MSAF 606

TAXES & BUSINESS STRATEGY

Lesson 9– Tax Planning and Strategy

College of Humanities
University of Ghana Business School
Department of Accounting
 Session Overview

Lesson Objectives
▪ By the end of this session you should be able to:
• Understand the concept of tax planning
• Explain the types and principles of tax planning
• Discuss multinational tax planning including branch and
subsidiary
• Explain the process of tax planning
 Session Outline
▪ The key topics to be covered in this session are as follows:
• The Concept of Tax Planning and Strategy
• Types and Principles of Tax Planning
• Multinational Tax Planning branch and subsidiary
• Planning your Income Tax
 Reading List
▪ Amidu, M. (2019), Principles and Practice of Taxation, First
Edition, Digibooks, Accra. Ghana Chapter 16, (pages 507-
532)
▪ Ali-Nakyea A. (2016), Taxation in Ghana-Principles, Practice
& Planning, Black Mask Ltd., 3rd Edition. Chapter 22, (pages
467-511)
▪ Income Tax ACT, 2015 (ACT 896), Ghana Publishing
Company Limited, (Assembly Press), Accra, Ghana
 Topic One

CONCEPT OF TAX PLANNING

Tax Planning and Strategy
Introduction
▪ Taxes are used by governments to achieve a variety of economic
and social goals.
▪ These goals naturally give rise to varying tax rates across different
economic activities, individual taxpaying units and taxpaying units
over time.
▪ The varying rate of taxes provide a strong incentive for taxpayers to
engage in tax planning.
Tax Planning and Strategy
The Concept of Tax Planning

▪ Corporate tax liability depends on a firm’s financial

results for a given period of time.

▪ These financial results are to a greater extent

influenced by management’s decisions.

▪ Management’s influence on tax liabilities provide a

strong foundation for tax planning.
Tax Planning and Strategy
The Concept of Tax Planning

Income statement of Moshosho limited for year

ended 31/12/2019
Sales 10,000
Less cost of sales 4,000
Gross Profit 6,000
Less General and Administrative expenses 2,000
Profit before tax 4,000
Less Tax @ 25% 1,000
Profit after tax 3,000
Tax Planning and Strategy
The Concept of Tax Planning
▪ Tax planning refers to the legal means of reducing taxes (tax
avoidance) as against an illegal means of achieving same results
(tax evasion).
▪ Tax planning involves organizing one’s tax affairs within the
provisions of the Law, in order to enjoy the maximum capital
allowances, exemptions, tax concessions and reliefs as provided
for by the tax laws.
▪ For example, Income Tax Act 2015 (Act 896), Section 14
provides capital allowances, Section 7(1) list all the exemption,
5th Schedule provides personal reliefs and 6th Schedule explains
the temporary concessions
Tax Planning and Strategy
Principles Tax Planning
▪ For effective tax planning, one has to consider the tax
implications of a proposed transaction for all parties to a
contract or transaction.
▪ Both the explicit and implicit taxes also needs to be
considered when making investment and financing decisions.
▪ Explicit taxes are the cedi amount of tax paid directly to the
Government or the Taxing Authorities.
▪ Examples include: Income Tax (PAYE), Consumption Tax
(VAT) or Capital Gains Tax.
▪ Implicit taxes are the taxes paid indirectly in the form of lower
before-tax rates of return on tax - favoured investment.
 Tax Planning and Strategy
Principles Tax Planning
▪ Tax planners should further know that, tax systems seek to achieve a
variety of social goals;
▪ These goals give rise to varying tax rates across different economic
activities.
▪ For example corporate tax rate on:
• Hotel/Hospitality 22%
• Export of non-traditional goods 8%
• Petroleum/mining operations 35%
• Free-zone company after the concession period 15%
• Individual taxpayers pay individual tax rate as opposed to a body of
person which is taxed using the corporate tax rate.
▪ The varying tax rates provide strong incentives for taxpayers to engage in
tax planning.
 Tax Planning and Strategy
Types Tax Planning
▪ Taxpayers in an attempt to maximize their tax planning may have
income converted from:
• One type (permanent) to another (ordinary)
• Shift from one pocket (e.g. Corporate) to another (Personal) , and

• From one time period to another.

 Tax Planning and Strategy
Types Tax Planning
Converting from one type (permanent) to another (ordinary):
▪ A taxpayer may convert his/her income from salaried employee to
an investor on the capital market.
▪ The income of an investor may either be capital gains or dividend.
▪ In Ghana, capital gains are taxed favourably relative to the ordinary
income.
▪ For example, a taxpayer earning a taxable employment income of
GH₵ 120,000 in 2017, will pay a tax of GH₵26,333 as compared
to a capital gain tax of GH₵ 18,000 on the same amount. (see
Box 16.3 for detail computation)
▪ The GH₵ 18,000 is 15% of 120,000
Tax Planning and Strategy
Types Tax Planning
Change from one pocket of income to another:
▪ A taxable person can be an employee, investor, self-employed or a
company.
▪ As tax rates differ between and among individuals and companies,
an opportunity exists for tax planning.
▪ Entrepreneurs must decide which organizational form to adopt
when starting a new business.
▪ The organizational form determines whether the business income
would be subjected to the individual tax rate or the corporate tax
rates.
 Tax Planning and Strategy
Types Tax Planning
▪ Example, if the chargeable income of an individual taxpayer is
GH¢120,000, the tax liability on the income would be GH¢26,333
▪ However, if this same amount of GH¢120,000 is earned by a company
or trust, the tax liability would be GH¢30,000 (25% of GH¢120,000).
▪ Thus, shifting from one pocket (e.g. Corporate) to another (Personal)
will result in tax saving.

Income Chargeable Cumulative Tax Cumulative

Band Income Income Rates Tax Tax
First 2,592 2,592 0% 0 0
Next 1,296 3,888 5% 65 65
Next 1,812 5,700 10% 181 246
Next 33,180 38,880 17.5% 5,807 6,053
Exceeding 81,120 120,000 25% 20,280 26,333
Tax Planning and Strategy
Types Tax Planning
Shifting from one time period to another
▪ Since tax laws may vary with respect to time; a taxpayer can shift
income from one time period to another for the purposes of
minimizing his/her tax liability.
▪ When a taxpayer believes that, the tax rate in succeeding year will fall,
he/she will try to delay the income.
▪ For example, if an individual taxpayer earned GH¢120,000 in 2018,
he will pay tax of GH¢26,340,
▪ However, If the same income is earned in 2019, the tax liability will be
GH¢26,025, making a tax saving of GH¢315. (See Box 16.4 for the
computation)
Tax Planning and Strategy
Types Tax Planning
Shifting from one time period to another
2018
Income Chargeable Cumulative Tax Cumulative
Band Income Income Rates Tax Tax
First 3,132 3,132 0% - -
Next 840 3,972 5% 42 42
Next 1,200 5,172 10% 120 162
Next 33,720 38,892 17.5% 5,901 6,063
Exceeding 81,108 120,000 25% 20,277 26,340

2019
Income Chargeable Cumulative Tax Cumulative
Band Income Income Rates Tax Tax
First 3,456 3,132 0% - -
Next 1,200 4,332 5% 60 60
Next 1,680 6,012 10% 168 228
Next 36,000 42,012 17.5% 6,300 6,528
Exceeding 77,988 120,000 25% 19,497 26,025
Tax Planning and Strategy
Types Tax Planning
▪ Should the taxpayer delay or shift his/her income because of
GH¢315? What is the net present value of GH¢315 in 2018?
What will be the actual savings?
▪ Alternatively, if tax rates is currently 25% and is expected to rise
to 30% in six months’ time,
▪ It makes economic sense to accelerate the payment of tax unless
the taxpayer can invest the income and earn an after- tax return of
more than 30% in six month.
 Topic Two

MULTINATIONAL TAX PLANNING

Tax Planning and Strategy
Multinational Tax Planning
▪ When firms invest or engage in international trade, they become
subject to tax laws of at least two countries.
▪ Each country applies its own set of tax law to determine the amount
of tax payable on the foreign income.
▪ Notwithstanding the fact that, tax systems around the world have a
lot in common, the systems differ from one country to the other,
along a number of dimensions.
▪ The variation in the tax laws provide a fertile ground for creative tax
strategies.
▪ This may involve shifting income from high-tax jurisdictions to low-
tax jurisdictions.
Multinational Tax Planning
Strategy for Avoiding Worldwide Taxation

▪ Taxpayers may free themselves from worldwide taxation

by renouncing their citizenship and moving to tax havens
▪ Taxpayers may decide to shift income to low-tax
jurisdictions.
▪ For example, multinationals can shift income to low-tax
jurisdictions using activities such as locating intangible
assets in subsidiaries operating within a low-tax
jurisdiction and charging fees, copyright or royalties to
subsidiaries located in high-tax jurisdictions.
 Tax Planning and Strategy
Multinational Tax Planning
▪ The approach to taxing foreign income is either based the Territorial
Tax System or the Worldwide Tax System.

Territorial Tax System:

▪ Countries tax only incomes which are derived or accrued within its
territories or borders.
 Tax Planning and Strategy
Multinational Tax Planning
Worldwide Tax System:
▪ Countries generally tax the worldwide income of its residents and
domestic companies. Ghana, United States and Japan are some
examples of countries with a worldwide system of taxation.
▪ Most other countries with worldwide tax systems operate in the same
manner, taxing only their residents and domestic corporations on
their worldwide income and taxing the rest only on their income
accrued in or derived in the country. (See Box 16.5 for more analysis)
 Multinational Tax Planning
Branch Vrs Subsidiary Operation

▪ Corporations incorporated under the laws of Ghana are termed resident

companies.
▪ Corporations not incorporated in the Ghana but are managed and controlled
from Ghana will be considered for tax purposes as resident companies
▪ Corporations not incorporated in the Ghana and that their affairs are not
managed and controlled from Ghana are generally treated as foreign
corporations.
▪ Foreign corporations with a Ghana trade or business are only taxed directly by
Ghana on their income earned in Ghana.
▪ This is on the principle of non-resident person whose income accrued and
derived in Ghana are subject to tax.
▪ Generally, Ghanaian shareholders are taxed when they receive a dividend from
a foreign corporation.
 Multinational Tax Planning
Branch Vrs Subsidiary Operation

▪ Consider a Ghanaian parent company (Despite Group) that has a

number of Ghana subsidiaries ( Peace FM, Hello FM, Best Assurance)
and a wholly owned South Africa subsidiary (Dakyi Asem Inc.)
▪ The income of the Ghanaian parent (Despite Group) and its
subsidiaries ( Peace FM Hello FM, Best Assurance) will be subject to
worldwide taxation (see section 101 (4b) of Act 896),
▪ These entities most likely will file a consolidated Ghana tax return.
▪ However, the South Africa subsidiary’s (Dakyi Asem Inc.) income
generally will not be subject to Ghana taxation until it pays a dividend
up to its parent (Despite Group) which is Ghana as it is not managed
and controlled from Ghana
▪ This brings to the fore the significant difference between financial
reporting and tax reporting
 Topic Three

PLANNING ONE’S TAX

Planning One Tax
Tax Planning Process
▪ In order to fully take advantage of the Provisions of the Tax Law,
one needs to have :
Tax Planning Process
• A firm grasp of the relevant laws e.g. the Income Tax Act 896,
• A great deal of imagination, and
• Sound commercial judgement.
Planning One Tax
Tax Planning Process
▪ After identifying the project/investment, management must :
• Prepare an operating budget determine profitability or viability of
Tax Planning Process
the project or the investment,
• Choose a method of finance: debt or equity or lease or hybrid,
• Select the type of business form/type: sole proprietorship, or
partnership or, limited liability company, and finally
• Prepare a cash flow based on the option selected.
▪ As a tax consultant, you make all the information available to your
client by taking him/her through the entire process.
▪ The best practice is to allow the client to choose based on the
entire possible scenario presented to him/her.
Discussion Questions and Problems
Question 9.1
Tax Planning
CJA Ltd Process
is a resident company engaged in Real Estate Business. As part of
efforts to diversify its operations, it plans to acquire interest in Don-bill Ltd
another resident company. At the last AGM held on 4th March 2017, some
Shareholders were of the view that CJA should acquire 15% of the shares in
Don-bill. The Managing Director of CJA was of the view that the Company
should rather invest and acquire 25% shares to give it enormous influence in
Don-bill Ltd. Your firm has been identified to give a professional advise on
the two proposals to help in decision making.

Required:
What is the tax implication on the two proposals and which proposal will
you advise CJA Ltd to adopt to leverage on the tax benefits.
(10 marks)
Discussion Questions and Problems
Question
Tax 9.2 Process
Planning
A large corporation hires you as a consultant. The firm has
accumulated tax losses, and it expects to be in this position for a
number of years. The firm needs a new distribution facility on the
West Coast to service its customers there more efficiently. The facility
has an estimated cost of $10 million. The firm is considering three
alternative plans. Under plan A, the firm can borrow the $10 million
and purchase the facility. Under plan B, the firm can issue common
stock to raise the $10 million and purchase the facility. Under plan C,
the firm can lease the facility from the current owners.

The firm asks you to prepare a brief report outlining the tax
consequences of each plan. Your report should also contain your
recommendation as to the most tax-efficient plan.
Discussion Questions and Problems
Question 9.3 Process
Tax Planning
What are the tax differences between operating as a foreign branch
and a foreign subsidiary of Ghanaian company? What are the
advantages and disadvantages of each?