- 20 Marks
Question
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:
| Expenses | GHe |
|---|---|
| Reconnaissance & Prospecting Cost (Underground Mine) | 100,000,000 |
| Reconnaissance & Prospecting Cost (Surface Mine) | 50,000,000 |
| Depreciation | 20,000,000 |
| Expenses on Hedging transactions | 10,000,000 |
| Operating Expenses (Underground Mine) | 80,000,000 |
| 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.
| Tax Rates | Rate |
|---|---|
| Income Tax Rate for Companies | 25% |
| Mineral Income Tax Rate | 35% |
| Mineral Royalty Rate | 5% |
| Interest Withholding Tax Rate | 8% |
| Capital Allowance Rate | 20% on straight line basis |
| Capital Gains Tax Rate | 15% |
Answer
ABC Mines Ltd will be liable to pay the following tax types:
(a) Mineral Royalty
(b) Interest Withholding Tax or exempt where the loan is from a resident financial institution.
(c) Mineral Income Tax
(d) Tax on gain from disposal of mineral rights in Surface Mine.
Computation of Mineral Royalty
| Description | GHS |
|---|---|
| Gross income from operations | 450,000,000.00 |
| Royalty @ 5% | 22,500,000.00 |
Computation of Interest Withholding Tax
| Description | GHS |
|---|---|
| Interest | 20,000,000.00 |
| Interest Withholding Tax @ 8% | 1,600,000.00 |
| or Exempt |
Computation of Mineral Income Tax
(i) Capital Allowance Computation
Capital Allowance will be computed in respect of Underground Mine only because Surface Mine is yet to commence operations.
| Year | Cost | Rate | Allowance | Written Down Value |
|---|---|---|---|---|
| 2019 | 100,000,000.00 | 20% | 20,000,000.00 | 80,000,000.00 |
(ii) Income Tax Computation
| Description | GHS | GHS |
|---|---|---|
| Net Profit before tax | 200,000,000.00 | |
| Deduct | ||
| Realised Sum from Surface Mine disposal | 100,000,000.00 | |
| Hedging Income | 40,000,000.00 | |
| Mineral Royalty | 22,500,000.00 | 162,500,000.00 |
| 37,500,000.00 | ||
| Add Back | ||
| Depreciation | 20,000,000.00 | |
| Reconnaissance & Prospecting Cost (Underground Mine) | 100,000,000.00 | |
| Reconnaissance & Prospecting Cost (Surface Mine) | 50,000,000.00 | |
| Expenses on Hedging Transactions | 10,000,000.00 | |
| Gen. & Admin. Expense. (Surface Mine) | 20,000,000.00 | 200,000,000.00 |
| Adjusted Profit from Operations | 237,500,000.00 | |
| Add | ||
| Hedging Income | 40,000,000.00 | |
| Less: Expenses on Hedging Transactions | 10,000,000.00 | 30,000,000.00 |
| Insurance Receipt | 35,000,000.00 | |
| Assessable Income | 302,500,000.00 | |
| Less Capital Allowance | 20,000,000.00 | |
| Chargeable Income | 282,500,000.00 | |
| Tax @ 35% | 98,875,000.00 |
Tax on Gain from disposal of Mineral Rights – Surface Mine
| Description | GHS |
|---|---|
| Realised Sum from disposal of minerals right | 100,000,000.00 |
| Less: | |
| Recon. & Prospecting Cost (Savanna Mine) | 50,000,000.00 |
| Gen. & Admin. Expense. (Savanna Mine) | 20,000,000.00 |
| Gain on disposal of minerals right | 30,000,000.00 |
| Tax @ 35% | 10,500,000.00 |
Assumptions:
- The loan for the interest expense is not from a resident financial institution, hence withholding tax applies.
- Reconnaissance and prospecting costs for both mines are not allowable deductions for income tax purposes.
- General and administration expenses for Surface Mine are related to the disposal and thus deductible for capital gains tax computation.
- Insurance receipt is taxable as it relates to minerals produced in the Underground Mine.
- Hedging income and expenses are treated separately for tax purposes
- Topic: Mineral Royalties vs. Resource Rent Tax
- Series: AUGUST 2020
- Uploader: Samuel Duah