Question Tag: Location Incentives

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:

2. 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)