Following the government’s commitment to build one factory in each district in Ghana, an investor from Mauritius intends to invest in ICT- Hardware manufacturing company to be located at Nsawam in the Eastern region of Ghana or start a Mango plantation company at Aburi 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 (ICT Hardware or Mango plantation).
. GH¢
Building 4,000,000
Plant and Machinery 6,500,000
Furniture and Fittings 100,000
Computers 100,000
Additionally, he intends to recruit fresh graduates from the Islamic University College of Ghana. It is further projected that in the first 3 years that is years 2018, 2019 and 2020, it will make (GH¢ 20,000), (GH¢ 18,000) and (GH¢ 10,000) losses respectively.
The investor hopes to start making profits from year 2021. He intends to borrow a loan at 20% interest from his USA associate amounting to the equivalent of GH¢80,000,000. The equity he intends to start with is GH¢20,000,000.
Required:
As a tax adviser, evaluate the proposed investment by the Mauritius investor and the tax implication on the various activities highlighted in the scenario. (10 marks)
View Solution
Evaluation of investment on ICT-hard ware manufacturing versus mango plantation
Introduction
Following your request for evaluation of the above for an investment decision, I furnish as below to enable you take a decision on the type of investment you want to undertake and the consequent tax implication.
For clarity I would proceed to analyze the various activities and their tax implication under the heading as follows:
Locational Advantage
The laws of Ghana grant locational tax incentive for manufacturing companies operating in Ghana. Tax rates are: Accra/Tema 25%, Regional Capitals 18.75% with a rebate of 25% and any other area 12.50%, a rebate of 50%. The Nsawam in the Eastern Region of Ghana falls under any other area hence will enjoy a tax rebate of 50% on a corporate rate of 25%. In effect, the company will pay tax at the rate of 12.50%.
This will be available to the ICT-Hard Manufacturing but this will not be available to the Mango Plantation option.
Carry over of losses
Both ICT-Hard Ware Manufacturing and the Mango plantation shall be allowed to carry over their losses (tax losses) for a period of 5 years. The proposed losses of (GH¢20,000), (GH¢18,000) and (GH¢10,000) in the years 2018, 2019 and 2020 respectively shall be carried over and deducted in the years that profits are made. They are, however, granted in the order in which they occur but limited to 5 years upon occurrence.
That is the proposed loss of (GH¢20,000) in 2018 shall not go beyond 2023. If all is not recouped, it shall not be carried forward in year 2024.
Both fall under the priority area and are treated the same for tax purposes.
Capital Allowance
The proposed capital assets to be acquired shall be granted capital allowance which is a relief to the proposed company. This is granted to enable companies recoup cost incurred in the acquisition of capital assets and also using same in the generation of income. This is available to either investment decisions.
Fresh graduate incentives
The tax laws allow companies which recruit fresh graduates from Ghanaian universities are granted incentives. The following is the categorization of the incentives:
Percentage of fresh graduates in workforce Additional deduction
Up to 1% 10% of wages and salaries
Between 1% and 5% 30% of wages and salaries
Above 5% 50% of wages and salaries
The percent of wages and salaries shall be granted as additional allowable deduction for tax purposes. This would help reduce the chargeable income or increase the tax loss as the case may be.
This incentive is available to both investment decisions.
Thin capitalization
Section 33 of Act 2015 Act 896 provides that a resident entity which is not a financial institution in which 50% or more underlying ownership or control is held by an exempt person either directly or indirectly, the interest on loan that exceeds 3:1 shall be disallowed for tax purpose.
The loan from the associate shall be looked at from an angle of control of 50% or more either alone or together with other persons. And if that is met, the interest above the ratio shall be disallowed.
The percentage equity in the resident person by the USA Associate is critical in the determination of whether thin capitalization should apply or not. The facts and circumstances are not too clear for a definite position to be drawn on its applicability or non-applicability.
Additionally, interest payment shall be subject to withholding tax at the rate of 8% final. This exposure is the same to either option.
Temporary Concession
The tax laws allow persons in certain category to enjoy temporary concession that is pay tax at the rate of 1%. In the case of Mango plantation, it has 10 years after commencement of operations, temporary concession during which it will pay tax at the rate of 1%.
This incentive is not available to the ICT hard Ware Manufacturing option.
Recommendation/conclusion
It is hoped that the above would help you in your investment decision making on the best investment decision to make as either proposal has been looked at or analysed in the light of the activity intended to be undertaken.
(5 points @ 2 marks each =10 marks)