TAXATION OF MERGERS, TAKEOVERS, ACQUISITIONS AND RESTRUCTURING
Suggested questions and answers
Question 1
(a) Explain what you understand by the terms: Mergers, Acquisitions and Mergers
Solution:
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) 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.
Solution to 1b:
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
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:
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.
EXPORT/FREE TRADE ZONE BUSINESS
Suggested Questions and Answers
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
Solution:
Solution to question 1: 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 Companies operating in the Customs Territory NO VAT NO Withholding Tax (WHT)
2 Sales made by Approved Enterprises to Companies operating in the Customs Territory. VAT payable by Purchaser NO WHT
3 Purchases or Sales made from Customs Territory by Unapproved Enterprises operating within the Zones VAT and WHT applicable
4 Imported goods conveyed through other Ports outside the Zones but consigned to the Zones. No VAT and WHT 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 Enterprises Approved Enterprises to submit Tax Returns through the Free Zone Authority to FIRS
6 Business activities of Head Offices or Branch Offices of Approved Enterprises located in Customs Territory dealing with Approved Enterprises. All relevant tax laws applicable except as related to purchases and sales.
7 Approved Enterprises having contract of supplies or design with companies in the customs area. VAT and WHT applicable
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.
Solution to question 2:
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
TAXATION OF MINING OF SOLID MINERALS
Suggested Questions and Answers
Question 1: 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.
Solution to question 1:
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
Question2: Discuss some of the challenges faced by the solid mineral sector in Nigeria.
Solution to question 2:
Challenges of the solid mineral sector
1. Civil war of 1960 - The civil war of the late 1960s which makes most of the player’s abandonment of sites and many mining expatriates left the country.
2. Discovery of crude oil - The discovery of oil in 1956 makes government reduced attention on mining and focus in the new resources
3. Lack of funding - Multinational corporations were encouraged to fund the oil sector rather than the mining sector
4. Revenue from oil exploration and production was tremendous which worsen the neglect of the solid mineral sector
5. Neglect of the sector - Neglect of the solid mineral sector by successful government.
6. Economic recession - The Nigerian economy went through its worst slump in 25 years arising from low yield of oil output and fall in prices. This made government to re-focus on solid minerals as an emerging source of revenue through taxes and royalties which some countries of the world have been using to finance their economy.
Question 3: List out the requirements before a company can obtain a mining lease in Nigeria.
Solution to question 3:
Below are the requirements for grant of mining lease in Nigeria are as follows:
i. Exploration License
ii. Certified true copy of company certificate and other incorporation documents
iii. Completed application forms
iv. Pre-Feasibility Report
v. Prospecting plan
vi. Payment of processing fee
vii. Evidence of financial capability
viii. Evidence of technical competence or COMEG accredited geologist
ix. Irrevocable consent from the landowner(s) and/or occupier(s) to the applicant
x. Attestation of non-conviction of criminal offences under the Act by a Lawyer
Question 4: List out the various types of mining licences that can be obtained by companies in Nigeria.
Solution to question 4:
i. a reconnaissance permit;
ii. an exploration licence;
iii. a small-scale mining lease;
iv. iv a mining lease;
v. a quarry lease; and
vi. a water use permit
REGULATED SECURITIES LENDING TRANSACTIONS (‘SEC LENDING) IN NIGERIA
Suggested Questions and Answers
Question 1
In a SEC lender transaction, certain documents and transactions are exempted from the imposition of stamp duties. Required: Give examples of documents and transactions exempted from stamp duties under a SEC lending transaction.
Solution to question 1:
The following documents and transactions are exempted from stamp duties in a SEC lending transactions:
(1) All documents issued by the SEC in relation to a SEC Lending;
(2) Shares, stocks or securities returned to a lender or its recognized agent by a borrower in accordance with the rules of a SEC Lending;
(3) given by any person under a SEC Lending; and
(4) Shares, stocks or securities transferred by a lender to its agent or borrower in furtherance of a SEC Lending
Question 2
The company Income Tax Act grants specific exemptions and concessions to both interest and dividend incomes arising from a SEC lending transactions.
Required: Briefly identify and explain the provisions of the sections under the Company Income Tax Act on exemptions granted to dividend and interest income generated from a SEC lending transactions.
Solution to question 2:
The following are the specific sections and provisions of the Company Income Tax Act that grants exemptions and concessions to dividend and interest income generated from SEC lending transactions. (1) Section 23 of CITA (as amended): Despite the provision of section 9 (1) (c) of CITA which regards gross dividend and interest received by a lender and borrower as taxable, section 23(1)(t) and (u) of the Act, provides that dividend received by a lender from a borrower or by an agent from a borrower under SEC Lending is a franked investment income, hence it is not subject to further tax in the hand of the lender. Given the provisions of section 23(1) of the Act, interest received by an agent from a lender under SEC lending is tax exempt in the hand of the agent.
(2) Section 24 of CITA (as amended): Interest paid by a lender to an agent or a borrower under a SEC Lending is an allowable deduction under section 24(1)(l) of the Act.
(3) Section 80 of CITA (as amended): Section 80 of CITA exempts payment of a dividend by a borrower to an agent from withholding tax deduction.
Question 3
The operations of a SEC lending transaction in Nigeria is governed by certain regulatory provisions. Required: Identify and explain the regulatory provisions governing the operations of a SEC lending transaction in Nigeria.
Solution to question 3:
The operation of SEC lending in the Nigerian capital market is regulated by the provisions of the Investment and Securities Act, Securities and Exchange Commission Rules 2013 (as amended) and other extant laws and regulations. However, the taxation of SEC lending transactions is governed by the provisions of the Company Income Tax Act (as amended) and other relevant tax laws.
Question 4 As a result of the lull in the stock mark partly occasioned by the advent of Covid-19, investors in the Nigerian capital markets now sees securities lending as a veritable investment option.
Required: (a) Explain what you understand as “Regulated Securities Lending Transaction (SEC Lending) in Nigeria.
Solution to question 4(a):
Regulated securities lending transaction (SEC lending): Regulated securities lending transaction means an arrangement where a lender enters into an agreement with an agent, for depositing securities for the purposes of lending, through the lending agent, in accordance with SEC rules, and the borrower enters into a separate agreement with the lending agent for the purposes of borrowing of the securities. This also includes an arrangement where the borrower deposits collateral with the lender, through the agent as a security for the borrowed securities.
(b) What is the benefit of stock lending to the Nigerian stock market.
Solution to question 4(b):
Benefit of stock lending to the Nigerian stock market: There are essentially two major benefits of securities lending to the Nigerian stock market:
(i) increases market liquidity leading to the optimal functioning of the stock market.
(ii) increases the efficiency of market pricing which in turn lowers overall cost for investors.
(c) Give examples of the types of income under a SEC lending transaction.
Solution to question 4(c):
Types of income under a SEC lending: The following are the types of income under a SEC lending:
(i) Dividends;
(ii) Interests;
(iii) Securities lending fees or any other right or reward arising from the securities loaned;
(iv) Bonus;
(v) Rights; and
(vi) Redemption benefits.
Question 5 Securities lending transaction involves certain procedures and or steps which makes the lending process smooth and seamless.
Required: Identify and explain the steps that are involved in a typical securities lending transaction.
Solution to question 5:
The following are the steps involved in a typical securities lending transaction.
Step One: Securities Lending Initiation: The process begins with the borrower contacting a prospective lender or their lending agent (intermediary) asking for the availability of a particular security for lending. If the lending agent or prospective lender responds positively to the enquiry, the next step, negotiation of stock lending terms, begins.
Step Two: Negotiation of Stock Lending Terms: The second step in securities lending is negotiation of terms covering issues relating to cash and/or non-cash collateral, loan duration, dividends and corporate actions, and the fees payable.
Step Three: Delivery of Collateral: Having agreed on the terms, the borrower then delivers the agreed-upon collateral to the lending agent.
Step Four: Delivery of Securities: Having “received” the collateral, the lender delivers the agreed upon securities to the agent or the intermediary.
Step Five: Investment of Collateral: If the collateral posted by the borrower is a cash collateral, it is then placed in a short-term investment. This reinvestment step does not take place if the collateral is non cash.
Step Six; Daily Mark to Market Calculation: Because the value of the securities loaned varies daily according to market conditions, the lender or his agent, needs to be able to monitor the daily value of the securities in order to find out if the collateral posted remains adequate or insufficient. Where the collateral becomes inadequate because the value of the loaned securities has increased, a collateral call is placed on the borrower, at which point the borrower is required to add to the collateral.
Step Seven: Return of Borrowed Securities: At the end of the duration of the contract, or when called by the lender, the borrower returns the borrowed securities through the lending agent
Step Eight: Return of Collateral: The cash collateral plus the interest or rebate is the returned to the borrower and the loan closed.
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