- 20 Marks
Question
A) In relation to customs and excise duties, explain how the “value for duty purposes” is calculated on the following:
i. Imports
ii. Locally manufactured goods and services
iii. Export
(B) As part of the revenue mobilization campaign of the Ghana Revenue Authority, your firm, Messrs. Skin Pain & Co. has been contracted to carry out tax audit on the 2018 published accounts of a member of a group companies engaged in the importation of used spare parts. One of the audit teams has just returned to the office and submitted their audit file on Tom and Jerry Company Limited to you for review. The team has made the following findings:
- The total IDF value of imports was $5,330,844.56, Import Duty and VAT paid were GH¢7,475,654.23 and GH¢6,546,689.04 respectively.
- Total amount transferred to Okamoto Trading Corporation of Japan; the main suppliers was $9,182,250.00. This transfer included $1,237,500 allegedly transferred from the Managing Director’s own resources. The company has a ninety-day credit facility with Okamoto Trading Corporation.
- Statement of account for the year ended 31/12/18 from Okamoto Trading Corporation indicated opening and closing balances as $540,690.60 and $708,732.02 respectively.
- The account audited which had been filed with Ghana Revenue Authority indicated purchases of GH¢509,552.03 is local purchases from other importers.
- Amount of Import Duty and VAT charged in the published accounts amounted to GH¢710,068.11 and GH¢461,544.51 respectively.
- Note that import duty rate is 20%; VAT rate is 17½%; and $1.00=GH¢4.20.
You are required to:
i. Analyze the findings of the Audit Team and present a report to your Audit Manager indicating any tax implications of their findings.
ii. What further audit work would you advise the audit team to undertake on the transfer by the managing director to assure yourself that is not business income of funds belonging to the company or from a taxable source.
Answer
A (i) The value for duty purposes on imports is based on the cost, insurance and freight (C.I.F) charges. The duty rate is charged or determined on the transaction value of the item.
(ii) For locally manufactured goods and services, the value for duty purposes is also determined on the transaction value based on cost, insurance and freight (if any) – (C.I.F).
(iii) The value for duty purposes for exports is based on the free on board (F.O.B) value i.e. the duty excludes insurance and freight on computation.
(b)
WORKINGS
(a) Reconciliation of account with Okamoto Trading Corporation for 2018
| $ | |
|---|---|
| Balance @31/12/2017 | 708,732.02 |
| Total Transfer during the year | 9,182,250.00 |
| 9,890,982.02 | |
| Balance @31/12/08 | 540,690.60 |
| C & F value of purchases from Okamoto for 2018 | 9,350,291.42 |
| GH¢ equivalent | $9,350,291.42 x 4.20 |
| GH¢39,271,223.96 | |
| Import Duty | 39,271,223.94 x 20% |
| = 7,854,244.79 | |
| VAT | = 17.5% (39,271,223.94 + 7,854,244.79) |
| = 8,246,957.03 |
SUMMARY
| Tax Type | Amount Payable | Amount Paid | Amount Outstanding |
|---|---|---|---|
| Import Duty | 7,854,244.79 | 7,475,654.23 | 378,590.56 |
| VAT | 8,246,957.03 | 6,546,689.04 | 1,700,267.99 |
| 2,078,858.55 |
MEMORANDUM
TO: Audit Manager
DATE: 13th July 2020
FROM: Supervisor
SUBJECT: REPORT ON THE AUDIT OF TOM AND JERRY COMPANY LIMITED
| GH¢ | |
|---|---|
| Import Value per transfers | $7,480,233.13 |
| Import Value per IDF | $9,182,250.00 |
| Import Value per Published Accounts | $9,350,291.42 |
The above figures indicate that the imports were under-invoiced to reduce amounts of Import Duty and VAT payable. The following is the taxes due on imports:
| Tax Type | Amount Payable | Amount Paid | Amount Outstanding |
|---|---|---|---|
| Import Duty | 7,854,244.79 | 7,475,654.23 | 378,590.56 |
| VAT | 8,246,957.03 | 6,546,689.04 | 1,700,267.99 |
| 2,078,858.55 |
- Penalties on Tax Underpaid
i) Import Duty
If Tom and Jerry Company Limited is convicted, they may pay a penalty not exceeding three times GH¢378,590.56 being the tax evaded and all goods in respect of which the offence was committed shall be forfeited to the state in accordance with the law.
ii) VAT
Tom and Jerry Company Limited is liable on conviction to pay three times GH¢1,700,267.99 being tax evaded in accordance with Act 870.
iii) Ghana Revenue Authority
The audit findings indicate that the import value of purchases and taxes due on them were suppressed to reduce the corporate tax payable. Tom and Jerry is liable to pay triple the underpayment of tax which may result.
Thank you.
(Sgd)
Supervisor
(ii) Further audit work on the Managing Director’s transfer:
- Verify the source of the $1,237,500 by requesting bank statements and personal financial records of the Managing Director to confirm it is not company funds.
- Review the company’s financial records to ensure no business income was used for the transfer.
- Obtain written confirmation from the Managing Director and Okamoto Trading Corporation regarding the nature and purpose of the transfer.
- Check for any related-party transactions or tax implications by reviewing the Managing Director’s tax returns to ensure the funds are not from a taxable source.
- Tags: Customs Duties, Excise Duties, Exports, Imports, Local Manufacturing, Tax Compliance, Valuation
- Level: Level 1
- Topic: Revenue Inquiry and Financial Analysis
- Series: AUGUST 2020
- Uploader: Salamat Hamid