
(b) a Mines Environmental Compliance Department;

and
(c) such other departments as he may consider

expedient for the proper administration of this
Act.
(2) Such inspectors, officers and other employees as may be

considered necessary for carrying out the objectives of
this Act shall be appointed into the departments and
agencies established pursuant to subsection (1) of this
section.
(3) The powers and duties of the inspectors, officers, or other

employees appointed under subsection (1) of this section
shall be those assigned to them respectively under this
Act, its regulations and in accordance with the provisions
of the Public Service Rules in force.
7.1.14 FUNCTIONS OF THE MINES INSPECTORATE

DEPARTMENT
The Mines Inspectorate Department shall in addition to any other

functions prescribed by this Act and subject to the direction of
the Minister:
(a) exercise general supervision over all reconnaissance,
exploration and mining operations to ensure their
compliance with this Act;
(b) supervise and enforce compliance by mineral titleholders

with all mine health and safety regulations prescribed
under this Act and any other law in force;
(c) prepare and render records, reports and returns as

required by the Minister or as prescribed by Regulations;
(d) take custody of mineral resources required by any Court

to be forfeited to the government;
(e) with the prior approval of the Minister, dispose of any

mineral resources forfeited to the government;
(f) carry out investigations and inspections necessary to

ensure that all conditions relating to mineral titles and the
requirements of this Act are complied with;
(g) discharge such other duties as may be assigned from time

to time, by the Minister; and
(h) review and recommend to the Minister, programmes for

controlling mining operations.
7.1.15 FUNCTIONS OF THE MINES ENVIRONMENTAL

COMPLIANCE DEPARTMENT
The Mines Environmental Compliance Department shall in

addition to any other function prescribed by this Act and subject
to the direction of the Minister:
(a) review all plans, studies and reports required to be

prepared by holders of mineral title in respect of their
environmental obligations under this Act;
(b) monitor and enforce compliance by holders of mineral

title with all environmental requirements and obligations
established pursuant to this Act, its regulations and by
any other law in force;
(c) periodically audit the environmental requirements and

obligations established pursuant to this Act, its
regulations and by any other law in force and make
recommendations thereon to the Minister; and
(d) liaise with relevant agencies of Government with
respect to the social and environmental issues involved
in mining operations, mine closure and reclamation of
land.
7.1.16 ESTABLISHMENT OF STATE MINERAL RESOURCES

AND ENVIRONMENTAL MANAGEMENT
COMMITTEE
(1) There is hereby established for each State of the

Federation a committee to be known as the Mineral
Resources and Environmental Management Committee,
in this section referred to as "the Committee".
(2) The Committee in each state shall consist of:
(a) a representative of the Mines Environmental

Compliance Department in the Ministry who
shall be the chairman of the Committee;
(b) a representative of the Ministry responsible for

land matters or mineral related matters in the
state;
(c) the Mines Officer responsible for the state;
(d) a representative of the Ministry of Agriculture or

Forestry in the state;
(e) a representative of the Surveyor-General of the

state;
(f) a representative of the Local Government

Council when matters affecting the said Local
Government Area are being considered by the
Committee;
(g) a representative of the State Environmental

Department or Agency; and
(h) a representative of the Federal Ministry of

Environment in the State.
(3) The functions of the Committee are to:
(a) consider and advise the Minister on issues

affecting returns of necessary reports affecting
grants of mining titles;
(b) consider issues affecting compensation and make
necessary recommendations to the Minister;
(c) discuss, consider and advise the Minister on the

matters affecting pollution and degradation of
any land on which any mineral is being extracted;
(d) consider such other matters relating to mineral

resources development within the State as the
Minister may, from time to time, refer to the
Committee;
(e) advise the Departments established in accordance

with the provisions of this Act for the supervision
of mineral exploitation and the implementation of
social and environmental protection measures;
(f) advise the Local Government Areas and

communities on the implementation of programs
for environmental protection and sustainable
management of mineral resources;
(g) advice and other necessary assistance required by

holders of mineral titles in their interaction with
State Governments, Local Government Councils,
communities, civil institutions, and other
stakeholders;
(h) advise the Minister in resolving conflicts between

stakeholders; and
(i) advise the Minister in respect of matters

connected with the implementation of this Act.
(4) The Committee shall-
(a) meet at least once every three months and at such

times as the Minister may deem necessary; and
(b) regulate its own procedure.
(5) The Chairman shall appoint a competent officer from the

Mines Inspectorate Unit in the state to be the secretary of
the Committee. The secretary shall have no right to vote
at any meeting of the Committee.
(6) The Committee shall forward its report to the Minister

after each meeting.
(7) Where the Committee desires to obtain the advice of a
host community or any other person on a particular
matter, the Committee may co-opt a representative of the
relevant host community or any person as a member for
such period as it thinks fit, but such a person shall not be
entitled to vote in any meeting of the Committee and his
attendance shall not count towards a quorum.
(8) The Chairman and three other members shall form a

quorum at a meeting of the Committee.
(9) Every meeting of the Committee shall be presided over

by the Chairman or, in his absence, by the Mines Officer
for the state.
(10) If on any question to be determined there is an equality

of votes, the Chairman shall have a casting vote.
(11) The Committee shall have the power to determine its

own procedure.
7.1.17 DELEGATION OF POWERS BY THE MINISTER
(1) The Minister may, by notification in

the Gazette, delegate to any department or officer of the
Ministry the exercise or performance, subject to such
conditions and restrictions as may be prescribed in the
notification, of any function conferred on the Minister
under this Act provided that it shall not apply to any
function of the Minister to make regulations.
(2) An officer authorised in writing by the officer in charge

of the Mines Inspectorate Department may enter any
mineral title area where mining operations are being
carried out under this Act, or which is within the general
area of the mineral title for the purposes of inspecting
such operations and he shall be provided by the mineral
titleholder with any information reasonably requested for
the purpose of making a report.
(3) The failure of the mineral titleholder to provide access to

an officer for the purposes of inspection under subsection
(2) shall constitute an offence.
7.1.18 REGULATIONS
The Minister shall subject to the provisions of this Act make

regulations in respect of any matter required to be prescribed by
regulations under this Act and generally for giving full effect to
the provisions of this Act, including prescribing, amending or
withdrawing any form that may be required under this Act.
7.1.19 USE OF LAND FOR MINING A PRIORITY
(1) The use of land for mining operations shall have a

priority over other uses of land and be considered for the
purposes of access, use and occupation of land for mining
operations as constituting an overriding public interest
within the meaning of the Land Use Act.
(2) In the event that a mining lease, a small-scale mining

lease or a quarry lease is granted over land subject to an
existing and valid statutory or customary right of
occupancy, the Governor of the State within which such
rights are granted shall within sixty days of such grant
or declaration revoke such right of occupancy in
accordance with the provisions of section 28 of the
Land Use Act.
7.2 MINING INCENTIVES

The under listed are key incentives under the Mining Act and the
Company Income tax Act available to companies engaged in mining
operations in Nigeria:
7.2.1 Incentives Available under the Mining Act (S.5.2.1):

1. Tax holiday for an initial period of 3 years from commencement
of operations and renewable for additional 2 years. Any dividend
recorded during the tax holiday period will not be subject to
withholding tax upon distribution to shareholders;
2. Exporters of mineral products may be permitted to retain part of
their foreign exchange earning in a domiciliary account for the
purpose of acquiring spare parts and other mining inputs;
3. Exemption from customs and import duties in respect of plant,
machinery equipment and accessories imported exclusively for
mining operations. However, the plant and equipment can only
be disposed of locally upon payment of the applicable customs
and import duties;
4. Free transferability of foreign currency through the Central Bank
of Nigeria (CBN) for the following:
i. Payment for servicing of certified foreign loan; and
ii. Remittance of foreign capital in event of sale or
liquidation of the business.
5. Grant of personal remittance quota for expatriate personnel free
from any tax imposed by any enactment for the transfer of
external currency out of Nigeria;
6. Accelerated capital allowance on mining expenditure (95%
initial allowance and retention of 5% until asset is disposed);
7. Grant of investment allowance of 10% on qualifying plant and
machinery;
8. All infrastructure cost provided by the mining company and
approved by the MCO to be capitalized and capital allowance
claimed at 95% in the first year of operation;
9. A company may also be entitled to claim an additional rural
investment allowance on its infrastructure cost, depending on the
location of the company and the type of infrastructure provided;
10. Annual indexation of unutilized capital allowance carried
forward by 5% for mines that commenced production within five
(5) years from the date of enactment of the Act. Whilst the period
for new companies to enjoy this incentive lapsed in 2012, new
producers may apply to the Minister of Finance, through the
Minister of Mines and Steel Development, to enjoy this
incentive. Such application may be considered on a case by case
basis;
11. The Minister may grant a concession for the royalty payable on
any mineral to be deferred for a number of years, subject to the
approval of the Federal Executive Council; and
12. Actual amount incurred out of reserves made for environmental
protection, mine rehabilitation, reclamation and mine closure
cost shall be tax deductible, subject to certification by an
independent.
7.2.2 Incentives Available under the CITA:

1. The profits earned by a mining company after the initial tax
holiday period may continue to be exempted from income tax
under the following circumstances:
i. If the minerals are exported from Nigeria, and the
proceeds from such exports are repatriated to Nigeria and
used exclusively for the purchase of raw materials,
plants, equipment and spares;
ii. If the minerals produced are exclusive inputs for the
manufacture of products for exports, provided the
exporter gives a certificate of purchase of input to the
company; and
iii. Potential full or partial exemption of interest on foreign
loan from income tax, subject to the conditions stipulated
under CITA.
2. Where a mining company records a turnover below ₦1million
within the first five years of commencement of business, it will
be liable to tax at the rate of 20% on any taxable profit recorded.
3. Any interest, rent, royalty, or dividend received by a Nigerian
company from abroad, and brought into the country through any
of the approved Nigerian Banks, will be exempted from
corporate income tax.
4. Interest and/or gains received from bonds issued by any
government or corporate body in Nigeria, as well as from short
term securities issued by the Federal Government, are exempt
from income tax. This exemption is only applicable until 2022
financial year (i.e., 2023 tax year). However, bonds issued by the
Federal Government of Nigeria shall continue to enjoy this
exemption.
5. The Company may be entitled to the following reliefs:
i. Employment tax relief (ETR): To qualify for this relief,
the company must have a minimum net employment of
10 employees in an assessment year, out of which 60%
must be individuals without prior work experience and
have recently graduated from a school or vocation (not
older than 3 years). The ETR claimable is limited to the
lower of the gross emoluments paid to qualifying
employees, or 5% of the assessable profits for the year.
ii. Work experience acquisition programme relief: Any
company with a minimum net employment of five new
employees in any year, and where the company has
retained the employees for a minimum of two years. This
relief exempts from income tax, 5% of the assessable
profits.
iii. Infrastructure tax relief (ITR): This relief is granted to
any company that provides infrastructure of a public
nature in any assessment year, including power
(electricity) roads and bridges, water, health care
facilities, educational and sporting facilities. Such
company will be entitled to claim tax exemption of
30% of the cost of the public infrastructure provided.
The above reliefs are only available until 2017
financial year (i.e., 2018 tax year).
7.3 MINERALS TITLES
A mining title can be granted to an individual, a company or a co-
operative. The grant of exploration licence or mining lease could be by
competitive bidding or on individual request. In a competitive bid, the
government consolidates various mineral locations into blocks, and
offer the blocks for sale to all investors with sufficient financial and
technical capabilities to carry on mining operations
The Mining Act under Section 46 makes the following provisions with
regards to a mineral title:
1. The right to search for or exploit mineral resources is obtained
through one of the following mineral titles in the form of:
i. a reconnaissance permit;
ii. an exploration licence;
iii. a small-scale mining lease;
iv. a mining lease;
v. a quarry lease; and
vi. a water use permit.
2. Subject to the exceptions provided in this Act, any person that
undertakes or is involved in the search for or exploitation of
mineral resources without the requisite mineral title or authority
shall be guilty of an offence.
3. Any mineral title issued under this Act shall be subject to such
conditions as may be prescribed in the licence or lease or by
regulation made under this Act.
4. The form of all mineral titles shall be prescribed.
7.4 POSSESSIONS AND PURCHASE OF MINERALS;

According to S.92 of the Act “The provisions of this part do not apply to
bona fide specimens of mineralogical, geological, or educational interest or-
to the receipt by an employer of minerals from his tributers.
According to S.93 “No person, other than an officer of the Ministry authorised
in that behalf by the Minister and acting in the execution of his duty shall
possess any mineral unless-
(a) the mineral is Won from mineral title area of which the person is the
holder and which entitles him to explore and exploit the minerals; or
(b) the person holds a permit to possess or purchase that mineral issued
under the provisions of this Act; or
(c) the person is in respect of that mineral within the meaning of regulations
made under this Act, a duly authorized agent or employee of any person
permitted by paragraphs (a) and (b) of this subsection to possess that
mineral”.
According to S.94 “No person shall purchase any mineral unless he holds a
licence to purchase minerals issued under this Act”
According to S.95 “proceeds recovered under a small scale mining Lease shall
be sold to a licensed mineral procurement centre, hereinafter referred to as a
"mineral buying centre" and valid, sales receipts obtained and when "mineral
buying entre" and valid sales receipts obtained and when centres required shall
be produced for inspection by an authorised officer of the Cadastre Office “
According to S.96.-(1) The requirements for a buying centre shall be in

accordance with this Act. (2) All buying centres, so registered shall be
required to keep an up to date record of all purchases and sales of minerals
acquired with details as to which mine within the country the minerals were
won: and obtained.
7.5 ENVIRONMENTAL CONSIDERATIONS AND RIGHTS OF HOST

COMMUNITIES
1. According to S.120 (1) The Environmental Protection and

Rehabilitation Programme required under the provisions of the Act
shall:
(a) provide for specific rehabilitation and reclamation actions,
inspections, annual reports;
(b) a reasonable estimate of the total cost of rehabilitation;
(c) cost estimates for each specific rehabilitation and reclamation
action; and
(d) a timetable for the orderly and efficient rehabilitation and
reclamation of the Mineral title area to a safe and
environmentally sound condition suitable for future economic
development or recreational use.
2. The Mines Environmental Compliance Department shall exercise all its
powers in respect of environmental protection and rehabilitation
programs provided for in section 119 in consultation with the State
Mineral Resources and Environmental Management Committee
established pursuant to Section 19 of this Act.
3. The Mines Environmental Compliance Department may approve or
reject an Environmental Protection and Rehabilitation Program
submitted by a Mineral title Holder and shall notify the holder of the
mineral title of its decision thereon within sixty days of the submission
of the environmental protection and rehabilitation Programme.
4. If the Mines Environmental Compliance Department does not notify the
holder of a mineral title within the period specified under subsection (3)
of this section, the environmental protection and rehabilitation
programme shall be deemed to have been approved as submitted.
5. In the case of a rejection of the environmental protection and
rehabilitation programme by the Mines Environmental Compliance
Department, the mineral titleholder may:
i. submit such other number of environmental protection and
rehabilitation programmes as may be necessary in order to obtain
the approval of the Mines Environmental Compliance
Department; or
ii. if its application is rejected twice, the holder may submit the
matter to arbitration within thirty days of notification of the,
decision under subsection (3) of this section.
6. In the case of its approval, the Mines Environmental Compliance
Department shall ensure the implementation of the environmental
protection and rehabilitation programme.
7.6 OFFENCES AND PENALTIES;

1. According to S.131 A person who:
(a) conducts exploration or mines minerals or carries out quarrying
operations otherwise than in accordance with the provisions of
the Act;
(b) in making application for mineral title, knowingly makes a
statement which is false or misleading in any material particular;
(c) in any report, return or affidavit submitted in pursuance of the
provisions of this Act, knowingly gives an information which is
false or misleading or fails to declare in any material particular;
and
(d) removes, possesses or disposes of any mineral contrary to the
provisions of this Act commits an offence.
2. According to S.132 (1), No loan granted pursuant to Part III of this Act
shall be applied to any loans purpose other than that for which the loan
was granted.
3. Any person who applies a loan granted pursuant to Part Ill of this Act in
contravention of subsection (I) of this section commits an offence and is
liable on conviction to a fine of an amount not less than the amount of
the loan and interest accruing thereof in respect of which the offence was
committed or imprisonment for a term of not less than five years.
4. Where an offence under this section is committed by a body corporate
is proved to have been committed with the consent or connivance of, or
to be attributable to any neglect on the part of any director, manager
secretary or other similar officer of the body corporate (or any person
purporting to act in any such capacity} he as well as the body corporate
shall be deemed to be guilty of the offence and maybe proceeded against
and punished in accordance with subsection (2) above.
5 According to S.133 A mineral title holder who is guilty of an offence

under section 131 is liable to have his licence revoked and on conviction
at the first instance, to a fine not less than N20,000,000.00; and
imprisonment of not less than five years, if the offence is a continuing
one, whether or not it is a first offence, the person convicted shall, in
addition, be liable to a fine of N20,000.00 in respect of each day during
which the offence continues.
6. According to S.134, A person who:

(a) places or deposits, or causes to be placed or deposited in a place any
minerals, with the intention to mislead any other person as to the mineral
possibilities of the place; or
(b) mingles or causes to be mingled, with samples or ore, any substances
which may enhance the value or in any way change the nature of the ore,
with the intention to cheat, deceive or defraud; or engages in the business
of milling, leaching, sampling, concentrating, reducing, assaying,
transporting, or dealing in ores, metals or minerals, contrary to the
provisions of this Act commits an offence under this Act and is liable on
conviction to a fine of not less than N500 ,000.00 or to imprisonment
for a term not exceeding 2 years or to both fine and imprisonment.
7. According to S.135: A "person who keeps or uses any false or

fraudulent scale or weight for weighing ores, metals or minerals, or uses
any false or fraudulent assay scale or weight or enriched fluxes used for
ascertaining the assay value of minerals, knowing them to be false or
fraudulent commits an offence under this Act, and is liable on conviction
to a fine of not less than N100,000.00 or more than N1,000,000 or to
imprisonment for a term not less than 1 year or both fine and
imprisonment.
8. According to S.136 (1) A person who falsely represents that he obtained,
the grant of an exploration licence, temporary title mining or other
mining title and by that representation induces or attempts to induce any
person to invest capital in a company or syndicate connected with the
company before he actually obtains the grant of the mining title shall
forfeit any claim to the grant of the mining title
Where a person who makes a false representation as in subsection (1) of

this section is a holder of another mining title, that mining title shall be
revoked.
Nothing in this section shall be construed as a person who makes a false

representation from liability to civil action or a criminal prosecution in
respect of the representation.
9. According to S.137 A person who without lawful authority willfully

breaks, defaces or removes or in any other way interferes with any
boundary mark, beacon pillar or post erected for any of the purpose of
this Act or the regulations made under it without necessary approval or
authority under this Act commits an offence.
If the offence is continuing one whether or not it is a first offence, the

person convicted shall, in addition, be liable' to a fine of N10,000.00 in
respect of each day or part of a day during which the offence continues.
10. According to S.138 (l) Any person who without lawful cause;
(a) interferes with or obstructs any mining or quarrying operation
authorised by or under this Act; or
(b) interferes with any machinery, plant work or property on, in
under or over land in exercise of a right conferred by or under
this Act commits an offence.
(2) A person who commits an offence under section 137and

subsection (1) of this section is liable on conviction:
(a) at the first instance, to a fine not exceeding N500,000.00 or
imprisonment for a term not exceeding 2 years or both the fine
or imprisonment; and
(b) at a second or subsequent offence, to imprisonment for a term
not exceeding 5 years or below 2 years.
11. According to S.139. (1) Where an offence under this Act or under the
regulations made there under is committed by a body of persons -
(a) in the case of a body corporate other than a partnership, every
director of the body who took part in the management of the body
shall, be deemed to be guilty of that offence; and.
(b) in the case for a partnership, every partner or officer of that body
shall be deemed to be guilty of that offence.
(2) Nothing in this section shall be construed as exempting any

person who actually committed an offence, under this Act from
the penalties provided for the offences committed by him.
12. According to S.l40. -( 1) Where an offence under this Act has been
committed by a body corporate or firm or other association of
individuals, a person who at the time the commission of the offence was
an officer thereof or was purporting to act in such capacity is severally
guilty of that offence and liable to be prosecuted 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 connivance.
(2) In this section and the other provisions of this Act, officers:
(a) in relation to a body corporate, includes a director, chief
executive, manager and secretary;
(b) in relation to a firm, includes a partner and other officer
thereof; and
(c) in relation to any other association of individuals,
includes a person concerned in the management of the
affairs of such association.
13. According to S.141.-( I ) Any dispute arising between the holder of a

mineral title and the Government in respect of the interpretation and
application of this Act, its regulations and the terms and conditions of
mineral titles shall be resolved, in the first instance, on an amicable
basis.
(2) Where the dispute is in the nature of a bona fide investment
dispute, and such dispute is not amicably settled as provided
under subsection (1) of this section, it shall be resolved in
accordance with the provisions of the Nigerian Investment
Promotions Commission Act, Cap. N 117 Laws of the
Federation of Nigeria, 2004
(3) Any other dispute between the holder of a mineral title and the
Government shall be resolved in the Federal High Court, if not
settled in accordance with the provisions of subsection (1) or (2)
of this section.
14. According to S.142; An offence under this Act and the regulations
made under it shall be tried by the Federal High Court.
7.7 ALLOWABLE AND DISALLOWABLE EXPENSES

The following expenses are allowable
1. All direct cost of mining and transportation are all allowable
expenses.
2. All allowable expenses as we have under CITA for corporate mining
company
3. All allowable expenses as we have under PITA for individuals into
mining business
7.8 RATES OF CAPITAL ALLOWANCES

Below is the summary of capital allowance rates applicable to mining
companies:
Description Initial Allow % Annual Allow %
Company Individual Company Individual
Mining 95 20 0 10
Expenditure
Furniture and 25 15 20 10
Fitting
Motor Vehicle 50 25 25 20
Building and 15 5 10 10
Leasehold (not
industrial
buildings)
A mining business is assessed to tax in the same manner as any other company
subject to tax under the Company Income Tax Act i.e. on PYB basis.
Essentially, the profit of the business is adjusted in the same manner i.e. subject
to the WREN test. Loss (if any) is deducted (see treatment of loss below) and
thereafter, capital allowance that is accelerated is deducted to arrive at the
taxable profit. This is then is subject to company income tax at 30%. Also,
tertiary education tax is charged at 2% of assessable profit.
7.10 TREATMENT OF LOSSES

Under the Act, losses incurred in a year of assessment can be carried forward and set-
off against the assessable profits of the subsequent tax years (if any), up to a maximum
of four (4) tax years, after which the loss shall lapse. However, the 4-year restriction
only applies to losses incurred within the first three years of commencement of business,
based on the amendment to CITA in 2007. Tax losses incurred after the first three years
of commencement of business can be carried forward indefinitely.
7.11 SCOPE AND ADMINISTRATION OF THE NIGERIA EXTRACTIVE

INDUSTRIES TRANSPARENCY INITIATIVE (NEITI) ACT NO 17,
2007
The detailed administrative structure is as stated under sub-heads below;
7.11.1 ESTABLISHMENT OF THE NATIONAL STAKEHOLDERS

WORKING GROUP
(1) The governing body of the NEITI shall be the National stakeholders
working group (in this Act referred to as "the NSWG").
(2) The NSWG shall be responsible for the formulation of policies,
programmes and strategies for the effective implementation of the objectives
and the discharge of the functions of the NEITI.
(3) Without prejudice to subsection (2) of this section, the NSWG shall have
powers to recommend the annual budget and work-plan of the NEITI and
ensure the periodic review of programmes performance by the NEITI.
7.11.2 COMPOSITION OF THE NSWG

(1) The NSWG shall be constituted by the President and shall consist of a
chairman and no more than 14 other members, one of whom shall be an
Executive Secretary.
(2) (a) In making appointment into the NSWG, the President shall
include:
(i) representative of extractive industry companies;
(ii) representative of civil society;
(iii) representative of labour unions in the extractive industries;
(iv) experts in the extractive industry; and
(v) one member from each of the six geo-political zones.
(b) The Chairman and other members of NSWG other than the
Executive Secretary shall serve on part-time basis.
(3) The appointment of Executive Secretary shall be for 5 years and no more.
7.11.3 TENURE OF OFFICE OF NSWG

A person appointed as a member of the NSWG shall hold Office for 4
years and no more.
7.11.4 PAYMENT OF THE ALLOWANCES TO THE NSWG

The members of the NSWG as well as any person appointed to any of
its special committees under section 2 may be paid such allowances out
of the funds of the NEITI as the National Revenue Mobilisation and
Fiscal Commission may approve.
7.11.5 MEETINGS OF THE NSWG

(1) The NSWG shall ordinarily meet quarterly for the dispatch of
business at such times and places as it may determine, but not less than
four times in a year.
(2) At every meeting of the NSWG, the Chairman shall preside and,
in his absence, a member of the NSWG appointed by the members
from among themselves shall preside.
(3) Questions proposed at a meeting of NSWG shall be determined by
a simple majority of members present and voting and in the event of
an equality of votes, the person presiding shall have a casting vote.
(4) The NSWG may at any time co-opt any person to act as an adviser
at any of its meetings but no person so co-opted shall be entitled to
vote at any meeting.
(5) The validity of the proceedings of the NSWG shall not be affected
by the absence of any member, vacancy among its membership or by
any defect in the appointment of any of the members.
7.11.6 QUORUM
The quorum of the NSWG at any meeting shall be 8 members.
7.11.7 SPECIAL COMMITTEES

The NSWG may constitute such special committees as it considers fit to
deal different aspects of its responsibilities.
7.11.8 APPOINTMENT OF EXECUTIVE SECRETARY,

CONSULTANTS AND OTHER STAFF OF THE NSWG
(1) The NSWG may create departments and engage the services of such
staff and consultants as it may consider necessary for the NEITI.
(2) The NEITI shall have an Executive Secretary who shall-
(a) be appointed by the President upon the recommendation of the
NSWG provided he is a graduate with relevant qualifications and at
least 10 years cognate experience;
(b) be responsible for the day to day administration of the NEITI; and
(c) serve as Secretary to NSWG.
(3) The staff and consultants of the NEITI may be engaged on such
terms and conditions as the NSWG may determine.
(4) The NSWG shall fix the remunerations, allowances and benefits of the
staff and consultants of the NEITI.
(5) (a) The NSWG shall recommend to the President for appointment,
qualified validators in line with NEITI guidelines as contained in
second schedule to this Act; and
(b) NSWG shall fix the remunerations, allowances and benefits for the
validators.
7.12 CHAPTER REVIEW
This chapter explained in detail the administrative procedure of within the
mining sector, the incentives available under the Mineral Act, list of mineral
titles, environmental considerations, process of tax computation, the peculiar
capital allowance computation and the scope and administration of the Nigeria
extractive industries transparency initiative (NEITI), Act No 17, 2007.
Question 1
Esau Mining and Exploration Company Limited is a company engaged in the

business of mining of solid minerals, which it exports to Europe and the Americas.
For the year ended 31 December 2018, the following result was presented. It
commenced business in 2014. The Profit and Loss accounts for the year ended 31
December 2018.
₦ ₦
Export 856,000
Local sales 136,700
Mining cost 256,950
Transportation cost 63,240
Rent 128,800
Bad debt 83,560
Directors fees 80,000
Auditors remuneration 50,000
Insurance 65,000
Balance of preliminary expenses
written off 25,000
Income tax provisions 78,000
Donation and subscription 20,000
Motor vehicle expenses 45,560
1,267,430
Net Loss 274,730

a) The company has a paid up share capital of 5,000,000. There is no foreign capital input,
extract of the balance sheet was provided as below:
Share capital 5,000,000
Reserves 450,000
5,450,000
The net asset of the company represents the share capital
b) It has been established that both the mining and transportation costs are the relevant direct
cost.
d) Included in donation is ₦8,500 given to Muslim Women Society of which the General
Manager’s wife is the chairperson
e) Capital allowances on assets other than mining expenditure have been agreed with the
Federal Inland Revenue Service as ₦20,000
f) Analysis of the bad debt account shows the following:
₦
General provision for doubtful debtc/f 35,000
Specific provision for doubtful debtc/f 48,000
Bad debt written off 70,000
Loan to customer written off 72,500
General provision for doubtful debtb/f (15,000)
Specific provision for doubtful debtb/f (18,000)
Bad debt written off recovered (59,000)
Profit and loss account 83,560
Required:
a) Compute the tax liability for the relevant tax year.
b) What is the tax position affecting this line of business?
Question 2
Under the Mining Act, companies operating in the Mining sector are entitled to certain
incentives.
Required: Give examples of the incentives available to companies that engage in
mining operation in Nigeria.
a Esau Mining and Exploration Company Limited

Computation of Tax Liability for 2019 tax year
₦ ₦
Net Loss as per account (274,730)
Add/Deduct:
Donation to Muslim Society 8,500
Bad debt provision (w1) 42,560
Preliminary expenses 25,000
Income tax provisions 78,000
Depreciation 101,930 255,990
Adjusted profit 21,260
Capital allowance 20,000

Total profit 1,260
CIT @ 20% 252
Education tax @ 2% 425
Tax Liability (minimum tax)(w2) ₦27,866
Workings
WORKINGS 1:
Bad debt provision account
₦ ₦
Bad Debt written off 70,000 Bal b/f 18,000
(Specific provision)
Bad debt recovered 59,000
Profit and Loss acct 41,000
Bal c/d (specific provision)48,000 _____
118,000 118,000
===== ======
Bal c/f 48,000
Amount of provision to be made before arriving at the adjusted profit:
₦
Provision made in the account 83,560
Less adjustment from bad debt provision account (41,000)
Provision allowed 42,560
Workings 2:
Computation of minimum Tax Payable
a) Based on a turnover of ₦500,000
i) Net assets: 0.5% of ₦5,450,000 =₦27,250
ii) Gross profit (w3): 0.5% of ₦672,510 = ₦3,363
iii) Turnover of ₦500,000 @ 0.25% = ₦1,250
iv) Share capital ₦5,000,000 @ 0.25% = ₦12,500
b) Highest based on net assets ₦27,250

Add excess of turnover:
₦(992,700 (w4) - 500,000) x 0.125% 616
Minimum Tax Payable ₦27,866
Workings 3:
Computation of Gross Profit ₦ ₦
Export Sales 856,000
Local sales 136,700
Less: cost of sale:

Mining cost 256,950
Transportation cost 63,240 (320,190)
Gross Profit 672,510
The following are the key incentives available under the Mining Act to
companies engaged in mining operations in Nigeria:
(a) Tax holiday for an initial period of 3 years from commencement of
operations and renewable for additional 2 years. Any dividend recorded
during the tax holiday period will not be subject to withholding tax upon
distribution to shareholders;
(b) Exporters of mineral products may be permitted to retain part of their
foreign exchange earning in a domiciliary account for the purpose of
acquiring spare parts and other mining inputs;
(c) Exemption from customs and import duties in respect of plant, machinery
equipment and accessories imported exclusively for mining operations.
However, the plant and equipment can only be disposed of locally upon
payment of the applicable customs and import duties;
(d) Free transferability of foreign currency through the Central Bank of
Nigeria (CBN) for the following:
i. Payment for servicing of certified foreign loan; and
ii. Remittance of foreign capital in event of sale or liquidation of the
business.
(e) Grant of personal remittance quota for expatriate personnel free from any
tax imposed by any enactment for the transfer of external currency out of
Nigeria;
(f) Accelerated capital allowance on mining expenditure (95% initial
allowance and retention of 5% until asset is disposed);
(g) Grant of Investment Allowance of 10% on qualifying plant and
machinery;
(h) All infrastructure cost provided by the mining company and approved by
the MCO to be capitalised and capital allowance claimed at 95% in the
first year of operation;
(i) A company may also be entitled to claim an additional rural investment
allowance on its infrastructure cost, depending on the location of the
company and the type of infrastructure provided;
(j) Annual indexation of unutilised capital allowance carried forward by
5% for mines that commenced production within five (5) years from the
date of enactment of the Act. Whilst the period for new companies to
enjoy this incentive lapsed in 2012, new producers may apply to the
Minister of Finance, through the Minister of Mines and Steel
Development, to enjoy this incentive. Such application may be
considered on a case by case basis;
(k) The Minister may grant a concession for the royalty payable on any mineral
to be deferred for a number of years, subject to the approval of the Federal
Executive Council; and
(l) Actual amount incurred out of reserves made for environmental protection,
mine rehabilitation, reclamation and mine closure cost shall be tax
deductible, subject to certification by an independent
APPENDIX
BIBLIOGRAPHY
Ani, A.A. et al(1982),Companies Income Tax and Petroleum Profits Tax in

Nigeria,UniversityPress Limited, Ibadan.
Ariwodola, J.A. (2005),Companies Taxation in Nigeria, Fourth Edition,JAA Nigeria Limited,
Lagos.
Soyode, L.and Kajola, S. (2006),Taxation: Principles and Practice in Nigeria,first
edition,Silicon Publishing Company, Ibadan.
Oyebanji, J. O.(2006)Principles and Practice of Taxation in Nigeria, third edition, Frontline
Publishers- AdesolaIbadan.
Uche, R.U. & Adebiyi, K.A. (2002),Petroleum Accounting and Taxation in Nigeria. Second
Edition, Alexander Books Associates, Oakland.
Companies Income Tax Act CAP C21, LFN 2004.
Companies Income Tax (Amendment) Act 2007
Development (Income Tax Relief) Act, CAP 17 LFN 2004
Nigerian Export Processing Zone Act, 2004
Nigerian Minerals and Mining Regulations, 2011
Nigeria-South Africa Double Tax Treaty
Petroleum Profits Tax Act, CAP 354 LFN 2004
Application guidelines for pioneer status incentives issues by Federal Ministry of Industry,
Trade and Investment in 2017.

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THE CHARTERED

THE CHARTERED INSTITUTE

NEW SYLLABUS STUDENT’S STUDY GUIDE ON

EFFECTIVE DATE: APRIL 2020

To be one of the foremost professional association in

To build an Institute which will be a citadel for the

Integrity and Service

© CITN, January 2020

All rights reserved. No part of this publication may be reproduced,

Kolawole Ezekiel Babarinde

Tax Audit and Investigation

various specialised businesses.

1.2.0 COMPANIES ENGAGED IN SHIPPING OR AIR TRANSPORTATION,

1.2.1 METHOD OF ASSESSMENT

1.3.0 UNIT TRUST SCHEME

1.3.1 DEFINITION OF TERMS

(i) Authorized Unit Trust: means in respect of a year of assessment, a unit

1.4.0 TAXATION OF INSURANCE COMPANIES

1.4.1 NON-NIGERIAN COMPANY

For a non-Nigerian insurance company to be liable to tax in Nigeria, it must have a

1.4.2 NIGERIAN COMPANY

(b) Reinsurance Business

Less transfer to general reserve:

(c) Life Business

ii. Special reserves

iii. Other allowable management expenses x (x)

1.4.3 INVESTMENT INCOME FOR LIFE

1.4.4 Additional information to be filed by insurance business

2.5.0 TAXATION OF BANKS

2.5.2 DETERMINATION OF ASSESSABLE PROFIT AND TAX LIABILITY

Table 2 schedule 3 of CITA 2004

Agriculture business or trade is defined as:

2.6 Chapter review

deals comprehensively with the computation of tax of a selected number of

(telecommunication) undertakings, unit trust, life and non-life insurance companies,

and banks and other financial institutions.

2.7 End of chapter questions

You are required to:

You are required to determine the Tax Payable in Nigeria.

The following additional information is provided:

You are required to compute

You are required to compute:

Net Profit 7,805,000

The following additional information was provided:

Life Non-life Reinsurance

Net premium income 11,000 21,000 29,000 61,000

Underwriting profit/(loss) 8,425 15,635 19,205 43,265

Impairment charges (225) (665) (540) (1,430)

Result of operating activities 9,720 13,960 21,425 44,605

(b) Statement of financial position

Life Non-life Reinsurance

Total liabilities and reserves 9,513,575

(vi) Investment income includes:

Life Non-life Reinsurance

(vii) The provision for unexpired risk includes:

The following additional information was provided:

Question 13 The profit

Other information are as follows:

2.8 Solution to end of chapter questions

iii. Global adjusted profit ratio (GAP)

iv. Depreciation ratio = 2,940,000 x 100 = 12%

iii. Adjusted profit ratio

iv. Depreciation ratio