tax accounting - july 2013.pptx

8/22/2019 tax accounting - july 2013.pptx

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TAX ACCOUNTING

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


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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 InternalRevenue Act, 2000 (Act 592), Internal Revenue

Regulation L.I. 1675 in respect of Direct Taxes.


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Accounts must be prepared inaccordance with Generally Accepted

Principles(GAAP)- The companys code

of Ghana, the IFRS and IAS (Sec 25 of theInternal Revenue Act 2000 Act 592 as

amended ).


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TAX STATUTES

Accounts must also be prepared inaccordance with the Tax Statutes. Theseare the Internal Revenue Act 2000 Act592 as amended, The Customs ExcisePreventive Service(CEPS) Managementlaw 1993 (PNDC Law 330) as amended

and the Value Added Tax (VAT) Act 1998(Act 546 ).


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METHODS OF TAX ACCOUNTING

There are two major methods of TaxAccounting; The Accrual Method of

Accounting and the Cash MethodAccounting. These methods areembodied in the Internal Revenue

Act, 2000 (Act 592) sec. 25 27.Section 24 details some of theprinciples in Tax Accounting.


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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.


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Accounting year of corporate and

non-corporate entities.

The Act stipulates that whatever the method,the accounting year or the year of assessmentof all entities including individuals or

partnerships shall be the calendar year ie 1stJanuary to 31st December. However, that of acompany or body of persons must be theaccounting year of the entity. For simplicity

regarding assessments, most corporateentities have 1st Jan; to 31st December, as theiraccounting year.


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Accounting Profit & Tax Profit

Sales 1,000

Less cost of sales 500

Gross Profit 500

Less adm. Exp:

T & T 100

Prov. Bad Debt 200

Repairs 50 350

Net Profit 150


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TAX PROFIT

Net Profit per accounts 150

ADD. Back Prov. For Bad 200

Adjusted Profit 350 (Tax Profit) Tax @ 25% 87.5


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Sales 1,000

Less cost of sales 500

Gross Profit 500

Less adm. Exp:

T & T 100

Prov. Bad Debt 200

Repairs 50 150

Tax Profit 350


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Variables leading to the differences between

accounting profit and tax profit;

Provisions

Dis-allowables

Capital Expenditure

Additional Income Income tax


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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


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6. Loans

7. Debtors8. Creditors

9. PAYE Particularly on directors feesand casual labour

10. Retailers/Wholesalers Registration

fees


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11. Cash flow statement IR Act 2000

Act 592 Sec 2512. Donations

13. Stock14. Capital Gain and Disposal


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Large Taxpayers issues:

1. Expatriates

2. Resident and non-resident persons

3. Subsidiaries

4. Take-overs

5. Mergers


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6.Thin capitalization

7. Transfer Pricing

8. Acquisitions-(Full & Part)

9. Capital Gains Tax10. Loan


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Tax Accounting Treatment of Withholding Tax

One of the pertinent issues relevant

to both the accountant and the tax

practitioner is the application andtreatment of Withholding Tax.


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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 taxas it is effected at source and paid to Direct

Tax Office or Domestic Tax Division of Ghana

Revenue Authority (GRA).


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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 RevenueAct 2000 Act 592 attracts

withholding tax.


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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 officeon account.


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A tax refund is only possible

after the taxpayer has filed

his or her tax returns andthe final assessment results

to a refund.


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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.


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Withholding Tax

Where a withholding tax is deemed

final, it implies that the tax withheld

is adequate for the payment of taxon the earned income and there

cannot be any additional tax.


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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.


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Consequently, taxpayers who

are in the good books of the taxauthorities could apply to the

commissioner for exemption of

payment of withholding tax.


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(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

10%

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

10%

4. Dividend and interest paid to a non-resident person 8%

5. Royalties, natural resource payment and rent to a

non-resident person

10%


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6. Management and technical service fees

paid to a non-resident person

15%


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Withholding Taxes which are not final

Interest paid to a resident personother than an individual 8%

Commission paid to a residentinsurance, sales or canvassingagent 10%


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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 theexpense of a competing product, in the

electronic or print media or otherwise 10%


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Withholding taxes which are not final

10.Commission paid to a resident lotto receiveror agent 5%

11.Payment for goods and services made to aresident person 5%

12.Payment for goods and services made to anon-resident person15%


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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-in-

trade of both the purchaser and the vendor, or if

the Commissioner grants an exemption inwriting for a good cause shown or is satisfied

that the person has a good tax record.


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A person provided with an exemption

by the Commissioner will have toprovide on a quarterly basis a list of

particulars of payments that wouldhave suffered withholding tax but for

the exemption.


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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 offinancial statements. Examples of International

Financial Reporting Standard (IFRS)


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Why IFRS & IAS

In view of the considerable growth ininternational investment, it is desirable to havesimilar accounting methods worldwide to makeinvestment decision more comparable.

The growth of multi-national organizations hasmade it imperative for standardization since mostof these companies produce financial statementscovering large number of countries.

The need for harmonized accounting standardssince some countries may not afford their ownstandards - the issue of relevance and weight.


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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 financialstatements to comply with the guidelines of IFRS

and IAS. Meaning in the UK small companies may

publish their accounts reference to the SSAPsand FRSs- Dual set of standards in the UK.

The case of Ghana IFRS & IAS


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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


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Examples of IFRS

IFRS 3- Business combination

IFRS 5- Non-current assets held for sale &

discontinued operations.


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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

Documents

tax accounting - july 2013.pptx