TAX ACCOUNTING

BY Dr. Akwasi .A. TWUMASI PhD,MIM,MSc,MBA,(Lond) CFC(Canada)

AN OVERVIEW OF TAX ACCOUNTING

Tax Accounting is the method of accounting which focuses on tax issues. It is mainly an accounting for tax purposes. Generally, the preparations of tax accounting must be in accordance with the relevant tax statutes, tax regulations and tax laws. In this context, tax statutes in the case of Ghana are the Internal Revenue Act, 2000 (Act 592), Internal Revenue Regulation L.I. 1675 in respect of Direct Taxes.

 Accounts must be prepared in accordance with Generally Accepted Principles(GAAP)- The companys code of Ghana, the IFRS and IAS (Sec 25 of the Internal Revenue Act 2000 Act 592 as amended ).

TAX STATUTES
Accounts must also be prepared in accordance with the Tax Statutes. These are the Internal Revenue Act 2000 Act 592 as amended, The Customs Excise Preventive Service(CEPS) Management law 1993 (PNDC Law 330) as amended and the Value Added Tax (VAT) Act 1998 (Act 546 ).

METHODS OF TAX ACCOUNTING

There are two major methods of Tax Accounting; The Accrual Method of Accounting and the Cash Method Accounting. These methods are embodied in the Internal Revenue Act, 2000 (Act 592) sec. 25 27. Section 24 details some of the principles in Tax Accounting.

Recognition of Owings
The Income Tax Form 21 of (GRA) Domestic Tax Division has a column for the choice of Cash Accounting or Accrual Accounting. Cash Accounting does not recognise Owings.

Accrual Accounting recognises Owings.

Accounting year of corporate and non-corporate entities.

The Act stipulates that whatever the method, the accounting year or the year of assessment of all entities including individuals or partnerships shall be the calendar year ie 1st January to 31st December. However, that of a company or body of persons must be the accounting year of the entity. For simplicity regarding assessments, most corporate entities have 1st Jan; to 31st December, as their accounting year.

Accounting Profit & Tax Profit

Sales Less cost of sales Gross Profit Less adm. Exp: T&T 100 Prov. Bad Debt 200 Repairs 50 Net Profit 1,000 500 500

350 150

TAX PROFIT
Net Profit per accounts ADD. Back Prov. For Bad Adjusted Profit Tax @ 25% 150 200 350 (Tax Profit) 87.5

Accounting Profit & Tax Profit

Sales Less cost of sales Gross Profit Less adm. Exp: T&T 100 Prov. Bad Debt 200 Repairs 50 Tax Profit 1,000 500 500

150 350

Accounting Profit & Tax Profit

Variables leading to the differences between accounting profit and tax profit; Provisions Dis-allowables Capital Expenditure Additional Income Income tax

In examining accounts for tax purposes Tax professionals centre mostly on the following tax issues as to whether the requisite tax has been levied and paid; 1. Withholding tax 2. Registration of business- Act 684 Schedule Sec 1 (2) 3. Capital allowance 4. Allowable and disallowable expenditure (Sec 23) 5. Additional Assets 6. Additional Capital

6. Loans 7. Debtors 8. Creditors 9. PAYE Particularly on directors fees and casual labour 10. Retailers/Wholesalers Registration fees

11. Cash flow statement IR Act 2000

Act 592 Sec 25 12. Donations 13. Stock 14. Capital Gain and Disposal

Large Taxpayers issues:

1. Expatriates 2. Resident and non-resident persons 3. Subsidiaries 4. Take-overs 5. Mergers

6.Thin capitalization 7. Transfer Pricing 8. Acquisitions-(Full & Part) 9. Capital Gains Tax 10. Loan

Tax Accounting Treatment of Withholding Tax

One of the pertinent issues relevant to both the accountant and the tax practitioner is the application and treatment of Withholding Tax.

Withholding Tax
Withholding tax contributes between 40 to 50 percent to Direct Tax Revenue, perhaps due to the nature of deduction and attention. The nature of deduction makes it partly direct tax as it is effected at source and paid to Direct Tax Office or Domestic Tax Division of Ghana Revenue Authority (GRA).

Withholding Tax is an upfront tax credit withheld by an agent of the commissioner from a payment to a payee for a transaction which according to the Internal Revenue Act 2000 Act 592 attracts withholding tax.

Withholding Tax Deduction

The tax deduction is usually effected at source by the withholding tax agent and paid to the tax authorities. The tax paid stands to the credit of the tax payer who then receives a tax credit certificate from the tax office on account.

A tax refund is only possible after the taxpayer has filed his or her tax returns and the final assessment results to a refund.

Withholding Tax assessments are mainly provisional since the tax paid may not be final assessment. However per the Internal Revenue Act 2000, Act 592 Sec 81-86, some withholding taxes are final. Meaning, such incomes are not to be assessed again.

Withholding Tax
Where a withholding tax is deemed final, it implies that the tax withheld is adequate for the payment of tax on the earned income and there cannot be any additional tax.

It must be emphasized that the major purpose of imposing withholding tax is simply to identify the tax payer. Once the taxpayer is clearly identified and responds appropriately to all tax obligations, it may not be appropriate for the tax authorities to continue the scheme.

Consequently, taxpayers who are in the good books of the tax authorities could apply to the commissioner for exemption of payment of withholding tax.

(Withholding Taxes which are final) Ref: 2007 Internal Revenue Act 2000 (Act 592) Section 81-86
1. Dividend paid to a resident 8%

2. Fees paid to a part time teacher, invigilator, supervisor, lecturer, or examination coordinator or supervisor 3. Fees, emoluments, benefits paid in cash or in kind to a resident director, manager or board members of a company or a body of persons who is not a permanent employee 4. Dividend and interest paid to a non-resident person 5. Royalties, natural resource payment and rent to a non-resident person

10%

10%

8% 10%

6. Management and technical service fees paid to a non-resident person

15%

Withholding Taxes which are not final

Interest paid to a resident person other than an individual 8%

Commission paid to a resident insurance, sales or canvassing agent 10%

Withholding taxes which are not final

Endorsement fees paid to a resident person for recommending a product in an advertisement launched to promote the sale of a new product or to promote sales at the expense of a competing product, in the electronic or print media or otherwise 10%

Withholding taxes which are not final

10.Commission paid to a resident lotto receiver or agent 5% 11.Payment for goods and services made to a resident person 5% 12.Payment for goods and services made to a non-resident person15%

It should be noted that the withholding tax of 5% on the supply or sale of goods does not apply where the goods constitute a stock-intrade of both the purchaser and the vendor, or if the Commissioner grants an exemption in writing for a good cause shown or is satisfied that the person has a good tax record.

A person provided with an exemption by the Commissioner will have to provide on a quarterly basis a list of particulars of payments that would have suffered withholding tax but for the exemption.

Generally Accepted Accounting Practice (GAAP)

Refers to the approved methods, rules, practices and procedures embodied in the following documents which all financial statements must comply; The International Accounting Standards (IAS), International Financial Reporting Standards (IFRS), The Companys code for the regulation of financial statements. Examples of International Financial Reporting Standard (IFRS)

Why IFRS & IAS

In view of the considerable growth in international investment, it is desirable to have similar accounting methods worldwide to make investment decision more comparable. The growth of multi-national organizations has made it imperative for standardization since most of these companies produce financial statements covering large number of countries. The need for harmonized accounting standards since some countries may not afford their own standards - the issue of relevance and weight.

Before IFRS and IAS

Up until 2005, SSAPS and FRS had precedence over IAS in the UK- Changed From 2005, it is mandatory for all listed companies within the EU preparing financial statements to comply with the guidelines of IFRS and IAS. Meaning in the UK small companies may publish their accounts reference to the SSAPs and FRSs- Dual set of standards in the UK. The case of Ghana IFRS & IAS

Examples of IAS
IAS 7- Cash flow statement IAS 8- Accounting policies IAS 10- Events after the balance sheet date IAS 11- Construction contracts IAS 16- Property, Plant & Equipment IAS 23- Borrowing costs IAS 36- Impairment of assets IAS 38- Intangible assets

Examples of IFRS
IFRS 3- Business combination IFRS 5- Non-current assets held for sale & discontinued operations.

Undercast & Overcast leading to Tax Loss

Overcast of opening stock Undercast of closing stock Overcast of purchases Overcast of Carriage Inwards Overcast of cost of production Overcast of expenses Overcast of Carriage Outwards Undercast of revenue eg.sales Overcast of return inwards Undercast of Return Outwards