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Week 7 - Tax Planning
Week 7 - Tax Planning
MBAF 604
First Semester 2021/2022
John Kwaku Amoh
Baba Seidu
Rester Togormey
Micahel Gift Soku
TAX PLANNING
Outline
o Learning Objectives
o Introduction
o Tax Evasion
o Modes of tax evasion
o Promoting tax compliance (Discouraging tax evasion)
o Tax avoidance
o Tax planning
o Maxims or variables of tax planning
o Constraints or limitations of tax planning
o Anti-avoidance rules
o Transfer Pricing ( Arm’s length transaction )
Learning Objectives
By the end of this lesson, students should be able to:
differentiate between tax evasion and tax avoidance
understand the concept of tax planning
explain the variables/maxims of tax planning
discuss the constraints and limitations of tax
planning.
discuss transfer pricing and its effect on the economy.
Introduction
Tax • Illegal
Evasion
Tax • Legal
Avoidance (Limitations)
Tax Evasion
• Plato alluded, “Where there is an income tax, the just man
will pay more and the unjust less on the same amount of
income”.
Activity
Time
Location or Jurisdiction variable: mostly, there are corporate
tax differentials depending on location of companies. In Ghana,
tax rates differ in certain industries depending on the location.
In accordance with Act 896,companies located within the free
zone enclave are taxed differently and the chargeable income of
a company from a manufacturing business is taxed based on
location as in indicated below:
Manufacturing bus.
located in the regional • 75% of the rate of
capitals of the income tax applicable
country.
Manufacturing bus. • 50% of the rate of
located elsewhere in
the country income tax applicable
Activity or Character variable: the activity or operation of an entity
determines the applicable tax rates.
Uncertainty
Judicial
Legislative
Uncertainty Constraint
• The projection and forecast of future cash
inflow and out flow may fail.
Judicial Constraint
Over the years, the courts have utterly disregarded certain tax
avoidance schemes.
Change in Taxation of
ownership shareholders
Arm’s length
transaction
( Transfer
Pricing)
Income Thin
Splitting Capitalization
Temporary
Concession
Change in Accounting Date
.
A company or trust can not change its accounting date
without an approval by the Commissioner-General.
Change in Ownership
. • Where the underlying ownership of an entity
changes by more that 50% at any time within a
period of three (3) years, the assets and liabilities
of that entity immediately before the change is
deemed to be realized.
• The quantum of debt to equity ratio in investments have a number of implications for
tax purposes.
• In normal corporate transactions interest is paid on any debt incurred while a dividend
is a return paid to equity shareholders.
• In Ghana as in most other jurisdictions interest paid on a debt incurred for producing
an income is an allowable deduction, while dividend paid to a shareholder is a taxable
income.
• In addition, the company pays a corporate tax just as its individual shareholders pay
tax on their earnings as dividends.
• Therefore when you finance an investment
through equity you are exposed to many more
levels of taxes than if the investment were
financed through debt (such as a loan).
• In the latter case you are entitled to a deduction
of the interest paid from your income on the
loan.
• The major reason being that interest is an
allowable deduction, whereas dividends are not
deductible.
• Therefore most companies, to avoid tax, prefer
a higher debt to equity arrangement in business
financing. Several countries including Ghana
have developed thin capitalization rules as a
response to the bias in favour of debt compared
with equity. Under these rules, the deduction
for interest paid by a resident company is
denied to the extent that the company is
financed excessively by debt.
• In accordance with the Act, an Exempt-
Controlled Resident Entity (which is not a
financial institution), which has an Exempt debt-
to-exempt equity ratio in excess of 3:1, will not
be allowed a deduction for any interest paid or
any foreign exchange loss incurred by that
entity on the part of the debt or loss otherwise
deductible.
• An Exempt-Controlled Resident Entity is defined by the
Act to mean a Resident Entity in which an Exempt person
holds 50% or more of underlying ownership or control.
The Act further defines an exempt person to include:
• Non-Resident, and
• Resident person for whom interest paid to that exempt
person by an Exempt-Controlled Resident Entity (ECRE)
or for whom any foreign exchange gain realized with
respect to debt claim against a ECRE:
• is exempt income or
• Not included in ascertaining the exempt persons Annual
Income.
Arm’s Length (Transfer Pricing )
• Arm’s length or transfer price is normally contrasted
with a market price, which is the price set in the
market place for transfer of goods and services
between unrelated persons.
• Product characteristics
• Raw material used
• Functions performed
• Managerial Competence
• Risk Assumed
Interpretation of Tax Statute
The approaches represent judicial attitudes towards tax
avoidance over the years:
• Traditional Approach- Literal/ strict interpretation
– Rusell v Scott, pattington v A/G, Cape Brandy Syndicate v
IRC,Ayshire Pullman v IRC , IRC V Duke of Westminster