You are a final level student of ICAG engaged by Baby Heights Ltd, a manufacturing company. The company is having issues with Ghana Revenue Authority on tax evasion and avoidance. Your first assignment is to meet the Board of Directors to brief them on various issues governing tax planning and how to take advantage of the provisions in the taxation laws to avoid the payment of certain taxes and possibly defer certain tax liabilities.
Required:
Write a brief report in relation to the case above explaining to the Board of Directors about tax planning maxims or variables with appropriate examples. (10 marks)
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The Consultant
ADDRESS
The Board of Directors
Baby Heights Company Limited
Attention: The Chairperson -Mrs XYZ
Dear Madam,
Subject: REPORT ON TAX PLANNING VARIABLES
Introduction:
Further to your request regarding tax planning issues of Baby Heights Company Limited, please find below the following are the tax planning schemes or variables or activities for your study: (1 mark)
Time Variable
When investors expect tax rates to decrease or remain constant over time, one desirable goal is to postpone the moment of taxation as further in the future as possible. Even when tax rates are expected to rise a little, one could benefit from delaying income recognition due to the concept of time value of money. However, if one expects a sharp increase in tax rates, acceleration of income recognition becomes rewarding.
Due to the decline in the present value of money, the further into the future that the money is received or paid out, the effect of a tax on income will be less if it occurs further in the future. Likewise, a tax deduction is more valuable if taken sooner rather than later, assuming that tax rates remain unchanged during the relevant time frame. Thus, taxes can be lowered by both postponing taxation of income items to later tax years and accelerating tax deductions to earlier tax years.
Rules of taxation pertaining to taxpayers vary with respect to time. One set of rules may apply for the first five years, and a different set will apply after that. Thus, a tax benefit available in one year may disappear in the next, just as a statutory restriction causing a tax problem this year may be lifted in the future. (2 marks)
Jurisdiction or Location Variable
The taxing rules under the Income Tax Act, 2015 (Act 896) and other laws (e.g. the Free Zones Act, 1995 (Act 504) vary depending on the location of the entity.
All citizens and residents, including companies incorporated in Ghana, are subject to income tax provided the income is accrued in, derived from or earned elsewhere outside Ghana. In Ghana, the rate of corporate income tax differs depending on where the entity is located. For example, within the Ghana Tax Jurisdiction, companies located in the Free Zone Areas have different rules. Manufacturing Companies in Accra/Tema, Regional capital and other areas enjoy location incentives. Agro-based companies established in Ghana and operating in northern Ghana enjoy tax holidays. Companies producing cocoa by-products from cocoa waste have different tax rates depending on where they are located. (2 marks)
Character or Activity variable
Different tax rules apply depending on whether a taxpayer is engaged in farming, manufacturing, real estate development, hospitality industry, The Income Tax Act, 2015 (Act 896) provides various incentives to persons that carry on these activities.
For example, a bank lending to farming businesses has a different and lower tax rate (20%) from one lending to other sectors of the economy, which is taxed at 25%. Also, a person who earns income from the export of non-traditional goods pays tax at 8%, whereas a person engaged in the hospitality (hotel) industry pays tax at 22%. (2 marks)
Entity Variable
Different entities, such as sole proprietorships, partnerships and limited liability companies, are taxed at different rates, so choosing the right entity may minimise taxes. Since tax rates differ between individuals and companies, an opportunity for tax planning exists. Moreover, some entities are either tax exempt or enjoy tax holidays. This variable is very important when entrepreneurs are starting new businesses and must decide which organisational form to adopt. This is because the choice of organisational form determines whether the business income will be subject to income tax rates applicable to individuals (sole proprietorship and partnership) or the corporate tax rate (for companies). (2 marks)
Conclusion
It can be concluded that a number of tax planning schemes can be available to the company, but this depends on the company’s circumstances and the tax planning appetite of the Board of Directors and management of the company.
Yours faithfully,
Signed:
Joe Fraser
Tax Consultant (1 mark)
(Total: 10 marks including address, subject and conclusion)