- 10 Marks
Question
Following the government’s commitment to build one factory in each district in Ghana and its desire to ensure food sufficiency through the planting for food and jobs program, an investor from Singapore intends to invest in a shoe manufacturing company to be located at Accra in the Greater Accra Region of Ghana. He also considers starting a juice manufacturing company at Nsawam in the Eastern Region of Ghana in response to the investment drive of the government.
As part of the investment, he intends to incur the following cost and start operations in 2018 on either proposal, which is the shoe manufacturing company or the juice manufacturing company.
| Description | Amount (GH¢) |
|---|---|
| Building | 7,200,000 |
| Plant and Machinery | 11,700,000 |
| Furniture and Fittings | 180,000 |
| Computers | 180,000 |
Additionally, he intends to recruit fresh graduates from the All Nations University College of Ghana. It is further projected that in the first three years, 2018, 2019, and 2020, it will incur GH¢36,000, GH¢32,400, and GH¢18,000 losses, respectively. The investor hopes to start making profit from the year 2021. He intends to borrow at 20% interest from his USA associate, amounting to the equivalent of GH¢100,000,000. The equity he intends to start with is GH¢36,000,000.
Required: As a tax adviser, evaluate the proposed investment by the Singaporean investor and the tax implication on the various activities highlighted in the scenario.
Answer
The proposed investment will have the following tax implications:
1. Tax Rebate:
- Shoe manufacturing in Accra: Corporate tax rate of 25%.
- Juice manufacturing in Nsawam: Corporate tax rate of 12.5% due to a 50% rebate (since the investment is located in the Eastern Region).
(2 marks)
2. Locational Incentives:
- Accra/Tema: Corporate tax rate of 25%.
- Regional capitals: Tax rate of 18.75% due to a 25% rebate.
- Other areas: Tax rate of 12.5% due to a 50% rebate.
(1 mark)
3. Capital Allowance:
The following depreciable assets will qualify for capital allowances:
| Asset | Cost (GH¢) | Rate | Method |
|---|---|---|---|
| Building | 7,200,000 | 10% | Straight line |
| Plant and Machinery | 11,700,000 | 30% | Reducing balance |
| Furniture and Fittings | 180,000 | 20% | Reducing balance |
| Computers | 180,000 | 40% | Reducing balance |
The capital allowance will reduce the chargeable income and consequently the tax payable.
(3 marks)
4. Fresh Graduate Incentive:
- Recruitment of fresh graduates provides an additional deduction based on the percentage of fresh graduates in the total workforce:
| % of Fresh Graduates in Workforce | % of Wages and Salaries as Deduction |
|---|---|
| Up to 1% | 10% |
| Above 1% to 5% | 30% |
| Above 5% | 50% |
(2 marks)
5. Loss Carry Forward:
The losses incurred in the first three years (2018: GH¢36,000; 2019: GH¢32,400; 2020: GH¢18,000) can be carried forward for five years. These losses will be deducted from future profits in the order in which they occur.
(1 mark)
6. Thin Capitalization Issues:
- The borrowing of GH¢100,000,000 against an equity of GH¢36,000,000 raises no thin capitalization issues as the safe harbor rule allows for a debt-equity ratio of up to 3:1.
- The allowable debt would be 3 * GH¢36,000,000 = GH¢108,000,000, which is higher than the amount of the loan (GH¢100,000,000).
- Interest on the loan will be allowable as a deduction provided it is at a commercial rate. If the debt-equity ratio exceeds 3:1, interest on the excess debt would not be deductible.
- Topic: Tax planning
- Series: NOV 2020
- Uploader: Theophilus