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Tuesday 21 September 2021

INTERNATIONAL TAXATION -CITN Exam Questions and Answers

 INTERNATIONAL TAXATION 

INTERNATIONAL TAX POLICY

SUGGESTED QUESTIONS AND ANSWERS

1. “International tax rules are not ends but means to ends” what are its objectives? 

Solution: 

the world. Discuss in details the major issues involved in tackling the relevant challenges in Nigeria.

Solution: 

Objectives of International Tax Rules The objectives are as follows; 

1. National wealth maximization: The country tries to ensure that it gets its fair share of revenue from cross-border transactions to enhance the well-being of its citizens, and in doing so, maintains its domestic tax base. 

2. Tax equity or fairness: Imposing equal taxes on taxpayers with equal income or equal ability to pay without reference to the source or type of income and the legal structures through which the income is derived. 

3. Economic efficiency: Developing the competitiveness of a country's domestic economy ideally, by ensuring that taxation does not drive a wedge into optimal investment decision-making.

2. Professionals are expected to operate under a minimum standard coded as “ethics”. Discuss the five major ones known to you.

Solution: 

The professionals are expected to be guided by the keys of ethics discussed below in their day to day practice

 1. Integrity:  A professional should be straightforward and honest in all professional and business relationships implying fair dealing and truthfulness. 

2. Objectivity:  A professional must comply with the principle of objectivity, which requires that he should not compromise with professional or business judgment because of bias, conflict of interest or undue influence of others. He should not undertake a professional activity if a circumstance or relationship unduly influences his judgment regarding that activity. 

3. Professional competence and due care: A professional must comply with the principle of professional competence and due care, which requires that he: (a) Attain and maintain professional knowledge and skill at the level required to ensure that a client or employing organisation receives competent professional service, based on current technical and professional standards and relevant legislation; and (b) Act diligently and in accordance with applicable technical and professional standards. 


4. Confidentiality: A professional should comply with the principle of confidentiality, which requires respect to the confidentiality of information acquired as a result of professional and business relationships. 

5. Professional behaviour:  A professional should comply with relevant laws and regulations and avoid any conduct that might discredit the profession.


 3. Economic transactions through the world wide web (www) present taxation issues in all countries of the world. Discuss in details the major issues involved in tackling the relevant challenges in Nigeria.

Solution:

Tackling the challenges associated with taxing digital economy in Nigeria involves the following;

 i. Review of the scope of “fixed base” as contained in section 13 of CITA:  Although Nigeria, just like India, is neither a member of the OECD nor the EU, it is important that the scope of “fixed base” under Section 13 of the CITA be expanded as is presently being proposed in India to ensure that the Nigerian digital economy is effectively captured for tax purposes. The introduction of a digital fixed base in Nigeria will certainly increase the tax base, thereby sharing the collective tax burden of taxpayers while ensuring an increase in government revenue. 

ii. Adoption of creative approach through innovative tax legislation: It has become expedient for the Nigerian tax authorities to explore a more creative approach to ensure taxation of the digital economy. Nigeria will need to borrow a leaf from other nations who have taken bold steps to tackle the non- taxation of the digital economy to plug revenue leakages through innovative tax legislation rather than seeking to extend the interpretation of obsolete legislations that are not sufficient to bring cross border digital transactions into the tax net. Given the peculiarities and innovations of the digital economy, it will be most appropriate for the Nigerian Government to enact a legislation to adequately cater for the taxation of the digital economy rather than trying to make it fit into existing tax laws.

 iii. Automation tax administration: Presently, FIRS has adopted the ITAS, an electronic filing platform as an indication of its seriousness to implement the aspirations lucidly expressed in the National Tax Policy (NTP) regarding the automation of the tax system. The NTP expects that “all processes starting from registration of taxpayers, filing of returns, audits and investigations, payment of taxes including correspondence with taxpayers will become automated. Where there are gaps in current tax laws or where the laws do not support the use of such systems, necessary amendments shall be made to ensure that the use of the systems is in line with the law”.

 iv.Data handling:  Another critical success factor in a digital economy is data handling. Elsewhere data is treated with something akin to reverence but Nigeria’s data gathering and storage processes are still not fully integrated. This will require huge investments including data protection as the recent ransomware “WannaCry” threat showed. 

v. Strategic partnership  with digital economy service providers: The FIRS should form “a strategic partnership with institutions which provide platforms to consummate digital transactions in Nigeria. This would ensure that the objective of minimising and reducing tax leakages especially from the digital economy is achieved at a faster pace. 

vi. Ratification of multilateral conventions: Ratification of multilateral conventions on tax related treaties to end profit shifting and tax evasion by multinational companies. The benefits are that the convention will swiftly modify existing bilateral tax treaties to implement tax treaty related matters in a costefficient manner, instead of individual negotiations and amendment of the treaty. The treaty will address abuse of tax laws, raise government tax revenue, promote transparency and check illicit financial flows 

vii. Capacity development: There is need for capacity development for tax administrators so they can implement a seamless interface with the different payment systems available in Nigeria


RESIDENCE

Suggested Questions and Answers

1. The issues of nationality and domicile are necessaries to the computation of relevant taxes. Discuss 

Solution:

Nationality: Nationality represents a person’s political status, whereby he or she owes allegiance to some particular country. Apart from cases of naturalization, it depends essentially on the place of birth of that person or on his or her parentage. 

Domicile:  The domicile of a person is, essentially the country where he or she intends to reside permanently or indefinitely. Every person must have a domicile and it is not possible at any time to have more than one domicile. There are three types of domicile: domicile of origin, domicile of choice and domicile of dependency.


2. Distinguish between habitual residence and ordinary residence 

Solution:

Residence 

Habitual Residence – Is the geographical place considered “home” for a reasonably significant period of time. A place where an individual usually resides and routinely returns to after visiting other places

Ordinary Residence – This is established when there is a regular habitual mode of life in a particular place “for a time being”, “whether of short or long duration”, the continuity of which has persisted apart from temporary or occasional absences. The residence must be voluntary and adopted for “a settled purpose.”





3. What are the objectives of regional intergration?

Solution:

The following are the objectives of regional integration; 

i. Strengthening of trade integration in the region; 

ii. Creation of appropriate enabling environment for private sector development;

 iii. Development of infrastructure programmes in support of economic growth and regional integration; iv. Development of strong public sector institutions and good governance;

 v. Reduction of social exclusion and the development of an inclusive civil society 

vi. Contribute to peace and security in the region; 

vii. Building of environment programmes at the regional level; and 

viii. Strengthening of the region’s interaction with other regions of the world.


DOUBLE TAX TREATY

SUGGESTED QUESTIONS AND ANSWERS

1. What are the objectives of double taxation agreement?

Solution:

The objectives of double tax arrangements are; 

(a) To avoid double taxation of taxpayers income

 (b) To clarify taxing rights of each contracting state 

(c) To encourage economic cooperation between states 

(d) To prevent fiscal evasion with anti-avoidance provision

 (e) To lower compliance cost.









PERMANENT ESTABLISHMENTS (PE)

SUGGESTED QUESTIONS AND ANSWERS

1. Place of business test is fundamental to tax computation. Explain the three (3) elements associated with it. 

Solution:

The three elements of business test are; 

i. The existence of a “place of business”, i.e., a facility such as premises or, in certain instances, machinery or equipment; 

ii. This place of business must be “fixed”, i.e., it must be established at a distinct place with a certain degree of permanence; and

 iii. The carrying on of the business of the enterprise through this fixed place of business. This means usually that persons (personnel) not “independent” of the enterprise conduct business in the State in which the fixed place is situated.


2. Discuss the primary players in base erosion and profit shifting 

Solution:

Multinational group of companies are best placed to take advantage of these tax avoidance tactics due to the following factors: 

• Their international operations provide a ready-made network of companies through which group funds can flow; 

• They have capital to set up and maintain entities used for tax reduction purposes; and 

• Their income tends to be large enough to support the cost of

 (i) taking advice on tax restructuring 

(ii) putting in place and maintaining the recommended tax structure and

 (iii) updating the structure with countries’ changes in tax law. 






3. Explain the concept of base erosion and profit shifting as it affects international tax

Solution:

Base erosion Base erosion is the use of financial measures and tax planning to reduce the size of the company’s taxable profits in a country. It is often achieved by structuring income to have more favourable tax treatment or by finding ways to write off certain expenditure against taxable income. This has the effect of reducing a company’s tax payment below what it would otherwise has been. 

Profit shifting:  Profit shifting involves making payment to other group companies in order to move profit from high–tax jurisdictions to lower–tax regimes. This serves to increase the overall profits available to the group shareholders. Often, these intra-group payments take the form of royalties and interest payments, as these expenses can be deducted from pre-tax profits. Another issue with these types of payment is that some jurisdictions have lower tax rates on them when received as income by other persons. Essentially, base erosion and profit shifting (BEPS) refers to corporate tax planning strategies used by multinationals to "shift" profits from higher–tax jurisdictions to lower–tax jurisdictions, thus "eroding" the "tax–base" of the higher–tax jurisdictions.


CONCEPT OF TRANSFER PRICING AND NIGERIAN TAXATION

Suggested Questions and Answers

1. A potential investor said: “Transfer pricing regulation is a matter for the corporate taxpayer’s and as such, all I need to do is register a business name, avoid all its provisions and take advantage as appropriate” 

Required: Discuss the relevant points to guide him out of his conception of the workings of the Income Tax (Transfer pricing) Regulations, 2018. 20marks 

Solution:

CHARTERED UGOCHI AND CO

(Firm of Chartered Accountants) 3, 

Abu Street, Ajegunle, 

Lagos

 Date; August 2, 2019 

The Investor, Kabiyesi Street, 

Ajegunle Lagos State.





Dear Sir, 

Letter of advice on transfer pricing regulations 

We noted with interest your comment on the above subject matter. It is our candid opinion that the Regulations under consideration is not meant for only the corporate taxpayers but for all business units within the Nigerian economy involving individuals, partnerships joint ventures etc. as a matter of fact, the regulations made specific reference to the understated tax statutes in Nigeria described as the applicable and relevant tax Acts to the regulations.

These Regulations give effect to the relevant provisions of the following statutes in Nigeria;

 (a) Personal Income Tax Act, CAP. P8, Laws of the Federation of Nigeria, 2004;

(b) Companies Income Tax Act, CAP. C21, Laws of the Federation of Nigeria, 2004 (as amended by the Companies Income Tax (Amendment) Act 2007;

(c) Petroleum Profits Tax Act, CAP. 13, Laws of the Federation of Nigeria, 2004 (as amended by the Petroleum Profits Tax (Amendment) Act, 2007;

(d) Capital Gains Tax Act, CAP. C1, Laws of the Federation of Nigeria, 2004; and

(e) Value Added Tax Act, CAP. V1, Laws of the Federation of Nigeria, 2004. Please note that these Acts cover all businesses and all classes of taxpayers.

Thank you 

Yours truly 

For: Chartered Ugochi and Co

 Signed 

Omo oba Ajuwon 

Managing Partner


Required: Discuss the relevant points to advice the managing director. 20 marks 

Solution:

The relevant points of advice would be classified into two as stated below. Candidly speaking after considering the understated values it would be clear to the Managing Director of Omo Esa Oke Plc that the Transfer Pricing Regulations are not just another tax laws but a process that makes straight the procedure for effective tax collection under some special circumstances and that also allow our tax practice to be at parity with other countries.



• Objectives of the Transfer Pricing Regulations; 

(a) ensure that Nigeria is able to tax on an appropriate taxable basis corresponding to the economic activities deployed by taxable persons in Nigeria, including in their transactions and dealings with related persons; 

(b) Provide the Nigerian t a x authorities with the tools to fight tax evasion that may arise through over or under pricing of transactions between related persons; 

(c) Reduce the risk of economic double taxation; 

(d) Provide a level playing field for both multinational enterprises and independent enterprises carrying on business in Nigeria; and 

e) Provide taxable persons with certainty of transfer pricing treatment in Nigeria. 

• Scope of the transfer pricing regulations;

 (1) These Regulations shall apply to transactions between connected persons and shall include 

a) Sale and purchase of goods and services; 

b) Sale, purchase or lease of tangible assets; 

c) Transfer, purchase, licence or use of intangible assets; 

d) Provision of services; 

e) Lending or borrowing of money; 

f) Manufacturing arrangements; and 

g) Any transaction which may affect profit or loss, or any other matter incidental to, connected with, or pertaining to the transactions referred to in paragraphs (a) to (f) of the regulation.











3. The mainframe and the basis for the Income Tax (Transfer pricing) Regulations, 2018 is the presence of “controlled transactions” in the daily activities of multinational business and the issues with influence of connected persons. 

Required: Discuss in details “The disclosure of controlled transactions” as contained in the regulation under reference indicating the extension period and exemption if any. 20 marks


Solution: 

Disclosure of Controlled Transactions 

(1) For each year of assessment, a connected person shall, without notice or demand, make a disclosure of transactions that are subject to these Regulations. 

(2) The disclosure referred to in sub-regulation (1) above shall be in the form as may be prescribed by the Service from time to time. 

(3) The disclosure shall be made and submitted to the Service not later than six months after the end of each accounting year or eighteen months after the date of incorporation, whichever is earlier.

(4) Subject to the provisions of extension of period for making declarations or disclosures (below) where any person fails to make disclosures of transactions which are subject to these Regulations within the period specified in this regulation, an administrative penalty shall apply as follows – 

(a)ten million naira or one percent of the value of controlled transaction not disclosed, whichever is higher; and

 (b)ten thousand naira for every day in which the failure continues. 

(5) Where a connected person makes an incorrect disclosure of transactions which are subject to these Regulations, an administrative penalty of ten million naira or one percent of the value of controlled transactions incorrectly disclosed, whichever is higher shall apply. 

Extension of Period for Making Declarations or Disclosures 

(1) A connected person may apply in writing to the Service for an extension of the time within which to comply with the declarations and disclosure of controlled transactions details stated above provided – (a) the application is submitted before the expiration of the time stipulated in the declarations and disclosure of controlled transactions details stated above and; 

(b) the applicant shows good cause for its inability to comply with stipulated submission dates.

 (2) Where the Service is satisfied with the cause shown in an application under sub-regulation 1 above, it may in writing grant an extension of time. 

(3) Where the taxable person fails to meet the extended submission date granted under sub-regulation (2) above, administrative penalties in the declarations and disclosure of controlled transactions details stated above as the case may be, shall apply as if no extension was granted



EFFECTS OF OFFSHORE JUDICIAL DECISIONS

Suggested Questions and Answers

1. Discuss the salient points of the country by country reporting guideline 

Solution:

The salient points of Country by Country Reporting guidelines are as stated below: 

(a) Where the group [parent entity and constituent entity resident in Nigeria] has a total consolidated revenue of sixty billion [N60b] or more in the immediate preceding year, it must file a country by country report with the FIRS; 

(b) The filing date is 12 months from the last date of the reporting accounting year of the group; and 

(c) The penalties for non compliance are: 

Failure to file report 

First month: N10, 000,000 

Second and other subsequent months of non-compliance: N1, 000,000 monthly 

Incorrect and fake report: N10, 000,000 

Penalty for failure to notify FIRS: N5, 000,000 for the first month and N10, 000 for every other month the failure continues.


2. Discuss the concept of tax neutrality and evaluate its uses 

Solution:

The concept of tax neutrality 

The primary purpose of the tax system is to raise the revenue needed to pay for government spending. As such, the goal is to raise this revenue without distorting the decisions that individuals and firms would otherwise make for purely economic reasons. Non-neutralities in the tax system lead people and firms to devote more socially wasteful effort to transforming the form or substance of their activities to reduce their tax payments, for example, by hiring accountants to structure financial transactions in a manner that minimizes tax liability. In some cases, deviations from a neutral tax system are unavoidable. It is widely agreed that tax payments should increase with some measure of well-being, like income, consumption or wages. One inevitable consequence of this agreement is that the market consumption of goods and services will be taxed, either directly (as in a consumption tax) or indirectly (as in an income or employment tax, both of which tax the money used to purchase consumption goods). In other cases, deviations from a neutral tax system reflect the goals of policymakers.



Evaluation of the use of neutralities in international tax policy

 A neutral tax is one that does not motivate firms or individuals to change their behavior. Do I invest more or less? Do I work more or less? Do I locate in one place rather than another? Do I employ more or less labour or more or less capital? Neutrality is an accepted standard for evaluating taxes. In several cases, the concept of neutrality provides a useful way to cut through some of the debates about tax policy and identify a more economically efficient way to organize the tax system.

 Three applications of neutrality to policy issues 

This general discussion motivates the application of the concept of neutrality to five specific issues.

 (a) Overall tax reform: A broader base and lower rates 

One of the traditional mantras of tax reform is to “broaden the base and lower the rates.”This involves two objectives: 

i. Broadening the base helps make the tax code more neutral between different activities by including more types of income in the definition of income and allowing fewer deductions and credits for specified activities; and 

ii. Lowering tax rates makes the tax code more neutral about the choice between working and not working. Both halves of the process potentially improve efficiency. 

(b) Using the tax code to encourage desired behavior: Credits instead of deductions

 In some cases, policymakers may want to encourage desired activities like home ownership or a college education. In these cases, it is worth examining whether the specific goal could be better accomplished through a spending program or through the tax code. In many cases, a spending program can be more effectively targeted and delivered to serve the goal in question. In some cases, subsidizing these activities through the tax code may be more efficient. 

(c) Discouraging undesired activity 

Just as it can sometimes be appropriate to introduce non-neutralities into the tax system to encourage desired activities so can it be appropriate to use the tax system to discourage undesirable ones like; smoking, drinking alcohol, or emitting carbon. In this manner, this can lead businesses and consumers to take the social costs of their actions into account, helping to ensure that the outcome of decentralized decisions and market competition leads to overall social efficiency.







3. Discuss the attributes of international organizations

Solution:

Attributes of international organizations 

The unique attributes of international organizations are as stated below: 

a. Facilitating negotiations; 

b. Implementing agreements; 

c. Dispute resolution; 

d. Offering technical assistance and developing rules;

 e. Neutrality: this enables organizations to act as mediators among states and to implement their decisions; 

f. Impartiality: this suggests that neither party to a dispute is favoured; and 

g. Independence: this means that international organizations can take decisions for themselves that is binding on member states.



THIN CAPITALIZATION AND NIGERIAN TAXATION

Suggested Questions and Answers

1. Evaluate the concept of thin capitalization 

Solution:

An entity is typically financed through a mixture of debt and equity. ‘Thin capitalisation’ refers to a situation in which an entity is financed through a relatively high level of debt compared to equity and is therefore said to be highly geared or highly leveraged.







2. Discuss the effect of thin capitalization rules 

Solution:

Effect of thin capitalisation rules 

The way a company is capitalized will often have a significant impact on the amount of profit it reports for tax purposes. Country tax rules typically allow a deduction for interest paid or payable in arriving at the tax measure of profit. The higher the level of debt in a company, the higher the amount of interest payable and consequently the taxable profit will be low. For this reason, debt is often a more tax efficient method of finance than equity. 

Multinational groups are often able to structure their financing arrangements to maximise these benefits. Not only are they able to establish a tax-efficient mixture of debt and equity in borrowing countries, they are also able to influence the tax treatment of the lender which receives the interest - for example, the arrangements may be structured in a way that allows the interest to be received in a jurisdiction that either does not tax the interest income, or which subjects such interest to a low tax rate. 

This creates problem for two sets of people: 

Exposure to solvency risk: Creditors and lenders may have to face the risk if the entity is unable to repay its debt over a time period, as the enterprise is already saddled with ‘debt’ burden; and Tax authorities: They may be concerned about the intentional ‘debt-abuse’ by interested parties and the resultant tax avoidance. Therefore, the capital structure of an entity has a significant impact on the profit it reports for tax purposes.


3. Evaluate the measures of addressing thin capitalization

Solution:

Measures of addressing thin capitalization

 Country tax administrations often introduce rules that place a limit on the amount of interest that can be deducted in calculating the measure of a company’s profit for tax purposes. Such rules are designed to counter cross-border shifting of profit through excessive debt, and thus aim to protect a country’s tax base. From a policy perspective, failure to tackle excessive interest payments to associated enterprises gives MNEs an advantage over purely domestic businesses which are unable to gain such tax advantages. 

Thin capitalisation rules typically operate by means of one of two approaches:

 a) determining a maximum amount of debt on which deductible interest payments are available; and 

b) determining a maximum amount of interest that may be deducted by reference to the ratio of interest (paid or payable) to another variable.


INTERNATIONAL TAX AVOIDANCE AND NIGERIAN TAXATION

Suggested Questions and Answers

1. Distinguish between tax avoidance and tax evasion 

Solution:

The distinction between tax avoidance and tax evasion Tax evasion is the illegal practice of not paying taxes, by not reporting income, reporting expenses not legally allowed, or by not paying taxes owed. One common tax evasion strategy is failing to pay taxes collected or deducted from others to the tax authority. Tax avoidance is the legitimate practice of minimizing taxes, using provisions included in the laws. It involves gaining a tax advantage that the tax laws may not have intended.

2. Explain with examples tax evasion and fraud practices 

Solution:

Tax evasion 

Tax evasion is the illegal practice of not paying taxes, by not reporting income, reporting expenses not legally allowed, or by not paying taxes owed. In this situation, the phrase "ignorance of the law is no excuse" comes to mind. Tax evasion is most commonly thought of in relation to income taxes, but tax evasion can be practiced by businesses on VAT and on employment taxes. One common tax evasion strategy is failing to pay taxes collected or deducted from others to the tax authority. 

Examples of Tax Evasion/Tax Fraud Practices

 In general, it's considered tax evasion if you knowingly fail to report income or you don't file an income tax return. Some practices considered tax evasion/tax fraud: 

a. Under-reporting income (claiming less income than you actually received from a specific source

 b. Not reporting an income source 

c. Providing false information to the tax authroities about business income or expenses

d. Deliberately underpaying taxes owed 

e. Substantially understating your taxes (by stating a tax amount on your return which is less than the amount owed on the income you reported). 

f. Filing false payroll tax reports or failing to file these returns. 

g. Deliberately under-reporting or omitting income, 

h. Overstating the amount of deductions 

i. Keeping two sets of books

 j. Making false entries in books and records 

k. Claiming personal expenses as business expenses 

l. Claiming false deductions 

m. Hiding or transferring assets or income


3. Discuss the general principles of domestic laws

Solution:

General Principles of Domestic Laws A good tax system should be based on the following principles

1. Convenience: A good tax system must be based on the ability to pay. That is, the burden of tax must be within the tax payers’ financial ability. 

2. Simplicity: A good tax system must not be complex. Its concept and principles must not be ambiguous. This implies that they must be straightforward, coherent, and must be understood by majority of the citizens and also must be simple to operate. Its administration should not be complex but consistent among the different tax organs of government. 

3. Economy: this implies efficiency in Administrative. The cost of administering a tax should not be higher than the revenue yield from such tax. Also, a good tax system must not be a disincentive to investment or inimical to economic growth.

 4. Equity: An ideal tax must be administered on the principles of equity and fairness. It implies that tax burden among different tax payers are shared based on their capability or involvement. Equity involves both vertical and horizontal equity. Vertical equity, it means that those in unequal circumstances should pay different amount of taxes. The importance of this criterion is to install confidence in the tax payer who will be more willing to pay their taxes if they believe that the system is fair and equal. Horizontal equity implies that those in equal circumstances should pay an equal amount of tax.

5. Certainty: a good tax system should not be vague, its scope must be clearly stated and its interpretation must not be ambiguous. This criteria also means the certainty that the tax can and will be enforced, because a tax that is easily evaded usually causes resentment and often a decline in tax payer morality. Also, the tax which every person is bound to pay ought to be certain and not arbitrary. 

6. Flexibility and Stability: The tax system should be flexible and responsive to changes in the legal, socio-political and economic environment. It must also possess stability, driven by the system and not distorted by changes in government.


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