Question Tag: Local sales

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  • 4 Marks

TX – May 2019 – L3 – Q5c – Business Income – Corporate Income Tax

Evaluate the statement regarding offsetting losses from export of non-traditional products against profits from local sales.

A company engages in exports of non-traditional products and makes local sales of its products. It has as recently, as of 2018, recorded huge losses on the exports but makes gains on the local sales and intends to offset the loss against the profit from the local sales as both represent its business activities.

Required: Evaluate the above statement critically in light of the tax provisions and its effect, if any, on revenue.
(4 marks)

  • Under Section 17 of Act 896, businesses are required to determine business income and investment losses separately.
  • Export of non-traditional products is taxed at the rate of 8%, whereas the local sales are taxed at 25%.
  • Losses from a business taxed at a lower rate (exports) should be carried forward and deducted from income generated from the same export activities, rather than offsetting it against profits from local sales, which are taxed at a higher rate.
  • The effect of offsetting such losses would be a reduction in tax revenue, as higher-rate profits would be reduced by losses taxed at a lower rate. This is not allowed under the Act

    • .

  • 6 Marks

AT – NOV 2021 – L3 – Q1a – Business income – Corporate income tax | International taxation

Compute tax payable for a Free Zone Enterprise based on income from local and export sales and determine the treatment of certain adjustments.

Orga Ltd has the following information relating to its operation as a Free Zone Enterprise for the 2020 year of assessment with a basis period from January to December each year:

Description Amount (GH¢)
Revenue 35,000,000
Cost (21,000,000)
Profit 14,000,000

Additional information:

  • Depreciation of GH¢200,000 has been added to the cost above.
  • Revenue: Local sales GH¢25,000,000; Exports GH¢10,000,000.
  • The Managing Director was provided with a mini bar and a swimming pool as part of his employment package costing GH¢1,200,000 in his private residence. The employer added only GH¢200,000 as part of the employment income for tax purposes. The total cost has been adjusted to the cost above.
  • The dividend received from the United States of America net of taxes of 10% was GH¢22,500. This income has not yet been recorded, although it has been credited in the bank statement.
  • The excess proceeds from the sale of a depreciable asset over the written down value amount to GH¢300,000. This has not yet been recorded in the company’s accounts.

Required:
i) Compute the tax payable. (6 marks)
ii) Explain the tax treatment of the cost of the swimming pool and mini bar. (2 marks)

i) Computation of Tax Payable

Description Amount (GH¢)
Profit for the year (given) 14,000,000
Add back non-allowable expenses:
Depreciation 200,000
Domestic expenditure (Swimming pool & minibar) 1,000,000
Adjusted profit 15,200,000
Add other income:
Dividend (grossed up from GH¢22,500) 25,000
Excess of proceeds over WDV 300,000
Chargeable income 15,525,000

Tax computation (Local sales and exports):

Description Local Sales Exports
Chargeable income allocation 11,089,285.71 4,435,714.29
Tax rate 25% 15%
Tax payable 2,772,321.43 665,357.14
Total tax payable GH¢3,437,678.57

ii) Tax Treatment of Swimming Pool and Mini Bar
The cost of the swimming pool and mini bar is considered domestic expenditure and is generally not allowable for tax purposes. However, since the company added GH¢200,000 to the Managing Director’s employment income, that portion is allowable for tax purposes. The remaining GH¢1,000,000 must be added back to the company’s income for tax purposes.

  • 20 Marks

AT – Nov 2020 – L3 – Q1 – Tax administration in Ghana | Business Income – Corporate Income Tax

A report on tax incentives for Free Zone Enterprises, tax implications for local sales, and requirements for foreign investors to start trading in Ghana.

Esther Naah, a Ghanaian by birth, has spent most of her life in the United Kingdom. She has made a lot of savings and would want to invest in Ghana. She has heard of the Ghana Free Zone Authority and been told that the rationale behind the free trade zone is the development of disadvantaged regions. You work in a Tax Consulting firm and your Managing Partner has called on you to brief Esther, on the following issues during her next appointment to the Tax Consulting firm.

Required: Draft a report that will incorporate the following:

a) Tax incentives and benefits for Free Zone Enterprises.
(10 marks)

b) What will be the tax implication if the Free Zone Enterprise sells into the local markets?
(4 marks)

c) What are the requirements a foreigner should meet in order to start a trade in Ghana?
(6 marks)

a) Tax Incentives and Benefits for Free Zones

Type of Incentive Description
Exemption of import duty 100% exemption on import duties and levies.
Exemption of export duty 100% exemption on export duties.
Corporate income tax exemption 100% exemption on income tax profits for 10 years; thereafter, a maximum of 15% tax rate.
Tax on dividends Total exemption from withholding tax on dividends from Free Zone investments.
Relief from double taxation Relief for foreign investors and employees where Ghana has a double taxation agreement.
Import license No import licensing requirements.
Customs procedures Simplified customs formalities with fewer documentation requirements.
Shares for investment 100% ownership of shares allowed for both foreign and national investors.
Restrictions on remittance No conditions or restrictions on repatriation of profits, foreign loan servicing payments, or fees.
Sale in the local market Up to 30% of annual production can be sold locally; at least 70% must be exported.
Nationalization and expropriation Investments are guaranteed against nationalization and expropriation.

(10 marks)

b) Tax Implication if Free Zone Enterprise Sells in Local Markets:

The free zone enterprises are required to export all their produce or products. However, the law allows the free zone enterprises to obtain permission to sell up to 30% in the local market, that is, in Ghana. When that happens, they are required to pay the following taxes:

  • Pay duties on the products or produce as duty was not paid at the time of importation.
  • Pay all VAT on those goods.
  • Pay National Health Insurance levies.
  • Pay all GETFund levies on the goods.
  • Chargeable income of the goods sold locally shall be subject to corporate tax at the rate of 25%.

(4 marks)

c) Requirements a Foreigner Should Meet to Start a Trade in Ghana:

  • The foreigner is required to bring into the country a minimum capital of 1 million United States Dollars in cash or goods and services relevant to the investment. Trading includes the purchasing and selling of imported goods and services.
  • Additionally, they must employ at least 20 skilled Ghanaians.
  • Trading does not include portfolio investments and exports.
  • 4 Marks

AT – March 2023 – L3 – Q2d – Tax administration in Ghana

Discuss the tax implications of a free zone entity exceeding its approved local sales quota.

Koliko Ltd established a free zone entity in Ghana and got approval to sell 20% locally and export the rest from the Minister of Trade. Contrary to the approval, Koliko Ltd decided to export 60% and sell 40% of its produce into the local market.

According to the Board Chairman of the company, this was wrong and that the Ghana Revenue Authority would consider the whole arrangement as artificial since the company departed from the approval by the Ministry of Trade.

Required:
What is the tax implication of the above arrangement?

The tax implications for Koliko Ltd, a free zone entity, exceeding its local sales quota are as follows:

  1. Taxation of Local Sales:
    • Free zone entities are typically allowed to export their products, with a portion of the sales allowed for the local market based on the approved quota.
    • Koliko Ltd received approval to sell 20% of its production locally. However, by selling 40% locally (exceeding the approved limit), the excess local sales will be subject to the regular corporate income tax rate of 25%. This is because the local sales are considered domestic taxable income.
  2. Export Sales:
    • The remaining 60% of Koliko Ltd’s exports will be taxed at the free zone corporate tax rate of 15%, which is the reduced rate applicable to export earnings under the Free Zones Act.
  3. Potential Anti-Avoidance Measures:
    • The Ghana Revenue Authority (GRA) may treat the arrangement as an artificial transaction aimed at reducing tax liability by diverting more goods to the local market than allowed. If GRA deems the arrangement artificial, it may impose further penalties or reassess the entire tax liability of the company.
  4. Compliance Issues:
    • Failure to adhere to the conditions of approval from the Ministry of Trade could result in sanctions, including revocation of free zone status or denial of future tax concessions.

In summary, the 40% of local sales exceeding the approved quota will be taxed at 25%, while the remaining 60% of export sales will be taxed at the reduced free zone rate of 15%.

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