- 20 Marks
Question
Gold Resources Ltd. is a mining company operating in the Sparrows Mine and Dove Mines in Ghana. Sparrows Mine shares a processing plant with Dove Mines, and both mines commenced commercial production in 2018. At the close of business on December 31, 2018, Gold Resources Ltd. acquired 20% exploration and production rights in the Eagle Mine which is a production mine for GH₵25,000,000.
The highlights of 2018 revenue and expenditure disclosed in tax returns filed by Gold Resources Ltd. include the following:
| Revenue | GH₵ |
|---|---|
| Gross income from its operations in 2018 | 300,000,000 |
| Hedging Income | 3,000,000 |
| Interest Income | 1,000,000 |
| Consideration realised from the sale of assets | 800,000 |
| Gross Dividend from a resident company in which it has 30% voting rights | 200,000 |
| Total Revenue | 305,000,000 |
Expenses include the following:
| Expenses | GH₵ |
|---|---|
| Reconnaissance & Prospecting Cost (Sparrows Mine) | 45,000,000 |
| Reconnaissance & Prospecting Cost (Dove Mines) | 35,000,000 |
| Depreciation | 12,000,000 |
| Exploration & Production Rights (Eagle Mine) | 25,000,000 |
| Expenses on Hedging transactions | 5,000,000 |
| Cost of the assets sold | 300,000 |
| Administrative Expenses | 10,000,000 |
| Profit before tax | 120,000,000 |
Required: Compute the tax liability for each tax type that Gold Resources Ltd will be liable to pay in 2018.
Additional Information:
| Item | Rate |
|---|---|
| Income Tax Rate for companies | 25% |
| Mineral Income Tax Rate | 35% |
| Mineral Royalty Rate | 5% |
| Capital Allowance Rate | 20% on straight line basis |
| Dividend Withholding Tax Rate | 8% |
| Interest Withholding Tax Rate | 8% |
Answer
Gold Resources Ltd. will be liable to pay: a) Mineral Royalty; b) Mineral Income Tax; c) Tax on Interest. Credit granted for withholding tax paid. d) Tax on gain on disposal of asset. This is added to income from operations
(a) Computation of Mineral Royalty Gross Income from operations US$300,000,000
Mineral Royalty @ 5% 15,000,000
(b) Computation of Interest Withholding Tax Interest Income US$1,000,000
Tax @ 8% 80,000
(c) Computation of Mineral Income Tax Underlying Assumption: Sparrows Mine and Dove Mines share the same processing facility and therefore constitute the same separate mineral operation. Capital allowance is therefore computed on the sum of their reconnaissance and prospecting costs.
Capital Allowance Computation
| Year | Cost | Rate | Allowance | Written Down Value |
|---|---|---|---|---|
| 2016 | 80,000,000 | 20% | 16,000,000 | 64,000,000 |
| (1 Mark) |
Tax Computation
| US$ | US$ | |
|---|---|---|
| Net profit as per accounts/returns | 120,000,000 | |
| Deduct | ||
| Minerals Royalty | 15,000,000 | |
| Hedging Income | 3,000,000 | |
| Interest Income | 1,000,000 | |
| Consideration Realised from sale of asset | 800,000 | |
| Gross Dividend from resident company 30% rights | 200,000 | 19,000,000 |
| 101,000,000 | ||
| Add Back: | ||
| Depreciation | 12,000,000 | |
| Reconnaissance & Prospecting Cost (Sparrows Mine) | 45,000,000 | |
| Reconnaissance & Prospecting Cost (Dove Mines) | 35,000,000 | |
| Exploration & Production Rights (Eagle Mine) | 25,000,000 | |
| Expense on Hedging transactions | 5,000,000 | |
| Cost of asset sold | 300,000 | 122,300,000 |
| Adjusted Profit | 223,300,000 | |
| Less Capital Allowance | 16,000,000 | |
| Chargeable Income from Mineral Operations | 207,300,000 | |
| Add: | ||
| Hedging Income | 3,000,000 | |
| Less Allowable Hedging Expenses | 3,000,000 | |
| Hedging Income Added | 0 | |
| Hedging Loss Carryforward | 2,000,000 | |
| Interest Income | 1,000,000 | |
| Consideration from sale of Asset | 800,000 | |
| Less Cost of Sale of Asset | 300,000 | 500,000 |
| Total Chargeable Income | 208,800,000 | |
| Tax @ 35% | 71,680,000 | |
| Less Interest Withholding Tax | 80,000 | |
| Tax Payable | 71,600,000 | |
Underlying Assumption
(a) Dividend is deducted from profits because it is subject to final withholding tax. But in this case it is exempt because the company that received the dividend controls more than 25% voting rights in the company that paid the dividend. Assumption is that the company that paid the dividend is not a mining or upstream petroleum company.
(b) Royalty computed on gross income from mineral operations. Other income not included.
(c) Exploration & Production Rights of Sparrows Mine and Dove Mines are capital expenditure and therefore added back and capital allowance granted instead.
(d) Eagle Mine is a separate mineral operation and therefore the cost incurred in acquiring the Eagle Mine (US25,000,000) is excluded from determine the tax liability of Gold Resources Ltd. No tax liability computed for the Eagle Mine because no income was earned. It was acquired at the close of business on December 31, 2016.
(e) Hedging expense is required to be limited to the hedging income included in the income from mineral operation. Hedging income in this case is US3,000,000 and its expense is US$5,000,000. The excess of US$2,000,000 is therefore disallowed as deduction and added back to profits. It is required to be carried forward and deducted from future hedge income.
(f) It is an obligation on any resident person, other than an individual, who pays interest to any person to withhold tax from the Interest. The interest withholding tax is not a final tax and therefore the interest incidental to the operations is taxed at the applicable rate and withholding tax deducted from the tax liability computed.
- Topic: Taxation of Mining Entities
- Series: FEB 2020
- Uploader: Samuel Duah