• 12 Marks

AT – Nov 2023 – L3 – Q2b – Tax planning

Assess the tax implications of the setup, location, and planned interventions for the establishment of Gigani Ltd.

Some investors have invited you for comments on a business they intend to establish in four years’ time. Your comments are critical to the investors in making a choice on the establishment of one of the two entities, that is:

  • Manufacturing company or
  • Free zone company.

The investors intend to name the entity Gigani Ltd and establish it in Ghana. The following relates to the projected business of Gigani Ltd:

  1. The shareholders plan to establish Gigani Ltd in either Accra/Tema, Ashanti Regional capital, or Kasoa in the Central Region. It is anticipated that irrespective of the location, Gigani Ltd would generate the same amount of profit in year 1 and grow by 5% each year, all things being equal.

Its first year’s financial performance is projected as follows:

Location Profit (GH¢)
Accra/Tema 10,000,000
Ashanti Regional Capital 10,000,000
Kasoa, Central Region 10,000,000
  1. Additional interventions on what the investors intend to do in the future when Gigani Ltd is established are as follows:
  • Establish the business with four resident shareholders.
  • Start with share capital of GH¢2 million from the contribution of the shareholders.
  • Raise a debt from two main sources: GH¢10 million from a financial institution in Ghana and GH¢20 million from shareholders with interest at 4% above the market rate.
  • Transfer an amount of GH¢2 million from retained earnings to share capital to increase the worth of the shareholders after the second year.
  • Recruit fresh graduates each year from the University of Ghana and Massachusetts Institute of Technology in Boston, USA for the next 5 years until it meets its staff requirement yet to be decided.

Required:
You are required to assess the tax implications of the: i) Set-up.
ii) Location.
iii) Interventions to be introduced.
(12 marks)

i) Tax Implications of the Setup:

Manufacturing Company:

  • Fresh Graduate Incentive: A percentage of wages and salaries paid to fresh graduates employed by the company is allowed as an additional deduction:
    • Up to 1% of the total workforce: 10%
    • Above 1% to 5%: 30%
    • Above 5%: 50%
  • Carry Forward of Losses: Manufacturing companies can carry forward losses for up to 5 years.
  • Import Duty Rebates: The company can register with Customs for rebates on import duty for raw materials.
  • Zero-Rated Exports: Exports by manufacturing companies are zero-rated for VAT purposes.
  • No Capital Requirement Restrictions: There are no specific capital requirements for foreign investors in manufacturing.
  • VAT Reliefs: Manufacturing companies that belong to an association may receive upfront VAT reliefs, with VAT paid later as due.
  • Deductibility of Business Costs: All operational costs are allowable deductions in calculating chargeable income.

Free Zone Company:

  • Tax Exemption for First 10 Years: Exports by free zone companies are exempt from tax for the first 10 years of operation.
  • Post-Exemption Tax Rate: After the exemption period, exports are taxed at a reduced rate of 15%.
  • Exemptions on Imports: Imports into the free zone are exempt from tax.
  • VAT and Levy Exemptions: The company is exempt from VAT, NHIL, GETFund, and Covid-19 levies.
  • Exemption on Dividends: Dividends paid to shareholders by the free zone company are exempt from tax.
  • Carry Forward of Losses: Losses can be carried forward similarly to manufacturing companies.

ii) Tax Implications of Location:

  • Locational Incentives: Tax rates vary based on the location of the business:
    • Accra/Tema: 25% tax rate.
    • Regional Capitals (other than Accra/Tema): 18.75% tax rate.
    • Other Areas (e.g., Kasoa): 12.5% tax rate.

iii) Tax Implications of Planned Interventions:

  • Close Company Status: With 4 shareholders, Gigani Ltd may be classified as a close company. The Commissioner-General may declare a deemed dividend if the company retains earnings instead of distributing them, leading to withholding tax.
  • Stamp Duty: The initial share capital of GH¢2 million is subject to a 0.5% stamp duty (now at 1%). If the capital is not from a taxable source, GRA may tax the amount in the shareholders’ hands.
  • Debt Financing and Thin Capitalization: The proposed debt of GH¢10 million from a financial institution and GH¢20 million from shareholders will be evaluated for thin capitalization. However, since the shareholders are resident and interest paid is taxable, thin capitalization rules may not apply.
  • Interest on Shareholder Loan: The interest exceeding 4% above the market rate will not be allowable for tax purposes and will be added back to profits.
  • Transfer from Retained Earnings: The GH¢2 million transferred from retained earnings to share capital will attract a 0.5% stamp duty (now at 1%) and possibly a deemed dividend withholding tax of 8%.
  • Fresh Graduate Incentive: Recruitment of fresh graduates from recognized Ghanaian institutions will qualify for the fresh graduate incentive, reducing the company’s taxable income. However, this incentive does not apply to graduates recruited from institutions outside Ghana.
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