Understanding taxation; part one

Tax is a compulsory payment or contribution made by the citizens of a county to the government for the general benefit of the country.

Tax is the life blood of every economy, without taxation, there is no nation. Things that are jointly needed like roads, hospitals, armed forces for protection, police; educational institutions etc. all require funds from taxation. A nation cannot be built by one individual. It requires the combined effort of all members of the society.

We, as citizens of Ghana have a social contract with the government. The theory of social contract posits that individuals have consented, either explicitly or implicitly, to surrender some of their freedoms and natural rights to the authority of the ruler in exchange for protection of their remaining rights. Payments of tax are one of the rights we have consented to surrender to government.

We expect government to protect our remaining rights by providing security and competent judicial system. In addition, government must provide roads, schools, hospitals as part of the contract. It is therefore incumbent on us as citizens to pay our taxes accurately and regularly to enable government to fulfill her part of the contract. Although many governments have not been able to adequately address the needs of their citizens, this cannot be an excuse to evade payment of tax. we owe it as a civic and religious obligation to pay taxes.

Formation of business

When forming a business, start-up owners obviously will be prone to some critical tax issues. This is because most start up owners have either some basic knowledge or no knowledge at all when it comes to the issue of tax. By paying attention to these issues, start-ups can position themselves well to take advantage of some meaningful tax benefits and avoid tax problems.

It is also notable to note that although it might seem expensive at the beginning of a business to engage the services of professionals such as Chartered Accountants, Lawyers and Tax professionals.

However, it is the best decision to consider before the business suffers in the future as a result of lack of knowledge in the area of taxation. Young business owners can also make it a point to visit the offices of the various revenue agencies to acquaint themselves with some knowledge in taxation, i.e., when they find it difficult to procure the services of tax professionals.

Nonetheless, the question that arises is how well must we plan with respect to taxation for Start-ups?

While it is perfectly fine to have some better understanding of taxation as a Startup owner, utilizing proper methods for tax planning would be a better move in the long run. One best way is to have some appreciable level of insights in relation to taxation for future planning.

It is extremely important to understand your tax obligations when starting a small business including effective record keeping.

A new business owner should be prepared and understand kinds of taxes relating to the business.

Types of taxes

The following are two types of taxes which operates in Ghana under our tax legislations:

Direct and Indirect Taxes:

a. Direct Taxes

Direct taxes affect the income of the recipient visibly. The income is reduced by the imposition of tax and the difference between the gross and the net is clear and obvious.

The burden falls on the income earner

1. Income Tax:

Income tax is imposed on all sources of income as stated in section 7,8 and 9 of the Internal Revenue Act, 2000 Act 529.

Examples of such incomes are from:

I. Business, which includes trade, profession and vocation

II. Employment

III. Investment from sources such as interest, rents and royalties.

2. Capital Grains

This is levied on the realization of chargeable assets such as land and buildings, where the gains from the realization exceeding GH¢ 50.00

3. Gift Tax

This is levied on specific gifts either in cash or in kind with a value exceeding

GH¢ 50.00

b.  Indirect Taxes

Indirect Taxes on the other hand are not so visible. They are taxes on goods and services and are normally passed on to the customer of the product or service. The seller or service provider may not bear the tax. The tax is sometimes treated as part of his operational expenses and are added to the cost of the product or service.

The examples of indirect taxes are:

I. Customs Duty

II. Exercise Duty

III. Value Added Tax

All the stated taxes are used primarily as a source of revenue for governments all over the world. The revenue is used to help governments in administration of areas under their jurisdiction. It is used also to provide social infrastructures such as roads, hospitals, schools and public services.

It is also important to get things right and the following are points to consider to avoid tax problems that many start-up companies experience:

1. Form a proper structure from the beginning your form of business determines which income tax returns you will have to file:

TYPES OF BUSINESS

1. Sole Proprietorship: A sole proprietorship is an unincorporated business that is owned by one individual. It is the simplest form of business organization to start and maintain. The business has no existence apart from you, the owner. Its liabilities are your personal liabilities.

You undertake risks of the business for all assets owned, whether or not used in the business.

You include the income and expenses of the business on your personal tax returns.

a. Partnership: Partnership business is the relationship existing between two or more persons who join to carry on a trade or business. Each person contributes money, property, labour or skill and expects to share in the profit and losses of the business.

A partnership must file an annual returns and accounts to report the income, deductions, gains, losses etc. on its operations but it does not pay income tax. Instead, it passes through any profits or losses to its partners.

Each partner includes his or her share of the partnership’s items on his or her tax return.

Partnership income for a basis period of a resident or non-resident partnership is accessible income under section 6 of Act 592 (the accessible income) in which chargeable income is based. This means that all remitted foreign income will be included in the income of the partnership irrespective of the residence of the partnership.

b. Limited Liability Companies: A limited Liability Company is an entity formed under the state law (the Companies Act) it must be understood that none of the members of a Limited Liability Company are personally liable for its debts which means that a company is liable for tax on its chargeable income in accordance with sections 5 and 6 of Act 592.

A dividend paid to a resident Company by another resident Company is exempt from tax where the Company receiving the dividend controls directly or indirectly 25% or more of the voting power in the company paying the dividend.

The above exemption does not apply to dividend paid to a company by virtue of its ownership of redeemable shares in the paying company (subscription for redeemable share may be structured in such a way that they are a substitute for a loan).

What to do when starting business

1. Inform the Ghana Revenue Authority
2. Have clear and accurate records of

• Earnings
• Day to day expenses
• All capital expenditure
• Staff wages
• Submit accounts and other tax returns at the end of the basic period

Record keeping

One of the key factors in the start-up business is the culture of good record keeping, especially records that will come in handy when it is time to think about taxes on the business.

Good records can help your business in a variety of ways, from monitoring your business financial growth to the preparations of your business financial report and tax returns

Suggestions to help you keep better records for tax purposes include the following:

a. Monitor the progress of your business

You need good records to monitor the progress of your business. Records can show whether your business is improving, which items are selling, or what changes you need to make.  Being on top of this information by keeping good records can increase the like hood of your business success.

b. Prepare your financial statements

Good records are a must in order to prepare detailed and accurate financial statements.

This statement can help you not only in filling your tax returns but also help to manage your business in any efficient manner.

c. Identify the source of receipts

You will receive money and or property from many sources during the course of business and your records can identify the source of these receipts.

This information is valuable due to couple of reasons.

Firstly, it will separate your business receipts from your non business receipts.

Secondly, it will separate your taxable income from your non-taxable income.

This business records can also be helpful in the event that your business is audited by the tax authorities

d. Keep track of deductible expenses

Valid business expenses are deductible and the best way to lower the amount of taxes your business will be obliged to pay is to keep good records.

Generally, an expense is deductible if it is “ordinary and necessary” in running your business.

It is a good idea to keep track of business expenses by recording them as they occur, otherwise you may forget them when the preparation of your tax returns are due.

Support items reported on tax returns

There is always a chance that your business may be audited, so it’s a must that you keep business records and make them available at all times for inspection by either the Ghana Revenue Authority or your own reporting Accountants.

In the event that your records or tax returns are examined by the Ghana Revenue Authority, you may be asked to explain the items reported so a complete set of records will speed up the examination. Please note that if your business is audited, the auditor is allowed to access and review your personal financial records as well.

Maintaining the record of the source of receipts can help ensure that proper deductions are claimed and deductions questioned by a tax authority have the appropriate support.

Comprehensive records assist with the preparation of accounts and other tax returns and provide a strong defense against any suspicion of wrong doing.

Note: It is always advisable to engage a tax professional or an experienced accountant to assist you in these arears.

An experienced accountant can help you reduce your tax exposure once the best records are practiced.

Others factors worth consideration

There are many factors a new start-up companies to consider. Between planning how to handle management, hiring, buying marketing restructuring and all of the other facets of a ‘new start up’, the issue of taxes can often be placed on the backburner.

The key is to set aside time to study what common tax issues plague businesses similar to yours, to avoid making the same kinds of mistakes.

This can go a long way in preventing any taxation-based unpleasantness later on.

Below are other ways to avoid tax problems that many start-up Companies experience.

1. Form a proper structure from the beginning
2. Separate personal and business expenses
3. Do not forget about payroll taxes if you want to avoid steep penalties
4. Hire experienced tax professionals
5. Hire third party players with proper agreement 

Tax planning

Tax planning is an attempt to pay the minimum amount of tax that you legally owe. Successful tax planning involves taking full advantage of legal loopholes in the tax system. Tax planning is not to be confused with tax evasion. Tax evasion is an illegal attempt to avoid paying the total amount of taxes you owe, usually by hiding income or falsifying tax records.

Tax planning plays a very important role in the business decision making process. Tax planning if it is well thought out can help you to avoid payment of tax for a reasonable period of time. However, don’t allow this singular advantage to cloud your sound commercial judgement. Tax advantage is important but a sound commercial judgment is also necessary in decision making. it does not make commercial sense to set up a business at a location where you cannot get good market for your product only for you to be exempted from paying taxes.

Tax planning should be a well thought out plan given due consideration to the whole spectrum of that tax laws and the economy generally. You should have a tax consultant who has a better and deeper understanding of the tax law. The consultant should not be called after the business has been run for some time. it should start from the point of selecting the type of activity, type of entity and location of your business.

INDUSTRY CONCESSIONS

BUSINESS	TAX HOLIDAY
Tree Crop Cattle	10 years from first harvest 10 years from when the business commenced
Livestock (other than cattle) Fish or cash crops	5 years from when business commenced 5 years from business commenced
Cocoa   Company in agro processing business	3 years from when commercial production commenced 5 years from when commercial production commenced
Established in Ghana after 2004 Company which produces on commercial basis	5 years from when commercial cocoa by-product derived from production commenced standardized beans, husks and other cocoa waste

Company whose principal activity is the 7 years from when commercial processing of waste including recycling of production commenced. Plastic and polythene material for Agricultural or commercial purposes.

Company in both agro processing and farming: Elect to be traded as agro processing business or cash crop farming business and claim eligible exemptions.

Rural banking: 10 years from when operations commenced. 8* corporate tax after the 10 years.

Entity

Internal Revenue Act, 2000, Act 592 (as amended) imposes different tax rates to different entities. The choice of entity can help you avoid tax rate.

Individuals:

Your first GH¢31,680.00 income that you earn will suffer tax rate which ranges between 0% – 17.5%.

Locational incentive

Depending on the location of your manufacturing business in Ghana, you will have different corporate tax rate.

Location                                             tax rate

Accra & Tema                                                 25%

Other Regional capitals                                  18.5%

Outside regional capital                                 12.5%

Three Northern Regions                                 0%

Tax planning is therefore essential in putting the business on a sound footing right from commencement and keeping it on track whiles taking advantage of all reliefs and incentives to pay just the right amount due.

Tax avoidance is synonymous to tax planning in the sense that it also takes advantage of the legal loop-holes in the tax system. The legitimate question that people normally ask is if tax avoidance is legal, is it moral or unethical?

There is nothing immoral or unethical about tax avoidance. After all, tax is not a voluntary contribution. it is rather enforced exaction. If tax administrators think that there are so many legal loop-holes in the tax system and businesses are taking advantage of it, they would advise parliament to seal the loop-holes.

It is now established that tax avoidance is legal and ethical. Therefore, if there are two methods of doing something, one of which incurs less tax than the other, then it is advisable to choose the one that gives you more tax advantage. Example if you import single cabin pick-up for a business use, you can claim the 15% VAT you paid at the port. However, if it is double cabin, you pick-up you cannot claim input VAT. So, if single and double cabin pick-up will serve the same purpose, the you import single cabin pick-up.

Take note of the following for the purpose of effective tax planning.

1. How much capital is available?
2. what type of business to undertake?
3. Where should the business be located?
4. What are the tax incentives, reliefs, exemptions etc. available?
5. Which business entity should be registered, is it sole proprietorship, partnership, Company etc.?

When the business is actually commenced

1. Keep proper records
2. Get better and deeper understanding of the tax laws ad be abreast with all amendments so that you can enjoy the reliefs fully
3. Submit returns and tax payments on time to avoid payment of penalties

The rights and obligations as taxpayer

Taxpayers have certain rights and obligations to fulfil under the tax law. Taxpayers’ rights include:

• Right to help and information
• Right to courtesy and consideration
• Right to fairness and transparency
• Right to independent appeal and review
• Right to pay taxes on quarterly installments
• Right to deduct all expenses that are wholly, exclusively and necessarily incurred in the generation of the income
• Right to claim refund of ascertained taxes overpaid
• Right to claim all personal reliefs upon the satisfaction of all laid down conditions
• Right to claim capital allowances
• Right to privacy and confidentiality
• Right to be educated in changes in tax laws

Taxpayer’s obligation includes:

• Inform Ghana Revenue Authority about all your business transactions truthfully
• Have good records
• Record all incomes
• Record all daily expenses
• Record all capital expenditure
• Record all drawings (money and goods taken from business)
• Record staff wages and salaries
• Pay all your taxes by the sue dates
• Withhold and pay all withholding taxes by due dates
• File all tax returns by the due date
• All tax returns should be accurate

Assessments

At the beginning of each year the commissioner of Ghana Revenue Authority GRA assesses all taxpayers. The taxpayers are notified of the assessment. The letter to the taxpayer states his chargeable income and it corresponding tax. The letter also specifies where the tax is supposed to be paid and the right to object. This is called provisional assessment.

When you receive your provisional assessment and the tax involved is beyond what you can pay, you have the right to object. You have nine months to object to your provisional assessment. If you fail to object to your provisional assessment after nine months, the assessment becomes final and conclusive unless you submit financial statements at the end of the year. In objecting to your assessment, you must state clearly why you or your company cannot pay the tax. if your reasons are tangible, your objection will be upheld and your tax will be reviewed downwards.

If it is not tangible and the commissioner has reason to believe that the tax is fair, your objection will not be entertained. If your objection is thrown out and you have good reason to believe that the tax is beyond you, you can seek a redress in an appeal court. Before your objection will be entertained and you must at least pay first quarter provisional tax.

The commissioner general has the right within three years to give any taxpayer additional assessment amending an assessment previously made when the need arises by reason of fraud or failure to disclose full income or falsification of information. All taxpayers are under obligation to keep their records for six years without destroying them. If they want to do so before six years, they must seek permission from the general commissioner.

At the end of each financial year, each business is enjoined by law to submit financial statements to Ghana Revenue Authority. If the account is received and it conforms to general accounting and taxation principles, the financial statement is hen examined and finalized. the final tax will be lower, higher or equal to the provisional tax which is given to you at the beginning of the year.

If what you have paid in the course of the year is less than the final tax, you will be called upon to pay the difference. If what you have paid equal to the final tax you are supposed to pay, then that ends the matter. If you have overpayment through desk audit but when the field audit is done, the situation can be different.

The commissioner general will communicate to you in writing your final tax for a basis period (Financial year) after examining your financial statement. The commissioner will serve you a letter and indicate when you should clear your tax liability if any. If you disagree with the computation of the final tax, you have 30dys within which you can object to your final assessment.

If you fail to act within the 30 days you forfeit the right to object and therefore the assessment becomes final and conclusive. Your accountant is also copied or given the same letter which is served on you. It is very important to see your accountant as soon as you receive such letters.

This is because you may not understand certain technicalities and before you become aware the deadline for objection has elapsed. You see your accountant to analyze the final assessment and see if you have been fairly assessed or not. If you fail to submit your financial statements or the commissioner general is not satisfied with your returns, the commissioner can assess you to the best of his judgment (ACT 592 (SECTION 77 (2a) (2b) and 122 (2). However, the commissioner general must state reasons why he is not satisfied with your return (section 77(3).

Provisional assessment is phasing out and it is self-assessment which is gaining prominence. By self-assessment, the company or individual will have its own projections for they year. Before the end of the current year, each company submits its chargeable income and tax payable of the ensuing year to the commissioner.

if they are unable to do that, they can do so within the first quarter of the financial quarter of the financial year, the tax is divided into four and it is paid on quarterly basis. The taxpayer has the right to revise his own assessment either upwards or downwards before the end of the financial year. The revision will certainly will certainly affect the quarterly payments.

Where a person furnishes an estimate or a revised estimate, the commissioner general is deemed to have made a provisional assessment or final assessment on that person. Where a specified person fails to furnish an estimate or the commissioner is not satisfied with the estimate or the revised estimate furnished, the commissioner may make a provisional assessment on the person section, 78(7).

Taxpayers can pay their taxes by tax credit and quarterly installment. Many taxpayers do not make use of their tax credits and do not even bother to take their withholding tax credit certificates.

The writer is a chartered Tax Accountant and a certified Professional Forensic Auditor. He has worked extensively with Accounting Firms and Banking Institutions. His specializations are Tax Planning for Companies, Institutions and individuals. He is also specialized in Forensic Audit and Investigations.

Contact: [email protected] – 0208438976