STP – Feb 2020 – L2 – Q4 – Business Entity Tax Implications
Advise on tax implications of establishing a company, partnership, or sole proprietorship and identify which offers the least tax exposure for an investor.
As a renowned tax consultant, a potential investor in the real estate sector in Ghana is seeking your expert opinion on the tax implications of establishing a company, a partnership or a sole proprietorship and which form of the business organisations gives the least tax exposure for an investor.
(a). The Chief Executive Officer (CEO) of Dana, a meat processing company based in the United Arab Emirates is exploring the possibility of expanding the operations of the company to Ghana. The CEO intends to establish a cattle farm and an ultra-modern meat processing which would process the meat for export to the Middle East. His initial inquiries revealed that Ghana has tax incentives for investors who seek to establish businesses which produce items for export.
Required: As the preferred tax advisor, provide an opinion on the income tax consequences of establishing a cattle farm indicating whether the location of the farm impacts on the tax incentives available to an investor.
(b). Based on your knowledge of the Free Zone Act, 1995 (Act 504) state and discuss five (5) tax incentives which the investor can obtain if he registers the meat processing factory as a Free Zone Enterprise.
Red flow Ghana Limited is a manufacturing entity in Ghana. Mr. Kurt Wildem, a citizen and resident of Germany owns 90% of the company’s shares. Mrs. Florence Wildem, a citizen and resident of Germany and wife of Mr. Wildem also owns 5% of the shares of the company. Mr. Jogen Wildem, the son of Mr. Kurt Wildem holds the remaining 5% of the shares in the company. As of 1st June 2019, the company had a stated capital of GH¢400,000.00. A report submitted by the management to the Board of Directors indicated that the company needs to acquire a plant valued at GH¢1,000,000.00 to enable the company to increase its production capacity. Mr. Kurt Wildem who is the majority shareholder has offered to finance the purchase of a plant for the company, but his challenge is whether to provide the asset to the company as a loan or as equity.
Required: Advise Mr. Kurt Wildem on i. the income tax treatment of providing the asset to the company as equity contribution. (7 marks) ii. the income tax treatment of providing the asset to the company as a loan. (7 marks) iii. the preferable option for providing the asset to the company in order to derive the maximum tax benefits.
Due to the aggressive stance of the GRA in recent times, the urgency and pace of submission of tax returns to the GRA has more than doubled. The Chief Finance Officer of SKABY BANK Ltd. requires to discuss Skaby’s Tax returns for year 2014 and 2015 by close of day today to enable him engage the Finance committee of the Board with the various tax liabilities arising from the two years’ banking activities and also access the Bank’s tax compliance level.
As Tax Consultant to SKABY BANK Ltd., extracts of the 2014 and 2015 financial statement which read as follows, has been deposited on your table for your necessary action.
SKABY COMMERCIAL BANK
STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 2015
Note
2015 GHC’000
2014 GHC’000
505,055.00
377,000.00
2
(82,200.00)
(51,300.00)
422,855.00
325,700.00
398,444.00
75,555.00
(10,424.00)
(8,200.00)
88,020.00
67,355.00
24,800.00
15,980.00
45,620.00
8,300.00
30,420.00
24,280.00
541,295.00
417,335.00
9,000.00
7,992.00
550,295.00
409,343.00
225,000.00
215,560.00
325,295.00
193,783.00
82,000.00
32,000.00
243,295.00
161,783.00
2015 GHC’000
2014 GHC’000
242,000.00
180,600.00
256,920.00
190,600.00
6,135.00
5,800.00
505,055.00
377,000.00
b) Necessary default certificates of GHC20,000.00 have been received on income included in investment return for year 2015.
Note 2: a) Interest Expense paid
2015 GHC’000
2014 GHC’000
Borrowings
9,900.00
8,900.00
Current and Savings A/c
45,650.00
20,500.00
Time and Other deposits
26,650.00
21,900.00
82,200.00
51,300.00
b) $20%$ of interest expense payments’ mandatory withholding tax deduction has not been made.
Note 3: Fees and Commission Income
2015 GHC’000
2014 GHC’000
Commission on letters of credit
3,200.00
2,650.00
Commission on Turnover
39,050.00
34,000.00
Processing fees
5,000.00
4,500.00
Commission of foreign services
2,200.00
3,060.00
Other fees and Commissions
48,994.00
31,345.00
98,444.00
75,555.00
Note 4: Other Income
2015 GHC’000
2014 GHC’000
Dividend Income
2,000.00
Bad Debt recovery
3,000.00
Profit on sale of property
2,200.00
Rental Income
2,470.00
2,200.00
Other Income
3,100.00
8,300.00
8,300.00
Note 5 a). Operating Expenses Include
2015 GHC’000
2014 GHC’000
Advertising
2,000.00
2,000.00
Rental of premises
45,000.00
40,450.00
Directors fees
2,100.00
3,000.00
Depreciation
16,000.00
15,000.00
Amortization
6,000.00
2,500.00
Donation to MD on death of mother
62,500.00
Purchase of computers
50,000.00
2,000.00
Goodwill paid
20,000.00
25,000.00
b). Tax on rental of premises has not been accrued or paid to the GRA.
Note 6: Income Tax
2015 GHC’000
2014 GHC’000
Balance b/f
200.00
Paid for year
65,000.00
20,000.00
Deferred Tax
17,000.00
10,000.00
Total
82,000.00
30,200.00
Note 7: Extracts from the Property, Plant and Equipment schedule is as below
2015
Land & Building GHC’000
Equipment Further GHC’000
Computers GHC’000
Motor Vehicles GHC’000
Total GHC’000
Cost as at 1 January 2015
50,000.00
53,000.00
32,000.00
57,000.00
192,000.00
Additions for year
2,500.00
12,200.00
7,500.00
2,550.00
24,750.00
Disposals
–
(250.00)
(350.00)
(2,300.00)
(2,900.00)
Write-off
–
(200.00)
(45.00)
–
(245.00)
At 31 December 2015
52,500.00
64,750.00
39,105.00
57,250.00
213,605.00
Note 8 Extracts from the Intangible Assets (GOODWILL) Register is as below
2015 GHC’000
2014 GHC’000
Cost as at 1 January 2015
7,500.00
Acquisition
10,500.00
7,500.00
Bal at year end 2015
18,000.00
7,500.00
Management policy for writing off goodwill is 10 years.
Required
Kindly present to the Chief Finance Office tax information on;
a) Corporate tax computation for year 2015 and 2014,
(10 marks)
b) Capital Allowance computation for year 2015 and 2014,
(8 marks)
c) Skabi’s Tax Position for year 2015 and 2014,
(2 marks)
d) Withholding taxes payable by Skabi to the GRA.
(2 marks)
Berchem Plc UK (Berchem) is a foreign company that provides engineering services to Gritty Electricals Company Ltd (GEC) here in Ghana. Koranten Systems (Koranten) serves as a country representative for Berchem in Ghana and assists Berchem to execute their service contracts. Koranten Systems provides labour and local material support to Berchem when needed on the contract, whereas Berchem provides the prefinancing, expertise and specialized equipment for the execution of work. As compensation, Koranten is paid commission in cash and equipment.
Berchem won its first contract with GECin January 2014. To date, no VAT was ever charged on invoices billed to GEC by Berchem. GEC also failed to withhold taxes on payments made to Berchem. Both GEC and Berchem had the general belief that these taxes were not stated as part of the signed contracts and therefore were not applicable in respect of the contracts. Berchem again saw the VAT charge as rendering pricing of the projects uncompetitive.
Consultants to GEC have recently advised GEC to start withholding taxes from payments made to Berchem as required by the Income Tax Act, since Berchem has been providing service in Ghana for “at least 2 years”.
Required:
On behalf of Berchem Plc, The Chief Executive of Koranten requests you to provide tax advisory service on the new development. Koranten requests for a documented Tax expert advice to submit to Berchem in respect of
a) Whether Berchem Plc is tax resident in Ghana,
b) The relevance, the basis and application of VAT, withholding, and corporate taxes on the business dealings between Berchem and GEC.
Due to the recent oil discovery in Ghana, many oil related companies continue to seek tax advice on doing oil related business in Ghana. As the Tax Partner for XYZ Consult, you receive a note from the Chief of Finance (Tax), Mauuwli Inc. Bubai as follows: “Mauuwli Inc. intends to supply parts of Gas turbines in Ghana. In addition, we shall provide maintenance services on these turbines. This is the business we do in Saudi and will do all the time across nations as the opportunity opens up to us. In view of this, we want to be 100% tax compliant in your country as there is no tax for my company in Saudi. We want to know whether as foreign company ordinarily resident in Dubai, we will be subject to the following taxes:
Corporate tax (4 Marks)
Withholding tax(WHT) and at what rate (8 Marks)
Valued Added Tax(VAT) and National Health Insurance Levy (NHIL) (3 marks)
Employee taxes” (4 marks)
Required As Tax Partner for XYZ Consult, provide your answer to the Chief of Finance, Mauuwli Inc., as requested for.
Broadway International Contractors (BIC) won the bid to construct the George Bush highway for five years but was ill advised about the tax responsibilities in respect of the construction work.
The GRA conducted a tax audit on completion of the project and noted several weaknesses in BICs tax compliance requirements.
As Tax Consultant you have been approached by BIC to advise as appropriate on the tax effects of the work. In particular Broadway International Contractors would wish to receive advice on their
a) Basic VAT responsibilities (8 marks)
b) Basic corporate tax responsibilities (8 marks)
c) Expatriate Payroll liability (4 marks)
d) Withholding tax liability on payments receivable from the Ministry of Highways and payment for services? (2 marks)
ABC Mines Ltd. is a mining company operating in the Underground Mine. Commercial production commenced in the Underground Mine in 2019. ABC Mines Ltd also has mineral rights in the Surface Mine which is yet to commence commercial production. In 2019, ABC Mines Ltd. disposed of its mineral rights in Surface Mine.
The highlights of 2019 revenue and expenditure disclosed in tax returns filed by ABC Mines Ltd. are as follows:
Revenue
GHe
Gross income from its operations in 2019
450,000,000
Realised sum from disposal of mineral rights in Surface Mine
100,000,000
Hedging Income
40,000,000
Total Revenue
590,000,000
Expenses include but not limited to the following:
General and Administration Expenses (Surface Mine)
20,000,000
Interest Expense (Underground Mine)
20,000,000
Profit before tax
200,000,000
You are required to compute the liability for each tax type that ABC Mines Ltd will pay in the 2019 year of assessment. State the underlying assumptions of your computations.
Additional Information:
Minerals produced in the Underground Mine worth GHS40,000,000 was destroyed in the leased area. An amount of GHS35,000,000 was paid as insurance claims to ABC Mines Ltd in respect of the minerals destroyed.
Yentua Limited is a company registered in Ghana under the Companies Act 1963, Act 179 on 15th September 2017. It started operations on 1st October, 2017. The company buys metal scraps both from internal and external sources and sells to the iron rod manufacturers in Tema. The company was not registered with the Ghana Revenue Authority and therefore has never submitted any tax returns on its operations. The activities of the company came to light when a team of Revenue Officers from the Enforcement unit of the Ghana Revenue Authority met the Managing Director and his staff in full operation. The team educated the Managing Director and his management team on importance of payment of taxes and registering with the Ghana Revenue Authority and submitting the tax returns to the Authorities regularly. The Managing Director then presented Tax Credit Certificates (TCC) totalling GH¢ 134,000 and receipts for duties paid on imported goods as taxes paid and therefore claimed his company was tax compliant. The Managing Director later approached you as a Tax Practitioner to help the company complete its tax returns on its business operations to Ghana Revenue Authority. The extracts from the company’s financial statement presented by the Finance officer for the year ended 30th September 2018 were as follows:
Yentua Limited Income Statement
GH¢
GH¢
Turnover
7,800,000.00
Cost of Sales
(6,929,300.00)
Gross Profit
870,700.00
Administration and General Expenses
(660,000.00)
Net Profit
90,000.00
Note 2: Cost of Sales
GH¢
Local Purchases
4,400,000.00
Imports
1,580,000.00
Freight and Insurance
98,500.00
Import Duties
436,000.00
Cargo Truck
240,000.00
Repairs and Maintenance
52,000.00
Depreciation – Truck
48,000.00
Fuel and Lubricants
24,000.00
Transport and Handling
50,800.00
Total
6,929,300.00
Note 3: Administration and General Expenses
GH¢
Salaries and Allowances
285,000.00
Directors Remuneration
64,000.00
Consultancy Fees
90,000.00
Printing and Stationery
10,500.00
Rent (Office Building)
60,000.00
Rent (Residential)
36,000.00
Equipment Rentals
79,000.00
Utilities
35,500.00
Total
660,000.00
Required:
Determine the tax liabilities due from the company in respect of direct taxes for 2018 year of assessment, including any relevant penalties that are applicable. Corporate Tax rate applicable to the company is 25%.
Menuaa Manufacturing Limited (MML) produces iron rods for sale in both the domestic and foreign markets. The company is registered with the Ghana Revenue Authority for Value Added Tax (VAT). The company’s transactions during the month of October 2018 were as follows:
Transactions
GH¢
Sales (VAT Inclusive)
756,000
Exports to Sierra Leone
120,000
Relief Supplies
48,000
Purchase of Rolling Equipment
55,500
Hotel Expenses for Staff at a workshop on the new amendment on the VAT law. (VAT Inclusive)
4,500
Stationery purchased for Administration work
15,600
Iron Ingot imported (CIF)
141,750
Local Purchases
50,000
Unless otherwise stated Sales and Purchases are all Value Added Tax exclusive. National Health Insurance and GET Fund Levies are also exclusive except where it has been specifically stated.
Required:
a. You are required to calculate the NHIL and GET fund levies, VAT payable, if any, and Withholding Tax for October 2018.
Jantua Ltd (Jantua) is a company incorporated in the Republic of Israel with subsidiaries across other countries, including Frankaa Company Ltd (Frankaa) in Ghana. All subsidiaries were incorporated in their respective countries by Jantua.
Jantua won a contract with the Ministry of Roads and Highways to construct a road in Ghana. Jantua used its subsidiary, Frankaa, to carry out the project. Jantua billed the Ministry of Roads and Highways for the work done. Likewise, Frankaa billed Jantua for management and technical services on the road project.
Required:
What is the tax treatment of this arrangement?
(4 marks)
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10 Marks
AT – Nov 2020 – L3 – Q5b – Business income – Corporate income tax
Tax computation for Percy-Perry Construction Ghana Ltd and Percy-Perry Engineering Company USA Ltd, addressing related party transactions and withholding tax implications.
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)
Lakeside Exploration Ghana Ltd and Gasoil Energy Extraction Ltd are joint venture
partners who have 50% and 35% interest respectively in the Volta Offshore Field Ghana
Ltd. The agreement between the joint venture partners and the Government of Ghana
provides for Royalty of 5%, Initial Carried Interest of 10%, Additional Participating
Interest of 5%, and corporate tax rate of 35%.
Production commenced in the Volta Offshore Field Ghana Ltd in 2021. Information
available on the Volta Offshore Field Ghana Ltd is as follows:
Exploration Costs GH¢500,000,000
Development Cost GH¢4,000,000,000
Average production cost per barrel GH¢10
Average Price of crude oil per barrel GH¢50
Actual oil Production in 2021 100,000,000 barrels
Required:
i) State FOUR (4) payments or transactions on which withholding tax is applicable.
ii) Identify FOUR (4) payments or transactions that are exempt from withholding tax.
a) Songe Enterprise Limited is a dealer in rice. It buys its rice from the Rice Masters, a wholesaler, and sells to retailers. It has not over the years deducted withholding tax on payments to its suppliers, and its management is contemplating doing so to avoid any possible sanctions from the Ghana Revenue Authority. It has received a letter from the Ghana Revenue Authority to conduct a tax audit on its activities. Ahead of the tax audit, the management has invited you as a Tax Consultant to conduct a tax health check on its operations and put things right.
Required:
Advise the company on the withholding tax situation on payment to its suppliers.
(6 marks)
b) What constitutes taxable gifts under Direct Tax?
(3 marks)
c) Should a contractor in the upstream petroleum sector be subject to tax by the Ghana Revenue Authority in a situation where its products are exported to its Parent Company without evidence of sale (technically called “export without sale”)?
(4 marks)
d) Carried interest is part of the income stream by the Host Government. What is the basis for the ownership of carried interest under petroleum upstream operations and the mining and mineral operations?
(4 marks)
e) CJA Ltd has been incorporated and intends to go into mining operations. You have been approached as a Tax Consultant on the key considerations for the issuance of a mining license.
Required:
What are the factors to be considered by the Minerals Commission before a license is recommended for issuance?
(3 marks)
A globally recognized Training and Research Centre on peacekeeping and peace support operations in Ghana has engaged you as a tax consultant to provide tax opinion on how the following transactions should be treated:
i. The Centre engages part-time lecturers on its Master’s Programmes which are run on a modular basis and run for a one-year period. Payments for the fees of these lecturers are based on the number of hours done.
(2 marks)
ii. The Centre engages facilitators who are to teach and direct the flow of class for courses that run for a short period. Payments for their services are based on hourly/daily work done.
(2 marks)
iii. The Centre engages experts/consultants to assist in developing new courses or review existing courses being run by the centre or undertake any other assignment as and when required by the Centre. Payment to this category of persons is also dependent on the duration of the task and based on man-days.
(2 marks)
The Management of 6Up Ltd has asked for advice on which of the following options is better for their Managing Director in connection with tax planning:
Option 1:
To rent the Managing Director’s personal house for use by the Managing Director as part of his condition of employment while taking a withholding tax at the rate of 8% on the rental payment.
Option 2:
To rent another place for the Managing Director instead of his own place so he may consider renting out his place of residence.
Required:
Advise on which option is better from the standpoint of tax planning implication for the Managing Director.
Bubandushe is a Non-Governmental Organisation (NGO) located in Accra with operational areas in the Northern Regions of Ghana. The NGO buys rice from a supermarket in Accra and transports it to the Northern Regions for distribution to widows and orphans. Its main source of funding is from a benefactor based in the Netherlands, who has been supporting the project since its inception.
In support of its operations, it engaged Chartered Accountants from the Institute of Chartered Accountants (Ghana) as employees. Their role is basically to organize training programmes for Government Institutions on budget preparation using advanced financial models for a fee. This additional source of income equally supports the operations of this NGO.
Ghana Revenue Authority (GRA) has written to this NGO to regularize its operations with it for tax purposes. The Management of the NGO has argued that it is exempt from tax on its income. The management has written to you to offer professional help on the matter.
Required:
i) Determine whether the NGO is required under the tax laws to pay tax and if yes, what type of taxes. (6 marks)
ii) On what basis are NGOs liable to tax or exempt? (2 marks)
The management of Kelkadadi Ltd, a company resident in Ghana since the year of assessment 2007, is a wholly owned subsidiary of Danlerigu Ltd, a company resident in Nigeria. The Finance Manager of Kelkadadi has invited you as a final level three candidate of ICAG and also a Tax Intern with Danlerigu to analyze the transaction below and provide tax implications thereon.
Kelkadadi Ltd contracted a loan of $10 million from Danlerigu Ltd to help it meet its operational activities. The balance standing on the loan account at the beginning of 2018 stood at $5 million and $4.1 million at the end of 2018 year of assessment. The exchange rates are as follows:
Year Start (2018) $1 = GH¢5.20
Year End (2018) $1 = GH¢5.21
The extract of the financial statement at the beginning of the year 2018 was as follows:
Stated Capital: GH¢200,000
Retained Earnings: GH¢1,235,000
Capital Surplus: GH¢40,000
Share Deals: GH¢30,000
Interest on the debt paid during the year amounted to GH¢90,124 and foreign exchange loss on the loan repayment stood at GH¢147,000.
Required:
Write a memo on the possible tax implication(s) on this arrangement to the Finance Manager.
