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- 6 Marks
Question
The following is the extract of financial statements – Financial position as at 31 December 2018 of the following companies:
| Item | Tiika (GH¢) | Taaka (GH¢) |
|---|---|---|
| Stated Capital | 1,000,000 | 1,000,000 |
| Retained Earnings | 600,000 | 600,000 |
| Share Deals | 30,000 | 30,000 |
| Total Equity | 1,630,000 | 1,630,000 |
Tiika is a Free Zone company, resident in Ghana. Taaka is also a company resident in Ghana, and both companies are engaged in the sale of tiles.
A Ghanaian who was living in the United States for a very long time has relocated to Ghana and has sought your opinion as a student of taxation to advise on the company to buy shares in. Your background checks indicate that the two companies have huge prospects.
Required:
Which of the companies will you advise this Ghanaian to invest in and why?
Answer
Investment Recommendation:
- Tiika Ltd: As a Free Zone enterprise, Tiika Ltd operates in a non-custom-controlled territory and pays tax at the rate of 15% on its income derived from exports. Local sales are taxed at the rate of 25%.
- Taaka Ltd: Taaka Ltd, operating within Ghana, is subject to a tax rate of 25% on its income.
Tax Benefits for Shareholders:
- Dividends Exemption: Dividends paid to shareholders by a Free Zone enterprise like Tiika Ltd are exempt from tax.
- Capital Growth Potential: Shareholders in Tiika Ltd stand to benefit from potential profits on exports, which could lead to significant capital growth due to the lower tax rate on exports.
- Lower Taxation on Income: The lower tax rate for Tiika Ltd’s export income makes it a more attractive investment compared to Taaka Ltd, which is taxed at a higher rate.
Conclusion:
Based on the tax benefits and the potential for higher capital gains from export operations, I would advise the investor to invest in Tiika Ltd. The Free Zone enterprise status provides significant tax advantages that would result in higher returns on investment, especially from dividends and capital growth.
- Tags: Free Zone Enterprise, Investment Decision, Tax Benefits
- Level: Level 3
- Topic: Business income - Corporate income tax
- Series: NOV 2019
- Uploader: Theophilus