THE INSTITUTE OF CHARTERED ACCOUNTANTS (GHANA) SOLUTION: PRINCIPLES AND PRACTICE OF TAX, NOVEMBER, 2014

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1 SOLUTION 1 (i) Basis for computation of the following taxes: - PAYE its computation is based on the chargeable income/taxable income of the individual employee. Its taxes at the graduated rate at the period of computation. - Corporate tax computation is based on the chargeable income of the company at the end of years of assessment. Its taxes at 25% flat rate. - 5% withholding tax its computation is based on the gross amount of goods and services to an individual or company. Its taxes at 5% of the gross amount. - VAT/NHIS its compute on the amount of taxable supply of goods and services. It s taxed at a rate of 15% of total taxable supply. - Excise duty its levied/computed on selected locally manufactured products such as cigarette, alcoholic beverages as well as petroleum products. Specific rate are used for taxes. - Capital gain tax it s computed at the tax rate of 15% on the capital gain on a chargeable assets realized. - Rent tax it s computed on the total rent income received with a year of assessment. It is taxed at a flat rate of 8%. - Gift tax its computation is based on the total gift received. Its taxed at a flat rate of 15%. (ii) Due date for statutory returns for each of the following: - PAYE within 15 days after the end of the month in which the payment was made. - Corporate tax file are return last working day of the fourth month following the end of the basis period. - 5% withholding tax within 15 days after the month in which the payments was made. - VAT/NHIS not later than the last working day of the month to which the returns relates. Page 1 of 13

2 - Excise duty within 10 days of the close of each month. - Capital gain tax report any capital gain within the year of assessment 30 days after the realization. - Rent tax furnish return on the gross income within 4 months after the end of year of assessment. - Gift tax within assessment year is required to furnish with a return in writing within 30 days of the receipts. (iii) Due date for payment of the tax due: - PAYE payment within 15 days after end of the month in which the payment was made. - Corporate tax payment within 4 months after end of the year of assessment. - 5% withholding tax payment within 15 days after the month in which the payment was made. - VAT/NHIS payment not later than the last working day of the month immediately following the accounting period to which the returns relates. - Excise duty payments within 10 days of the close of each month. - Capital gain tax payment is made for chargeable assets within year of assessment with 30 days after the realization. - Gift tax payment is made for taxable gift received within the assessment year within 30 days of the receipts. Page 2 of 13

3 SOLUTION 2 (a) Alhaji Issakah (i) Computation of capital gain tax Consideration received 800,000 Less: cost base: Cost of construction 450,000 Renovation cost 50,000 Insurance cost 20,000 Agency cost (1% of 800,000) 8, ,000 Capital gain assessable 272,000 Less exempt amount 50 Capital gain chargeable 271,950 Tax there 15% (15/100 x 271,950) 40, (ii) Computation of capital gain tax Consideration received 800,000 Less: cost base: Cost of construction 450,000 Renovation cost 50,000 Insurance cost 20,000 Agency cost 8, , ,000 Less roll-over relief: Cost of replacement asset (75% of 800,000) 600,000 Less cost base 528,000 72,000 Capital gain assessable 200,000 Less exempt amount 50 Capital gain chargeable 199,950 Tax 15% (15/100 x 199,950) 29, Page 3 of 13

4 (b) Benefits of double taxation agreements: - It allows for allocation of tax between treaty parties. - They create an environment of fiscal certainty, which encourages trade and investment. - They protect international shipping and air transport business. - They discourage the more obvious forms of discriminatory taxation of foreign nationals and enterprises. - They also help prevent international tax avoidance and evasion. - They provide direct benefits to the treasury of capital exporting countries e.g. in the case where tax holding exist in the country importing the capital. - It eliminates situations where incomes from one of the treaty countries are taxed twice. - They create a machine for administrative co-operation between tax authority of the contracting countries. SOLUTION 3 (a) (i) Power to determine the appropriate tax to be paid by a taxpayer in respect of capitalization of profits. (ii) Power to determine whether a company controlled by not more than 5 persons has distributed a reasonable part of its income as dividend. (iii) Power to exempt a person form the 5% WHT deductions. (iv) Power to compound an offence other than to the Solicitor of the Service. (v) Power to remit taxes, interest or penalties. Page 4 of 13

5 (b) Administrative resolution (i) A person who is dissatisfied with an assessment made under the Act may lodge an objection with the Commissioner-General - In the case of a provisional assessment within 9 months of the commencement of the basis period to which the provisional assessment relates. - In the case of final assessment within 30 days of the service of the notice. - In the case of penalty assessment within 30 days of the service of the notice. (ii) (iii) (iv) (v) (vi) (vii) An objection to an assessment shall be in writing and state precisely the grounds upon which it is made to the Head of Taxpayers assigned office. Taxpayer may appeal to the Commissioner-General if not satisfied with the decision from the Head of Taxpayers assigned office. The Commissioner-General may extend the time for lodging an objection where the Commissioner-General is satisfied that the delay was for a reasonable cause. The Commissioner-General shall serve the objector with notice of his decision within ninety days. Where a person has lodged a notice of objection to a provisional assessment an amount of thirty per centum of the amount payable as contained in the notice of assessment shall be paid pending the determination of the objection and an appeal. Any tax outstanding under the assessment as determined by the Commissioner- General or objection on appeal shall be payable within 30 days from the date of service of the notice of the decision of the Commissioner-General or the court. (viii) Where a person is required to pay tax as a result of the determination of objection by the Commissioner-General or the court, the person shall pay, in addition to the tax payable a penalty at a minimum prevailing bank rate on the tax payable from the date of service of the notice of assessment to the date the person pays the amount determined on objection or on appeal. Page 5 of 13

6 In all cases the decision will be one of the following: (a) The objection is up held in full (what the taxpayer has proposed to pay is accepted in full) (b) The objection is up held with modification (what the taxpayer has proposed to pay is adjusted upwards but below the assessment in dispute) (c) The objection is rejected (what the taxpayer has proposed to pay is not accepted and the original assessment stands) (d) The objection is rejected and the assessment is increased (what the taxpayer has proposed to pay is rejected and the original assessment is increased based on additional information provided by the taxpayer) Judicial resolution NB: an alternate dispute resolution (ADR) method between the objector and the Commissioner-General may be considered to settle the case amicably out of court. If this method fails to yield any fruitful result, then the full court proceedings may commence. (i) (ii) (iii) (iv) (v) Where the objector is not satisfied with a decision made by the Commissioner- General Where a decision has not been made by the Commissioner-General within 90 days after the objection has been lodged, the objector may elect to treat the Commissioner as having made a decision to disallow the objection and notify the Commissioner- General (the objector is treated as having been served with the notice of disallowance on the date of the objector s election is lodged with the Commissioner). A person dissatisfied with an objection decision may appeal against the decision to the High Court within 30 days after the service of the notice of the decision (by lodging a notice of appeal with the Registrar of the court) and must serve the Commissioner with a copy of the notice of appeal within 5 working days of doing so. The High Court may confirm, reduce, increase or annul the assessment on which the decision is based or make an appropriate order. An appeal against a decision of the Commissioner-General shall be instituted against the Attorney-General. (vi) The Commissioner-General or the appellant may appeal against the decision of the High Court to the Court of Appeal on a matter of law only. Page 6 of 13

7 (vii) An appeal against the decision of the Court of Appeal shall lie as of right to the Supreme Court. (viii) An appeal to the Courts of Appeal or the Supreme Court shall be made within 30 days after the decision to which it pertains. (ix) (x) (xi) (xii) Where a person has lodged a notice of objection to a provisional assessment an amount of thirty per centum of the amount payable as contained in the notice of assessment shall be paid pending the determination of the objection and an appeal. Any tax outstanding under the assessment as determined by the Commissioner- General or objection on appeal shall be payable within 30 days from the date of service of the notice of the decision of the Commissioner-General or the court Where a person is required to pay tax as a result of the determination of objection by the Commissioner-General or the court, the person shall pay, in addition to the tax payable a penalty at a minimum prevailing bank rate on the tax payable from the date of service of the notice of assessment to the date the person pays the amount determined on objection or on appeal. In an objection to an assessment or on an appeal, the onus is on the person assessed to prove, on the balance of probabilities, the extent to which the assessment made by the Commissioner-General is excessive or erroneous. In all cases the decision will be of the following: (a) The objection is up held in full (what the taxpayer has proposed to pay is accepted in full) (b) The objection is up held with modification (what the taxpayer has proposed to pay is adjusted upwards but below the assessment in dispute) (c) The objection is rejected (what the taxpayer has proposed to pay is not accepted and the original assessment stands) (d) The objection is rejected and the assessment is increased (what the taxpayer has proposed to pay is rejected and the original assessment is increased based on additional information provided by the taxpayer) Page 7 of 13

8 SOLUTION 4 (a) Computation of chargeable income of partners: year 2011 (1/1/ /12/2011) Atiemo s income = (1/6 x 45,000) 7,500 Ntow s income = (2/3 x 45,000) 15,000 Seidu s income = (3/6 x 45,000) 22,500 Year 2012 (1/1/ /12/2012) Partners Atiemo Ntow Income (124,000 12) 62,000 62,000 Add salary (1,000 x 12) 12,000 (1,500 x 12) 18,000 Interest on capital (10/100 x 100,000) 10,000 (10/100 x 80,000) 8,000 84,000 88,000 (b) Computation of tax liability of partners Atiemo Ntow Chargeable income 84,000 88,000 Tax thereon: CI Tax rate Tax amt. CI rate tax amt. 1 st 1, Next 720 5% Next 1,008 10% Next 25, % 4, , Reminder: (84,000 28,800) 55,200 25% 13,800 (88,000 28,800) (59,200 x 25%) 14,800 18, , Page 8 of 13

9 SOLUTION 5 (a) (i) The following conditions have to be satisfied before a registered VAT trader can put a claim for refund: - The business must be registered for VAT - The business must submit returns for all the months that it has been in operation. - The business must complete and submit a prescribed VAT claim form for the refund of the VAT paid to the VAT service. - The business must be engaged in the export of 70% or more of its output. - The VAT paid should qualify as a deductible input VAT. - The input VAT paid should exceed the output VAT collected. (ii) The following are the circumstance under which the input VAT paid may not be refunded: - The taxable supply in question is an exempt supply - The period of 3 years has expired from the date of the deduction of VAT. - The taxable person cannot produce input VAT invoice to support any payment of VAT - The input VAT was incurred on the purchase or import of motor vehicles or vehicle spare parts unless the person is in the business of trading in or hiring motor vehicles or spare parts. Page 9 of 13

10 (b) (i) Mr. Dogood is the donor and does not have any obligation under the Internal Revenue Act 2000 (Act 592) (ii) Fafaa is the donee and has the following obligations under the Internal Revenue Act 2000 (Act 592) She has to file a return with the Commissioner-General within thirty days of the receipt of the gift stating the name and address of the donor; the total value of the gift, how it was calculated and the payable thereon Computation of the gift tax Value of gift 21,456 Less exempt limit 50 Taxable gift 21,406 15% 3, (c) (i) Mr. Kojo Ehun realized his chargeable asset in June 2005 (by transferring the asset to his son Kobina) and should have furnished the Commissioner-General with a return thirty days after the realization. However, since the transfer was to his son, he would be exempted from the payment of the capital gains tax. He would therefore not be required to file a return. (ii) Mr. Kobina Ehun on becoming the new owner of the building would not be obliged to inform the Commissioner-General but must note that the cost base of the building would be 57,000 and not 88,000 (the value at the time of transfer). (iii) Alhaji Bio, who purchased the Kasoa building in May 2010, does not have any obligations under the Internal Revenue Act 2000 (Act 592). (iii) Kobina Ehun used all the 150,000 realized to buy a replacement asset within one year so he would not be obliged to furnish a return to the Commissioner- General. Page 10 of 13

11 (v) In July 2012, Kobina Ehun sold the Madina house to Madam Fremah for a consideration of 200,000. He would therefore be required to furnish the Commissioner-General with a return thirty days after the realization stating the name and address of the new owner, the cost base of the asset immediately before the realization and the tax payable thereon. Computation of the capital gains tax Consideration received Less cost base of the asset Capital gain Less exempt limit Taxable capital gain 200,000 57, , ,950 15% 21, Page 11 of 13

12 Computation of tax liabilities of Viltex Company Limited 2012 Y/A Net profit as per accounts 8,600 Deduct: income from treasury bills 1,000 7,600 Add back: non allowable expenses Depreciation 1,000 Salary of MD s daughter (200 x 12) 2,400 Salary of MD s wife (400 x 12) 4,800 Difference in capital allowance 100 Donation MD s mother-in-law s funeral 2,000 Tax ,200 Adjusted profit (chargeable income) 18,800 Tax 8% (non-traditional export) 1,504 Add: tax on TB (1,000 x 25%) 250 Total tax 1,754 Less tax paid: ¼ ly tax payments 800 WHT on TB interest Tax outstanding 854 Page 12 of 13

13 Explanation (i) (ii) (iii) Both the MD s wife and daughter are not employees and therefore the payments to them are not wholly, exclusively and necessarily incurred by the company. Donation to the mother-in-law s funeral is a private expenses and therefore not allowable deduction. The tax rate applicable to the business income as the company is 8% since they are into non-traditional export. (iv) Income from TB is an investment income and datable at 25%. (v) Capital allowance is restricted to the agreed comment of 1100 instead of 1200 as provided by the copy. Page 13 of 13