- 10 Marks
Question
Percy-Perry Engineering Company (USA) Ltd is incorporated in the USA and has Percy-Perry Construction (Ghana) Ltd as its subsidiary in Ghana. The foreign company was awarded a road construction contract by the Government of Ghana at a total sum of GH¢9 million on 1 January 2019. The company subcontracted the job to Percy-Perry Construction Ghana Ltd at GH¢7 million. Both companies entered into a technical service agreement under which the parent company would provide equipment and technical personnel for the execution of the contract.
The contract was successfully executed by Percy-Perry Construction Ghana Ltd during the year ended 31 December 2019, and the statement of comprehensive income of the company showed the following:
| Description | Amount (GH¢) |
|---|---|
| Contract Fees | 7,000,000 |
| Less: | |
| – Cost of Materials | (910,000) |
| – Hiring of Equipment | (795,000) |
| – Technical Personnel Cost | (555,000) |
| – Other Administration Expenses | (223,000) |
| – Depreciation | (110,000) |
| Net Profit | 4,407,000 |
The following additional information is provided:
- The equipment hired from the parent company at GH¢795,000 could have been hired from another company at GH¢600,000.
- If the parent company did not provide the technical personnel, Percy-Perry Construction Ghana Ltd could have employed the same personnel at GH¢450,000.
- Capital allowances for the year have been agreed at GH¢65,000.
- The contract fees were subject to withholding tax.
Required: i) Compute the Companies Income Tax payable by Percy-Perry Construction Ghana Ltd for the relevant year of assessment and comment on the treatment of any two of the transactions.
(5 marks)
ii) Compute the Companies Income Tax payable by Percy-Perry Engineering Company (USA) Ltd to the Ghana Revenue Authority for the relevant year of assessment.
(2 marks)
iii) Explain THREE (3) objectives of the Ghana Investment Promotion Centre (GIPC).
(3 marks)
Answer
i) Tax Computation for Percy-Perry Construction Ghana Ltd:
Alternative Solution
Commentary on the Treatment of Transactions:
- Equipment Hire from Parent Company:
The equipment hire cost of GH¢795,000 charged by the parent company is higher than the market rate of GH¢600,000. This excess cost of GH¢195,000 is considered non-deductible for tax purposes under transfer pricing regulations and has been added back to the taxable income. - Technical Personnel Cost:
The technical personnel cost of GH¢555,000 charged by the parent company exceeds the local hiring cost of GH¢450,000. The excess cost of GH¢105,000 is also considered non-deductible for tax purposes and has been added back to the taxable income.
ii) Tax Computation for Percy-Perry Engineering Company (USA) Ltd:
| Description | Amount (GH¢) |
|---|---|
| Profit (9,000,000 – 7,000,000) | 2,000,000 |
| Tax @ 25% | 500,000 |
| Less: Withholding Tax (5% of 9,000,000) | (450,000) |
| Tax Payable | 50,000 |
Note: Percy-Perry Engineering Company (USA) Ltd is liable to a 25% tax on the profit attributable to the contract. However, withholding tax deducted on the contract fees paid to the parent company can be used as a credit to reduce the final tax liability.
iii) Objectives of the Ghana Investment Promotion Centre (GIPC):
The GIPC is a government agency tasked with promoting and facilitating investments in Ghana. The key objectives of GIPC include:
- Promoting Investment:
GIPC seeks to attract and promote both local and foreign investments by showcasing Ghana’s investment opportunities and creating a favorable environment for investors. - Setting Guidelines for Foreign Investors:
The GIPC establishes clear guidelines on what foreign investors can do in Ghana, ensuring that foreign participation complements local interests. - Providing Investment Incentives:
GIPC offers various incentives, such as tax holidays and exemptions, to businesses that register with them, especially those in priority sectors such as agriculture, manufacturing, and infrastructure development.
- Topic: Business income - Corporate income tax
- Series: NOV 2020
- Uploader: Theophilus