Principles and Practice of Taxation Lecture Notes

PRINCIPLES AND PRACTICE OF TAXATION LECTURE NOTES Taxation is a common phenomenon all over the world. Most countries cannot do without the imposition of tax, to boost its revenue generation. There are many definitions given to taxation by different authors. However, taxation can be explained as a weapon used by any Government to share from the wealth of an individual or corporate body. Hence, it can be concluded that taxation is generally an imposition. Taxation is a system of imposing a compulsory levy on all income, goods, services and properties of individuals, partnership, trustees, executors, and companies by the government. This system is supported by law. Tax: itself is an amount of money that you must pay to the government according to your income, property, goods etc. that is used to pay for public services and perform other social responsibilities. Therefore, taxes are one of the major sources of government revenue. Three major characteristics of tax are as follows:i. Tax is a compulsory contribution imposed by the government on the people in the country. Any person who refuses to pay is liable to punishment. ii. Tax is a contribution to defray the cost incurred by the state. i.e. to provide goods, public utility services and so on. iii. Tax is not levied in return for any specific service rendered by the government to the tax payer. That is individual cannot ask for any special benefit from the state in return for the tax paid by him. FORM OF TAXES The two main forms of taxes are as follows:(a) Direct taxes (b) Indirect taxes

DIRECT TAXES These are taxes levied on the income of individuals and business firm and which is actually paid by the person in which it is legally imposed. Examples are as follows:(i) Personal Income Tax:- This is a tax on the income of employees, sole traders, partnerships and pensioners. 1

(ii) Company Income Tax:- This is a tax charged on the profit/income of companies which are usually corporate economic entities. (iii)Petroleum Profit Tax:- This is a tax levied on companies or entities that engage in prospecting for, or the extraction and transportation of oil or natural gas. (iv) Capital Gain Tax:- This is a tax on the gains arising from the disposal of items of capital nature of companies, individuals and non-corporate bodies. INDIRECT TAXES These are taxes levied on goods and services. Examples of indirect taxes are:(i) Import duties (ii) Export duties (iii)Excise duties (iv) Value Added Tax (VAT) (v) Entertainment, Pool and Casino Taxes.

REASONS WHY GOVERNMENT LEVY TAXES i. To generate revenue. ii. To re-distribute income in a society. In a society where there is great disparity in income distribution, aggregate demand will fall. Government can pursue a tax system that imposes heavy burden on people within high income brackets and use the tax revenue to provide subsidy for goods normally consumed by the low income earners. iii. To discourage consumption of goods that are considered to be socially undesirable such as goods that are inimical to health. iv. To meet government‟s social, economic and political obligations such as the building of roads, hospitals, schools, electricity, water and other amenities. v. To control inflation through fiscal measures. vi. To promote export:- a reduction in tax of exported goods will be an additional incentive to exporters and will create room for more exports. vii. To stimulate growth and development in an economy. Tax policies like tax concessions, tax holidays could be pursed for rapid industrialization. viii.

To preserve foreign exchange reserves:- taxes that reduce import and encourage export will ensure this. 2

ix. To protect infant industries in the country. The government can use tax to raise the prices of imported goods so that they can be at the same level than prices of home made goods. QUALITIES OF A GOOD TAX SYSTEM 1. CERTAINTY:- The procedure must be objective, certain and scientific. For example two competent people applying the same tax law to the same individual and given the same information must arrive at the same liability. 2. EQUITY:- The tax must not be arbitrary nor should the amount payable be influenced by prejudice or personal feelings. People in the same circumstances must pay the same tax. 3. CONVENIENCE:- The payer must not experience great cost or inconvenience simply because he wants to comply with the tax obligation. 4. ECONOMIC PRINCIPLE:- A good tax system must ensure that it does not make the situation worse off. 5. ADMINISTRATION:- A good tax system must be easy to administer. It must be possible to know the tax base and it must be possible to collect the tax once levied.

FACTORS THAT ENHANCE EFFICIENCY OF TAX ADMINISTRATION 1. Voluntary Compliance:- the people should voluntarily pay tax rather than being coerced to pay. Voluntary compliance could be better achieved if people are satisfied with the way government spends its revenue by providing adequate social amenities and economic infrastructures. 2. Accounting records:- adequate accounting records of businessmen, professionals and other self- employed people should be kept for the tax authority to examine. A good tax system must therefore encourage the keeping of accurate, honest and reliable accounts. 3. Political will: There must be a political will, which is sincere and honest to ensure that everybody pays tax irrespective of social status. 4. Competent and honest staff: There is need for every honest and dedicated staff who must posses‟ sufficient technical and administrative competence to be able to practicalise the tax law, as may be modified from time to time. 5. Literacy: It is believed that educated people can read and understand the tax law and would therefore co-operate fully in reading consensus with tax authority on tax liability 3

whereas it will take a lot of time of deal with an illiterate tax payer who cannot even understand and complete the simplest income returns.

DETERMINATION OF RESIDENCE The determination of residence is very central to personal income taxation under the Nigerian laws. This is so for the following two reasons: (a) There are many taxing authorities and many taxing statutes. (b)

Individuals within the country are free and prone to movement within the country and to

pursue their business endeavors wherever they choose in order to maximize their earnings. As a result of the above, there is need for definite rules to enable each taxpayer to know where to discharge his/her tax obligations and to reduce or eliminate friction between the various tax authorities. The following rules are to be observed in the determination of residence under the Personal income Tax Act CAP P8 LFN 2004.

(i)

Foreign Employment

Foreign employment is an employment, the duties of which are performed wholly or partly on behalf of an Employer who is in a Country other than Nigeria. The gain or profit from a foreign employment shall not be deemed to be derived from Nigeria if; 

the Employee is not in Nigeria for a period or periods amounting to 183 days or more in any twelve months period commencing in a calendar year and ending either within that same year or the following year

 (ii)

the remuneration of the Employee is liable to tax in that other Country, Nigerian Employment

Nigerian employment is any employment that satisfies the following: 

Duties are wholly performed in Nigeria; and



The Employer is in Nigeria.

The gain or profit arising from Nigerian employment is taxable in Nigeria, even if it is from an employment by a Government in Nigeria, The gain or profit from any employment performed in Nigeria shall be deemed to be derived from Nigeria whether the gains or profits from the employment are received in Nigeria or not. 4

It must also be noted further, that the gains or profits from any employment, the duties of which are wholly or mainly performed in Nigeria, shall be deemed to be derived from Nigeria during any period of leave of the Employee from the employment, and any period of his temporary absence from Nigeria. Meanwhile, it is important to point out that no tax can be assessed on any individual whose residence in a tax territory cannot be proved for a year of assessment. An individual who holds foreign employment shall be deemed to be resident in the territory in which the principal office of his Employer is located.

On the other hand, an individual who holds a Nigerian employment shall be deemed to be resident in the territory in which he has a place or principal place of residence during a year of assessment,

A place of residence in relation to an individual is a place available for domestic use in Nigeria on a relevant date and does not include Hotel, Guest or Rest House or other places for temporary lodging. Where an Individual has more than one place of residence in a year of assessment, it is important to determine the principal place of residence of the Individual. The principal place of residence can be defined as the place where the individual normally resides,

(iii)

Other Employments

An employee whose remuneration is subject to income tax in Nigeria for a year of assessment but who is not deemed to be a Nigerian resident shall be deemed to hold a foreign employment and if he has no Employer's principal office, shall be assessable to tax by the Federal Inland Revenue Service rather than by any State of the Federation.

(iv) Federal Subjects Those referred to as Federal Subjects are those who earn incomes that are subject to Nigerian Income Tax but who are not resident in any State in Nigeria, or who, by the nature of their duties, are subject to constant movement both in and outside Nigerian borders. These categories of Taxable Persons include: 5



Residents of the Federal Capital Territory, Abuja.



Members of the Nigerian Armed Forces.



Members of the Nigerian Police Force.



Officers of the Nigerian Foreign Service.



Foreign Residents who earn incomes in Nigeria.

The above categories of Persons are taxed by the Federal Inland Revenue Service rather than by any State in which they may be temporarily resident.

(v)

Pensioners

The following rules of residence apply to Pensioners: 

Nigerian Pensioners are deemed resident in their places or principal place of residence as at 1st of January in the year of assessment.



Where the individual Pensioner has no place of residence in Nigeria and he is wholly paid by the Government of a territory in Nigeria, he is deemed resident in that territory.



Where the pension is not a Nigerian pension, the earner shall be deemed resident in the territory in which the principal office of the pension fund or other person authorizing the payment in Nigeria is situated.

CHARGEABLE PERSONS Every human being or association of human beings resident in the appropriate tax jurisdiction and engaged in trade or business or obtaining taxable remuneration are ordinarily regarded as taxable.

It follows from the above, that if a person has no income or has receipts that are not taxable, he cannot be taxed under the Personal Income Tax Act (PITA).

Similarly, certain Societies or Persons, because of their nature or the nature of their activities, may not be taxed, provided they refrain from engaging in trade. Section 1 of PITA imposes tax on the income of: 

individuals, Communities and Families; and



Any Trustee or Executor under any settlement, Trust or Estate. 6

CHARGEABIE INCOMES Chargeable incomes are the incomes on which Chargeable Persons are to be assessed to tax under PITA. These incomes include; (a) Gains or profits from any trade, businesses, profession or vocation carried on by the Chargeable Person. (b) Salaries, wages, fees, allowances or other gains or profit from employment. (c) Bonuses, premiums or other perquisites granted to an employee. (d) Gains or profits including any premium arising from a right granted to any other persons for the use of occupation of any property, (e) Dividends, interests or discounts (f) Any other profits, gains or other payments.

The following are, however, excluded from taxation-. o Re-reimbursement to an employee for expenses incurred by him which does not constitute a profit or gain. o Medical or dental expenses incurred by an employee. o Cost of passage to or from Nigeria incurred by an employee. o Any sum paid in respect of maintenance or education of a child. o Any compensation for loss of employment. o There are certain test prescribed by law to which the above chargeable income must be subjected to and by which their allow ability or otherwise will be determined under the Personal Income Tax Act. The Act provides that income tax is payable on incomes accruing in, derived from, brought into or received in Nigeria,

TYPES OF INCOME Generally, there are two broad categories of incomes and these are earned and unearned incomes.

(a)

Earned Incomes 7

in relation to an individual, earned incomes, mean incomes derived from atrade, business, profession, vocation or employment, carried on or exercised by him. It means incomes that were earned through physical, intellectual or artistic exertion, as opposed to those earned passively through investment. Earned incomes include profits, salaries, wages, commission, bonuses, etc.

(b)

Unearned Incomes

These are incomes derived from sources other than employment, business or reward for services rendered. Mainly, unearned incomes are investment incomes such as rental incomes, dividends, royalties, earnings from trademark, patents, etc. It also includes gifts, inheritance and bequeathals,

EXEMPT INCOMES Exempted incomes under the Personal Income Tax in Nigeria, include the following, amongst others: (a) The official emoluments of the holders of the office of the President, Vice - President, the Governor of a state, the Deputy Governor or anybody acting in those capacities. (b) All consular fees received on behalf of a foreign state or by a consular officer or employee except where the officer is a Nigerian, working in Nigeria. (c) An income in respect of which tax is remitted or exempted under the provisions of the Diplomatic immunities and Privileges Act, (d) The income of a Local Government or Government Institution. (e) The income of any ecclesiastical, charitable or educational institution of a public character. (f) Wound and disability pension granted to members of the Armed Forces or of any recognized national defense organization. (g) Pension granted to a Person under the provisions of the Pensions Act relating to widows and orphans. (h) The income of a trade union, registered under the Trade Union Act. (i) Gratuities. (j) The income of a Cooperative Society. (k) The income of a statutory or registered friendly society. 8

(l) A sum withdrawn or received by an employee from a pension, provident or other retirement or other benefits scheme, fund or society approved by the Joint Tax Revenue Service. (m) The income of a person other than a citizen of Nigeria from employment in technical assistance scheme with the Government of the Federation or a State. (n) Interests accruing to a person not resident in Nigeria. These interests are on Government loans from international institutions, deposit accounts or transfers made wholly in foreign currencies, loans raised in the United Kingdom. (o) Dividends paid to a person by a company incorporated in Nigeria provided: (i)

the equity participation of the person in the company paying the dividend

is either wholly paid for in foreign currencies or by assets brought into Nigeria between 1st January, 1987 and December 31,1992. (ii)

The person to whom the dividends are paid owns not less than 10% of the

equity share capital of the company, (iii)

The tax free periods for (i and ii) above are limited to 5 years in the case

of agricultural and agro-allied companies and 3 years for others beginning from the year of assessment following the year the capital was brought into Nigeria,

BENEFITS IN KIND OR PERQUISITES Benefits -In-Kind are benefits provided by the Employer to an Employee(s), They are other benefits received by an employee apart from the normal salary and allowance. Perquisites are benefits not monetized. These benefits include:

(a)

Provision of Assets

Where assets such as motor vehicles, furniture, equipments, etc are provided for the use of an Employee by the Employer, the amount of benefits-in-kind is determined as follows: (i) If the asset is owned by the Employer, the benefit is 5% of the cost of the asset; and (ii) If the asset is rented or hired, the benefit is the rent or hiring charge paid to the Landlord or Hirer.

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(b)

Provision of Accommodation

An Employee that is favored with the use of an accommodation by the Employer would be deemed to have enjoyed a sort of benefits-in-kind from such employment. The benefits derived are determined as follows: (i) Asset Owned: the annual rate or ratable value of the asset is used for the purpose. (ii) Asset Rented: amount of rent paid.

(c)

Domestic Servant

Where the employer engages the services of Steward, Driver, Wash-man, House-Maid, etc for the advantage of an Employee, the cost incurred in form of remuneration by the Employer to these people shall be regarded as benefits-in-kind in the hands of the Employee and thereby liable to tax.

(d)

Provision of Utilities

Where the Employer pays any amount in respect of energy consumption bills, telephone bills and others to an Employee, such amounts are deemed to be additional income in the hands of the Employee.

NON-TAXABLE ALLOWANCES The Personal Income Tax Act specifically exempts some allowances from tax. These allowances include: House Allowance

From 2001 to date, the tax-free rent allowance increased to N150, 000 per annum or 28% of basic salaries, whichever is higher. NB

With effect from 1996, where the Employer pays rent of the Employee's residence directly to the Employee's Landlord; such amount will be considered as an allowable deduction for company tax purposes to a maximum of 100% of the Employee's basic salary per annum.

Transport Allowance (a) Between 1999 and 2000 tax years, allowable allowance was increased N15, 000. 10

(b) From 2001 to date, tax-free allowance was increased toN20,000 Meal Allowance: -

N5, 000 per annum

Utility Allowance: -

N10, 000 per annum

Entertainment Allowance: - N6, 000 per annum Leave Allowance/Grant: - maximum of 10% of annual basic salary.

RELIEFS Reliefs are meant to reduce the tax burden of the Individual in recognition of his personal financial responsibilities. They are deductions allowed to an individual taxpayer in a year of assessment to reduce the Chargeable Income of such individual. The reliefs include:

(a)

Personal, Allowance

This is granted to every Taxpayer who cams income irrespective of his/her age. The allowance is calculated on Earned Income. This allowance is granted to both residents and non-residents and could also be referred to as earned income allowance. Allowable amount of personal allowance are as follows: With effect from 1998 to date, the allowance is &5,000 plus 20% of earned income.

(b)

Disabled Person Allowance

This is an allowance granted to a Taxpayer who is disabled and who uses special equipment and the services of an attendant in the course of his paid employment. The allowance is in addition to personal allowance. Before 1998 tax year, it was the lower of 12,000 or 10% of earned income with effect from 1998; the allowance was increased to the higher of 3,000 and 20% of earned income.

[c)

Wife Allowance

This allowance was given to every married man up to 1991 assessment year but was abolished with effect from 1992, probably to eliminate discrimination against women.

[d)

Children Allowance 11

This is granted to any Taxpayer who on the first day of the preceding year maintained a natural offspring or an adopted child. Conditions for claiming the allowance are: (i) The number of children shall not exceed four, (ii) The child shall be maintained by the individual in the preceding year of assessment (iii)The child shall be less than 16 years of age on the first day of the preceding year. (iv) If the child is more than 16 years of age, the allowance can still be granted, if the child is still receiving full time instruction in a recognized educational institution or was under article ship or indenture in a trade or profession. (v) No deduction shall be granted in respect of a married child whatever his/her age. (vi) No deduction shall be granted to a husband and his wife in respect of the same set of children. (vii)

No additional allowance will be granted on account of educational cost on any of the children.

(viii) Where the cost of maintaining a child is shared between two or more persons, the tax authority reserves the right to apportion the allowance between those persons. (ix) A widow, who re-marries, can still claim the full allowance in respect of the children of the deceased husband, up to a maximum of four.

(f)

Life Assurance Allowance

This allowance is given in respect of life insurance premium paid by an individual during the preceding year of assessment for himself or for his wife.

With effect from 1996, the

allowance is the actual amount of premium paid. NB: The above includes any contribution made to an approved pension, provident or other retirement benefit scheme or fund.

(g)

Donation to Research & Development Companies

With effect from January 1st 1987, donations made to a research center or company floated exclusively for research purposes are allowed as relief. The amount claimable is the lower of: (i)

Actual amount of donation, and

(ii)

10% of the taxpayer's chargeable income.

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MINIMUM TAX Minimum Tax was introduced to ensure that Taxpayers do not escape being taxed due to heavy capital allowances and reliefs. The earned income that was exempted from tax was increased to N10, 000 in 1997 and subsequently to N30, 000 in 1998. This is applicable only to a person whose source of income in a year of assessment is from employment. Such a person will not be required to file any tax returns but he is not exempted from minimum tax of 0.5% of his total income.

TAX TABLES With effect from 2001 1st £30,000 @ 5% Next £30,000 @ 10% Next £50,000® 15% Next £50,000 @ 20% Above £160,000® 25% ASCRETAINMENT OF ASSESSABLE/ TOTAL PROFITS The assessable profit of a company is its adjusted profits or part thereof that is assessed to companies‟ income tax in an assessment year. While adjusted profit is computed based on the accounts of a company for whatever period covered by such accounts (normally twelve months), assessable profits is determined and assessed to tax in an assessment year. An assessment year, which incidentally is the same as the government fiscal year, is a calendar year running from January 1 of a year to December 31, of the same year. Conversely, a company‟s accounting year is the period for which it prepares its annual accounts. It is usually a twelve (12) months period which may begin and end in the same year (for example, January 1- December 31) or commence in a year and end the following year (for example, July 1 – June 30).

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BASIS OF ASSESSMENT Since adjusted profit is computed based on a company‟s accounting year while the assessable profit is determined and assessed to tax in an assessment year, the question that arises is “how do we determine the assessment year when the profit of an accounting year is assessable to tax”? This question forms the kernel of the concept of “Basis of Assessment”. The basis of assessment will be preceding year basis or actual or a combination of the two. Each tax year is called an assessment year. It runs from 1st January to 31st December every year.

SUBSISTING BUSINESS The basic principle underlying the concept of “Basis of assessment „ is that the assessment profit for a year of assessment shall be company‟s profits, that is, adjusted profit for its accounting year ended in the preceding year of assessment. It means the profit assessment in a year is the company‟s profit, that is, adjusted profit for its twelve (12) months accounting period ended in the preceding tax year. This is what is popularly referred to as the “preceding year basis” (PYB) of assessment.

ILLUSTRATION Pako Limited is a company which commenced business on January 1, 1990. It profit and loss account for the year ended December 31, 2003 showed a profit of N2million. After applying the rules for allow ability of expenses and taxability of income, the company had a adjusted profit of N3million for the year ended December 31, 2003. The company‟s adjusted profits for the two previous years are as follows:N Year ended December 31, 2001

1.5milliom

Year ended December 31, 2002

2.2 million

You are required to determine the basis of assessment and assessable profit dor a; relevant years of assessment.

SUGGESTED SOLUTION On preceding year basis, the assessable profit for all relevant years is as follows:Assessment year

Basis Period 14

Assessable Profit

N 2002

1/1/01-31/12/01

1.5million

2003

1/1/02-31/12/02

2.2million

2004

1/1/03-31/12/03

3.0million

It should be noted that the above basic principle will only apply where a company has been in business for some years and there is no change of accounting date. It cannot be strictly applied where a company has just commenced business, or there is cessation of business, or a change of accounting date. In these circumstances, the company may not have a twelve (12) months accounting period ended in the previous tax year and therefore unable to strictly apply the FYB of assessment Special rules are provided for under C1TA to take care of each of the peculiar situations stated above, Basis of Assessment en Commencement of Business The rules for ascertaining the assessable profits of a company from a new trade or business under the Companies Income Tax Act can be summarized as follows:

Assessment year (i) 1st year

Basis pence for assessment

assessment profit is the actual profit from date of commencement of

Business to December 31 following, that is, to the end of the first year of assessment.) (ii) 2nd year

Assessable profit is profit of the first Twelve 12 months from the date of

commencement of business. (iii) 3rd year

Assessable profit is the profit of a Twelve months (normal} Accounting period

ended in the Preceding year of assessment. However, where no norms accounting period ended in the preceding tax year, then, the basis of assessment in the 3rd year is the same as in the 2nd year of assessment.

The above rules can be illustrated using the following example:-

ILLUSTRATION 15

LBS Ltd commenced business on October 1, 1991 and prepared the first set of accounts to June 30, 1992. Therefore, accounts are prepared to June 30 of each year. The company‟s adjustment profits are as follows: -

9 months period of June 30, 1992 – N5million

-

Year ended June 30, 1993 – N3,million

You are required to determine the basis period as well as the assessable "profits for the first 4 years of assessment SUGGESTED SOLUTION Tax

Basis period

Working

Assessable

Year

Period N‟000

1991 1/10/91 – 31/12/91

3/9/x/N5m

1992 1/10/91 – 30/9/92

1/10/91 – 30 /6/92

N‟000 1,667

5,000

1/7/92-30/9/92 3/12 x N3.5m

8.75

5.875

1993 1/10/91 – 30/9/92

5.875

1994 1/7/92 – 30/6/93

3,500

Total Assessable Profits

16,917

Note: In the application of the above rules, some of the profits assessable on the company may suffer tax more than once. For instance in the above illustration, the actual profits of the company for a period of twentyone (21) months was assessed to tax over four assessment years, that is, 48 months due to overlap in basis period for assessment as demonstrated below:-

N‟000

N‟000

Total assessable profits for assessment years

16.917 16

1991-1994 (see above) Less: - Actual profits of 21 months, namely: - 9 months to 30/9/92

5,000

-12 months to ended 30/9/93

3,500

8,500

Profits assessed more than once due to overlapping basis period

8.417

In order to reduce the effect of overlapping basis period on the taxpayer, there is a provision which confers a right of election on the taxpayer to have the assessable profits for the second and third assessment years revised to actual basis. The conditions to be satisfied to be able to exercise this right of election are as followings: 1. Notice of intension to exercise the right must be given in writing to FBIR: 2. The notice must be given within two years after the end if the second year of assessment. 3. The election to be assessed on actual basis must be for the second and third years together and not for one or the other. 4. Notice to revoke the right of election, must be-given in writing within twelve months after the end of the third year of assessment if the taxpayer so decides.

ILLUSTRATION OBJ Limited commenced business on 1 June 1993 and profits were as follows: N -

Seven months ended

31/12/93.

7,000

-

Year ended

31/12/94

24,000

-

Year ended

31/12/95

18,000

-

Year ended

31/12/96

9,600

You are required to compute the assessable profits for all relevant years assuming the company takes advantage of any option open to it to minimize its tax liability. 17

Cessation of Business Cessation Provision: In a situation where a business ceases to operate i.e. the business discontinues, the following provisions will apply:-

(i)

Year of Assessment in which Cessation occurs:

The year of assessment in which cessation occurs is known as the ultimate year. The assessment for this year is raised on the profit from the 1st of January of this year in which cessation occurs to the date of cessation.

(ii)

Penultimate Year

The penultimate year is the year proceeding the year of cessation. For the penultimate year, assessment is raised on the greater of:

(a)

The actual profit of that year

And

(b)

The preceding year's profit of that year of assessment. It is further provided that the

power to revise to actual profit in the penultimate year rests exclusively with the Inland Revenue Authorities. At the commencement of business, the tax-payer exercises the option of election but at cessation, it is the Revenue authorities‟ option.

Examples 1 Question Mr. Yo Yo whose business profits have been going down and down for the Past few years decided to cease operations permanently on the 31st March 19X5. The adjusted profits are as follows:

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N Year Ended 31st June 19X2 118,000 Year ended 31st June 19X3 127,000 Year ended 31st June 19X4 115,000 Period to 31st March 19X5

27,000

You are required to compute the assessments for the relevant years.

CHANGE OF ACCOUNTING DATE There are a number of reasons why any business may wish to change its accounting date. These reasons may be: (a)

Because of the need to synchronize the accounting date of the subsidiary with that of the

holding Company. (b)

Because of the general convenience of stock taking at a particular period of the year.

( c ) Again, a business may take over the operations of another and as a result wish to change the accounting date of that taken over to its own. Where a change of accounting date takes place, be it a sole trader, partnership or a limited liability company, the provisions of section 30 (2) of the Companies Income Tax Act 1961 apply. The Act provides that the Tax Authorities have the power to decide the basis of computing the tax liability for the year in which the change occurs and the two following years of assessment. Of course, the Authority makes its decision on the best advantage to the Tax Authority. It is important to note that the three vital years are:

(i)The year of assessment in which the accounting date becomes different from the date of the earlier years. This is known as the year of assessment in which the change occurs, (ii) The next two years of assessment following that in which the change occurs. In practice, calculations are made on both the old dates and the new dates. The greater of these two aggregates will be the likely choice of the Tax Authority.

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Question Changer Enterprises which had always been inconsistent has been changing and changing. It had regularly made up its annual accounts to30th September of each year. Suddenly it decided to adopt 31st December as its new accounting date with effect from 19X2. From the books of accounts, it is observed that the adjusted profits are as follows: Year ended 30th September 19x0

N70, 000

Year ended 30th September 19x1

N79, 000

Year ended 30th September 19x2

N60, 000

Period ended 31st December 19x2

N25, 000

Year ended 31st December 19x3

N80, 000

Year ended 31st December 19x4

N80, 000

It is required that you make all necessary computations as would be expected by the Tax Authorities.

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