- 20 Marks
Question
(a). Mr. Joe Mensah, the MD of JoyCo Ltd is required to submit his company’s financial statement for the year 2006 to the Board next Tuesday. One particular item which Mr. Mensah intends to push for Board approval is a declaration of dividends consisting of a capitalization of profits to firm up member’s confidence in the earnings power of their investment in Joyco Ltd.
Mr. Joe Mensah has approached you with this strategy and requires that you advise on the tax concerns and advantages that capitalization of profits could have under the Internal Revenue.
Required:
Please advise Mr. Mensah as required above on this strategy.
(b). At a tax forum organised by the Chartered Institute of Taxation, a VAT representative submitted that “because of the right to deduct input VAT, VAT should be neutral for persons subject to VAT. A supplier of goods and services charges output VAT on sales and deducts input VAT on purchases, paying the balance to the VAT Service”
Mr. Anamang strongly objected to this simple statement and proposed a modification to it. He proposed “however, there is often a mismatch between theory and reality. VAT administrations for companies pose grave problems, but there are benefits in a VAT grouping scheme.
Required:
Kindly discuss any four VAT imposed problems that could be eliminated where group members are permitted to report a VAT transaction as a group rather than as a single taxable person.
Answer
(a). i. Ordinarily a dividend consisting of a capitalization of profits is treated as paid to each of the company’s shareholders in proportion to their respective interests in the company. Tax payable is at rate of 8%.
ii. If Joy Co fails to deduct the tax, the Commissioner has the power, in the case of capitalization of profits, to direct that appropriate tax be paid in accordance with the Tax Act.
iii. Sec. 45. Where the Commissioner is satisfied that a company controlled by not more than 5 persons and their associates does not distribute to its shareholders as dividends a reasonable part of its income from all sources for a basis period, within a reasonable time after the end of its basis period, the Commissioner may, by notice in writing, treat that part of the company’s income which the Commissioner determines as distributed as dividends paid to its members during that period or any other period.
iv. In determining whether a company has distributed a reasonable part of its income from all sources for a basis period, the Commissioner shall consider. a. The current requirement of the company’s business after accounting for any adjustments which the Commissioner may make under Sec. 70 or 112 and b. Any other requirements necessary or advisable for the maintenance and development of the business.
v. Conclusion: For points i to iii the tax advantage here is that the Commissioner may or may not declare tax payable on the capitalization. If he does declare, the saving here is in time saving for the cedi paid today is worth more than a cedi paid tomorrow.
(b). Main benefits of VAT Grouping
The clear benefits of VAT grouping for taxpayers are that it neutralizes excess direct VAT costs and that it reduces financial and administrative burdens related to VAT transactions.
It has a positive effect on the business environment and helps tax authorities ensure compliance and tackle abuse.
Neutralizing excess direct VAT Costs
There is the need to weigh volume discounts obtained by the group to discounts obtained by single entities. Discounts received entail lower VAT payable to the VAT office and less funds tied up in VAT claims.
Reducing Financial Costs/burden
VAT grouping reduces financial costs related to VAT. A lot of time can expire between the payment of VAT on input transactions and the reimbursement of VAT on output transactions. Therefore a pre-financing cost occurs for each intergroup transaction subject of VAT and for each group member that performs taxable transactions. VAT grouping neutralizes those costs. The positive and negative VAT positions of the group members are compensated. Only one VAT position for the group exists toward the tax authorities.
Administrative Burdens
VAT grouping allows members within the group to organize themselves more efficiently without being overburdened by VAT. For example, it will no longer make a difference whether a company operates with its members in the group. Transactions between members in the group are outside the scope of the VAT.
Reinforced Tax Authority Position
In principle VAT grouping brings with it joint and several liability for the group members, meaning that each member is responsible for the VAT debt of the group at all times. This gives the tax authorities greater recourse if problems occur.
- Topic: Strategic Indirect Tax Management
- Series: FEB 2007
- Uploader: Samuel Duah